What changed in this filing

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Item 1A. Risk Factors

2024-02-20 compared with 2023-02-16 · 21 added, 57 removed, 133 unchanged (37% of the section changed)

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See “Forward Looking Statements” under Item 7 of this report for a discussion of other important factors that can affect our business.

We are subject to credit risks relating to our loan and lease portfolios — We have certain lending policies and procedures in place that are designed to optimize loan and lease income within an acceptable level of risk.

Our management reviews and approves these policies and procedures on a regular basis.

A reporting system supplements the review process by providing our management with frequent reports related to loan and lease production, loan quality, concentrations of credit, loan and lease delinquencies, and nonperforming and potential problem loans and leases.

Diversification in the loan and lease portfolios is a means of managing risk associated with fluctuations in economic conditions.

We maintain an independent loan review department that reviews and validates the credit risk program on a periodic basis.

Results of these reviews are presented to our management.

The loan and lease review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.

Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans.

We are subject to credit risks relating to our loan and lease portfolios — Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans.

Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets, repayment of such loans may be influenced to a great extent by conditions in the market or the economy.

We seek to minimize these risks through our underwriting standards.

We obtain financial information and perform credit risk analysis on our customers.

Credit criteria may include, but are not limited to, assessments of income, cash flows, collateral, and net worth;

asset ownership;

bank and trade credit references;

credit bureau reports;

and operational history.

Commercial real estate or equipment loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and generate positive cash flows.

Our management examines current and projected cash flows of the borrower to determine the ability of the borrower to repay their obligations as agreed.

Underwriting standards are designed to promote relationship banking rather than transactional banking.

We seek to mitigate these risks through our underwriting standards.

Most commercial and industrial loans are secured by the assets being financed or other business assets;

however, some loans may be made on an unsecured basis.

Our credit policy sets different maximum exposure limits both by business sector and our current and historical relationship and previous experience with each customer.

We offer both fixed-rate and adjustable-rate consumer mortgage loans secured by properties, substantially all of which are located in our primary market area.

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The 1st Source Specialty Finance Group loan and lease portfolio consists of commercial loans and leases secured by construction and transportation equipment, including aircraft, autos, trucks, and vans.

Finance receivables for this Group generally provide for monthly payments and may include prepayment penalty provisions.

Our construction and transportation related businesses could be adversely affected by slowdowns in the economy.

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By the nature of the businesses these clients operate in, we could be adversely affected by rapid increases or decreases in fuel costs, terrorist and other potential attacks, and other destabilizing events.

These factors could contribute to the deterioration of the quality of our loan and lease portfolio, as they could have a negative impact on the travel and transportation sensitive businesses for which our specialty finance businesses provide financing.

Our aircraft portfolio has foreign exposure, particularly in Mexico and Brazil.

We establish exposure limits for each country through a centralized oversight process, and in consideration of relevant economic, political, social and legal risks.

We monitor exposures closely and adjust our country limits in response to changing conditions.

Currency fluctuations could have a negative impact on our client’s cost of paying dollar denominated debts and, as a result, we could experience higher delinquency in this portfolio.

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This area of lending, with transportation in particular, is dependent upon general economic conditions and the strength of the travel, construction, and transportation industries.

Our allowance for credit losses may prove to be insufficient to absorb losses in our loan and lease portfolio — In the financial services industry, there is always a risk that certain borrowers may not repay borrowings.

Our allowance for credit losses may prove to be insufficient to absorb losses in our loan and lease portfolio — There is always a risk that borrowers may not repay borrowings.

The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.

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Any such losses could have a material adverse effect on our financial condition and results of operations.

We may be adversely affected by climate change and related legislative and regulatory initiatives — Political and social attention to the issue of climate change has increased.

Federal and state legislatures and regulatory agencies continue to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change.

As a financial institution, it is unclear how future governmental regulations and shifts in business trends resulting from increased concern about climate change will affect our operations;

however, natural or man-made disasters and severe weather events may cause operational disruptions and damage to both our properties and properties securing our loans.

We may be adversely affected by climate change and related legislative and regulatory initiatives — Federal and state legislatures and regulatory agencies continue to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change.

As a financial institution, it is unclear how future governmental regulations and shifts in business trends resulting from increased concern about climate change will affect our operations, however, natural or man-made disasters and severe weather events may cause operational disruptions and damage to both our properties and properties securing our loans.

Losses resulting from these disasters and severe weather events may make it more difficult for borrowers to timely repay their loans.

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Market declines, reductions in the value of our clients’ accounts, and the loss of wealth management clients may negatively impact the fees generated by our trust and wealth management business and could have an adverse effect on our business, financial condition and results of operations.

We may be adversely impacted by the transition away from LIBOR as a reference interest rate — The London Interbank Offered Rate (“LIBOR”) is a short-term interest rate used as a pricing reference for loans, derivatives and other financial instruments.

In July 2017, the United Kingdom Financial Conduct Authority, which regulates the process for establishing LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021.

In November 2020, the Federal Reserve, FDIC and OCC issued a joint statement confirming that the lesser used one-week and two-month USD LIBOR settings would cease publication at the end of 2021, but the remaining USD LIBOR settings would continue publication until June 30, 2023 to better facilitate an orderly transition.

The agencies also stated that the act of entering into new contracts that use USD LIBOR as a reference rate after December 31, 2021 would create safety and soundness risks.

The transition is progressing, but the exact impact it will have on financial markets and their individual participants is not currently known.

Several substitute benchmarks are developing in the marketplace, with various permutations of the Secured Overnight Financing Rate (SOFR) emerging as primary market alternatives, but at this time it is not feasible to predict exactly which benchmarks will emerge as enduring substitutes for LIBOR.

We convened a transition committee in 2019 to monitor market developments and implement a transition plan.

Existing loans impacted by the transition have been actively tracked, appropriate legal fallback language has been created and incorporated into documentation where appropriate and we are an adhering party to the ISDA IBOR Fallbacks Protocol.

In 2021, we began to utilize other interest rate benchmarks and took necessary steps to comply with the regulatory prohibitions of originating LIBOR-denominated loans starting in 2022.

We continue with our transition efforts with the expectation of completing all necessary steps prior to the June 30, 2023 deadline.

As of December 31, 2022, we have approximately $719 million of loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR that are scheduled to mature after June 30, 2023.

The impact of the transition away from LIBOR may adversely affect revenues, expenses and the value of those financial instruments.

Federal legislation governing the transition was adopted in 2022, although the transition could result in litigation with counterparties impacted by the transition as well as increased regulatory scrutiny and other adverse consequences.

Any replacement benchmark ultimately adopted as a substitute for LIBOR may behave differently than LIBOR in a manner detrimental to our financial performance.

Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operation.

Continued elevated levels of inflation could adversely impact our business and results of operations — The U.S.

has recently experienced elevated levels of inflation, with the consumer price index climbing approximately 7% in 2022.

has recently experienced elevated levels of inflation, with the consumer price index climbing approximately 7% in 2022 and increased at a more moderate rate in 2023.

Continued elevated levels of inflation could have complex effects on our business and results of operations, some of which could be materially adverse.

The Federal Reserve has increased interest rates dramatically during 2022 in an effort to halt and reverse continued elevated inflation, which has negatively impacted the value of our available-for-sale investment securities portfolio.

The Federal Reserve increased interest rates dramatically during 2022 and 2023 in an effort to halt and reverse continued elevated inflation, which has negatively impacted the value of our available-for-sale investment securities portfolio.

In addition, inflation-related increases in our interest expense is due to increased rates paid on deposits.

Elevated levels of inflation has also caused increased volatility and uncertainty in the business environment, which could adversely affect loan demand and our clients’ ability to repay indebtedness.

Governmental responses to the current inflationary environment could adversely affect our business, such as severe changes to monetary and fiscal policy, or the imposition or threatened imposition of price controls.

Governmental responses to the current inflationary environment, such as severe changes to monetary and fiscal policy, or the imposition or threatened imposition of price controls, could adversely affect our business.

The duration and severity of the current inflationary period and the resulting impact on us cannot be predicted with precision.

Liquidity Risks

We could experience an unexpected inability to obtain needed liquidity — Liquidity measures the ability to meet current and future cash flow needs as they become due.

The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities and is essential to a financial institution’s business.

We could experience an unexpected inability to obtain needed liquidity which could adversely affect our business, profitability, and viability as a going concern — The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities and is essential to a financial institution’s business.

The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds.

The bank failures in the Spring of 2023 exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution’s ability to satisfy its obligations to depositors.

We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management.

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The loss of the chief executive officer and other senior management and key personnel could have a material adverse impact on our operations because other officers may not have the experience and expertise to readily replace these individuals.

Many of these senior officers have primary contact with our clients and are important in maintaining personalized relationships with our client base.

Many of these senior officers have primary contact with our clients and are important in maintaining personal relationships with our client base.

The unexpected loss of services of one or more of these key employees could have a material adverse effect on our operations and possibly result in reduced revenues if we were unable to find suitable replacements promptly.

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Technology security breaches — Information security risks have increased due to the sophistication and activities of organized crime, hackers, terrorists and other external parties and the use of online, telephone, and mobile banking channels by clients.

Any compromise of our security could deter our clients from using our banking services.

We rely on security systems to provide the protection and authentication necessary to secure transmission of data against damage by theft, fire, power loss, telecommunications failure or similar catastrophic event, as well as from security breaches, ransomware, denial of service attacks, viruses, worms, and other disruptive problems caused by hackers.

Any compromise of our security could impair our reputation and deter our clients from using our banking services.

Information security breaches can also disrupt the operation of information systems on which we depend, adversely affecting our business operations.

Such events can result in costly remediation measures and litigation or governmental investigation and responding to security breaches can place unanticipated demands on the time and attention of management.

We rely on security systems to provide the protection and authentication necessary to secure transmission of data against damage by theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, ransomware, denial of service attacks, viruses, worms, use of artificial intelligence and other disruptive problems caused by hackers.

Computer break-ins, phishing and other disruptions of customer or vendor systems could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure.

We maintain a cyber insurance policy that is designed to cover a majority of loss resulting from cyber security breaches, but there is no assurance such coverage will be adequate to address all potential material adverse impacts.

We maintain a cyber insurance policy that is designed to cover a majority of loss resulting from cyber security breaches, but there is no assurance such coverage or other protective measures we employ will be adequate to address all potential material adverse impacts.

We also confront the risk of being compromised by emails sent by perpetrators posing as company executives or vendors in order to dupe company personnel into sending large sums of money to accounts controlled by the perpetrators.

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We continually encounter technological change — The financial services industry is constantly undergoing rapid technological change with frequent introductions of new technology-driven products and services.

The effective use of technology increases efficiency and enables financial institutions to better service clients and reduce costs.

Our future success depends, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands, as well as create additional efficiencies within our operations.

Our future success depends, in part, upon our ability to address the needs of our clients competitively by using technology to provide products and services that will satisfy client demands, as well as create additional efficiencies within our operations.

Many of our large competitors have substantially greater resources to invest in technological improvements.

We may not be able to effectively implement new technology-driven products and services quickly or be successful in marketing these products and services to our clients.

In addition, our implementation of certain new technologies, such as those related to artificial intelligence, automation and algorithms, in our business processes may have unintended consequences due to their limitations or our failure to use them effectively.

Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

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Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations.

While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

Our investments and/or financings in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on our financial results — We invest and/or finance certain tax-advantaged projects promoting affordable housing, community redevelopment and renewable energy sources.

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Our results of operations may be adversely impacted in future periods depending upon the level and nature of competition we encounter in our various market areas.

Managing reputational risk is important to attracting and maintaining customers, investors, and employees — Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers.

Managing reputational risk is important to attracting and maintaining customers, investors, and employees — Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, data security failures, compliance deficiencies, and questionable or fraudulent activities of our customers.

We have policies and procedures in place that seek to protect our reputation and promote ethical conduct.

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Adverse publicity regarding such assessments of our ESG performance could damage our reputation or prospects.

Unresolved Staff Comments.

Adverse market perception can adversely affect the trading price of our shares.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors