Management’s Discussion and Analysis of Financial Condition and Results of Operations.
−Removed: The purpose of this analysis is to provide the reader with information relevant to understanding and assessing our results of operations for each of the past three years and financial condition for each of the past two years.
−Removed: In order to fully appreciate this analysis you are encouraged to review the consolidated financial statements and statistical data presented in this document.
+Added: This analysis is intended to assist you in understanding our results of operations for each of the past three years and financial condition for each of the past two years.
FORWARD-LOOKING STATEMENTS
13 unchanged sentences
• The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board.
−Removed: • Inflation, interest rate, securities market, and monetary fluctuations.
−Removed: • Political instability.
−Removed: • Acts of war or terrorism.
+Added: • Inflation, interest rate, securities market, and monetary fluctuations, including substantial changes in the cost of fuel.
+Added: • Political instability, acts of war or terrorism, or cybersecurity threats.
• The spread of infectious diseases or pandemics.
−Removed: • Substantial changes in the cost of fuel.
• The timely development and acceptance of new products and services and perceived overall value of these products and services by others.
6 unchanged sentences
• The ability to expand effectively into new markets that we target.
−Removed: • Changes in the competitive environment among bank holding companies.
+Added: • Changes in the competitive environment.
• The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, insurance, and climate change) with which we and our subsidiaries must comply.
20 unchanged sentences
Allowance for Credit Losses — The allowance for credit losses represents management’s estimate of expected credit losses over the expected contractual life of our existing loan and lease portfolio and the establishment of an allowance that is sufficient to absorb those losses.
−Removed: As of December 31, 2020, we adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326):
−Removed: Measurement of Credit Losses on Financial Instruments, as amended, which replaced the incurred loss methodology with an expected loss methodology that is referred to as current expected credit losses (CECL).
−Removed: The accounting standard was implemented at a time when we were experiencing conditions without historical precedent.
Determining the appropriateness of the allowance is complex and requires judgement by management about the effect of matters that are inherently uncertain.
7 unchanged sentences
Actual losses may differ from estimated amounts due to model inefficiencies or management’s inability to adequately determine appropriate model adjustment factors.
−Removed: The accounting standard further requires management to use forecasts about future economic conditions to determine the expected credit losses over the remaining life of the asset.
−Removed: Forecast adjustments are fundamentally difficult to establish and the current environment presents challenges with persistent inflation, markedly higher interest rates, and heightened geopolitical uncertainty.
+Added: Additionally, we are required to use forecasts about future economic conditions to determine the expected credit losses over the remaining life of the asset.
+Added: Forecast adjustments are fundamentally difficult to establish and the current environment presents challenges with increasing geopolitical uncertainty, elevated inflation, high interest rates, and persistently inverted yield curve.
We endeavor to apply a forecast adjustment that is directionally consistent, reasonable, supportable, and reflective of current expectations and conditions.
3 unchanged sentences
In assessing the factors used to derive an appropriate allowance, management benefits from a lengthy organizational history and experience with credit decisions and related outcomes.
−Removed: We have been diligent in our efforts to gain a thorough understanding of the CECL accounting standard, and have reviewed our portfolios, loan segmentations, methodologies and models and believe we have made appropriate and prudent decisions.
+Added: We have been diligent in our efforts to review our portfolios, loan segmentations, methodologies and models and believe we have made appropriate and prudent decisions.
Nonetheless, if management’s underlying assumptions prove to be inaccurate, the allowance for loan and lease losses would have to be adjusted.
19 unchanged sentences
Return on average common shareholders’ equity was 13.48% in 2023 versus 13.81% in 2022, and 13.07% in 2021.
−Removed: Net income in 2022, as compared to 2021, was positively impacted by a $26.83 million or 11.34% increase in net interest income and a $1.45 million or 0.78% decrease in noninterest expense which was offset by a $17.55 million or 407.81% increase in the provision for credit losses and a $8.83 million or 8.82% decrease in noninterest income.
−Removed: Net income in 2021, as compared to 2020, was positively impacted by a $10.82 million or 4.79% increase in net interest income, a $40.30 million or 111.95% decrease in the provision for credit losses, and a $1.22 million or 0.65% decrease in noninterest expense which was offset by a $3.80 million or 3.65% decrease in noninterest income and a $11.45 million or 46.01% increase in income tax expense.
+Added: Net income in 2023, as compared to 2022, was positively impacted by a $15.18 million or 5.76% increase in net interest income and a $7.38 million decrease in the provision for credit losses which was offset by a $17.03 million or 9.22% increase in noninterest expense.
+Added: Net income in 2022, as compared to 2021, was positively impacted by a $26.83 million or 11.34% increase in net interest income and a $1.45 million or 0.78% decrease in noninterest expense which was offset by a $17.55 million or 407.81% increase in the provision for credit losses and an $8.83 million or 8.82% decrease in noninterest income.
Dividends paid on common stock in 2023 amounted to $1.30 per share, compared to $1.26 per share in 2022, and $1.21 per share in 2021.
9 unchanged sentences
During 2023, average earning assets increased $295.44 million or 3.86% while average interest-bearing liabilities increased $520.63 million or 10.41% over the comparable period in 2022.
−Removed: The yield on average earning assets increased 36 basis points to 3.84% for 2022 from 3.48% for 2021 primarily due to higher rates on loans and leases and investment securities.
+Added: The yield on average earning assets increased 141 basis points to 5.25% for 2023 from 3.84% for 2022 primarily due to higher rates on loans and leases, tax exempt investment securities and other investments, which include federal funds sold, time deposits with other banks, Federal Reserve Bank excess balances, Federal Reserve Bank and Federal Home Loan Bank (FHLB) stock and commercial paper.
Total cost of average interest-bearing liabilities increased 189 basis points to 2.50% during 2023 from 0.61% in 2022 as a result of the higher interest rate environment.
−Removed: The result to the fully taxable-equivalent net interest margin was an increase of 22 basis points.
−Removed: The largest contributor to the increase in the yield on average earning assets in 2022 was the 42 basis point improvement in the loan and lease portfolio yield primarily due to market conditions as a result of seven Federal Reserve interest rate increases during the year.
+Added: The result to the fully taxable-equivalent net interest margin was an increase of six basis points.
+Added: The largest contributor to the increase in the yield on average earning assets in 2023 was the 151 basis point improvement in the loan and lease portfolio yield primarily from rising interest rates.
Average loans and leases increased $637.16 million or 11.45% in 2023 from 2022 while the yield increased to 6.25%.
−Removed: The yield on net loans and leases was positively impacted by three basis points in 2022 due to the recognition of $2.70 million of fees on PPP loans which have been forgiven by the SBA or paid down by customers.
−Removed: PPP forgiveness and customer payments totaled $74.88 million for the full year of 2022 with less than $1 million remaining.
−Removed: Strong growth primarily within our specialty finance group portfolios drove total average loans and leases higher during the year.
−Removed: During 2022, the tax-equivalent yield on investment securities available-for-sale increased 21 basis points to 1.50% while the average balance grew $401.97 million or 27.85% with the largest increases in U.S.
+Added: Strong growth primarily within our Auto and Light Truck, Construction Equipment and Commercial Real Estate portfolios drove total average loans and leases higher during the year.
+Added: Net interest recoveries positively contributed three basis points to the yield on average loans and leases during 2023 and two basis points to the average loans and leases yield during 2022.
+Added: During 2023, the tax-equivalent yield on investment securities available-for-sale increased seven basis points to 1.57% while the average balance decreased $168.70 million or 9.14% with the largest decreases in U.S.
treasury and federal agency securities and mortgage-backed securities.
Average mortgages held for sale decreased $2.81 million or 54.27% during 2023 while the yield increased 236 basis points.
−Removed: Average other investments, which include federal funds sold, time deposits with other banks, Federal Reserve Bank excess balances, Federal Reserve Bank and Federal Home Loan Bank (FHLB) stock and commercial paper decreased $196.48 million or 44.61% during 2022 while the yield increased 75 basis points.
+Added: Average other investments decreased $170.21 million or 69.78% during 2023 while the yield increased 391 basis points.
The average balance decrease in other investments was primarily a result of lower balances held at the Federal Reserve Bank.
Average interest-bearing deposits increased $530.60 million or 11.35% during 2023 while the effective rate paid on those deposits increased 183 basis points.
−Removed: The increased average balance was primarily due to increases in business, consumer and public fund deposits.
+Added: The increased average balance was primarily due to increases in time deposits, public fund, and brokered deposits.
The increase in the average cost of interest-bearing deposits was primarily the result of higher rates and a shift in the deposit mix.
−Removed: The deposit mix changed as the year progressed with clients moving their funds from non-maturity accounts to certificates of deposit due to the rising interest rate environment.
−Removed: Additionally, brokered deposits grew during the fourth quarter.
−Removed: Average noninterest-bearing demand deposits increased $155.71 million or 8.27% during 2022 due primarily to uncertain economic conditions and business customers maintaining a cautious stance with their funds and spending.
−Removed: Average short-term borrowings increased $28.24 million or 15.12% during 2022 while the effective rate paid increased 63 basis points.
−Removed: The increase in short-term borrowings was primarily the result of higher borrowings with the FHLB as part of liquidity management to support loan growth.
−Removed: Average long-term debt and mandatorily redeemable securities balances decreased $23.91 million or 30.32% during 2022 as the effective rate decreased 301 basis points primarily due to lower rates on mandatorily redeemable securities from a reduction in book value per share during 2022.
+Added: The deposit mix change which began during 2022 carried over into 2023 with clients moving their funds from non-maturity accounts to certificates of deposit due to the rising interest rate environment.
+Added: Average noninterest-bearing demand deposits decreased $284.73 million or 13.97% during 2023 due primarily to persistent rate competition for deposits and greater utilization of excess funds by our business customers.
+Added: Average short-term borrowings decreased $1.36 million or 0.63% during 2023 while the effective rate paid increased 259 basis points.
+Added: The decrease in short-term borrowings was primarily the result of lower repurchase agreements offset by increased borrowings with the FHLB.
+Added: Average long-term debt and mandatorily redeemable securities balances decreased $8.62 million or 15.68% during 2023 while the effective rate increased 827 basis points primarily due to higher rates on mandatorily redeemable securities from an improvement in book value per share during 2023.
Mandatorily redeemable shares are issued under the terms of one of our executive incentive compensation plans and are settled based on book value per share with changes from the previous reporting date recorded as interest expense.
100 unchanged sentences
Noninterest Income — Noninterest income decreased $0.64 million or 0.70% in 2023 from 2022 following a $8.83 million or 8.82% decrease in 2022 from 2021.
−Removed: The following table shows noninterest income for the most recent three years ended December 31.
+Added: The following table shows the components of our noninterest income for the most recent three years ended December 31.
(Dollars in thousands) 2023 2022 2021
6 unchanged sentences
Equipment rental 8,837 12,274 16,647
−Removed: (Losses) gains on investment securities available-for-sale (184) (680) 279
+Added: Losses on investment securities available-for-sale (2,926) (184) (680)
Other 19,895 15,042 12,560
Total noninterest income $ 90,623 $ 91,262 $ 100,092
−Removed: Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) decreased $0.68 million or 2.84% in 2022 from 2021 compared to a $2.67 million or 12.64% increase in 2021 over 2020.
+Added: Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) increased $0.60 million or 2.59% in 2023 from 2022 compared to a $0.68 million or 2.84% decrease in 2022 over 2021.
Trust and wealth advisory fees are largely based on the number and size of client relationships and the market value of assets under management.
The market value of trust assets under management at December 31, 2023 and 2022 was $5.46 billion and $4.84 billion, respectively.
−Removed: The negative performance of the stock and bond markets in 2022 resulted in a decline in the market value of trust assets under management compared to 2021.
+Added: The positive performance of the stock and bond markets primarily during the fourth quarter of 2023 resulted in an increase in the market value of trust assets under management compared to 2022.
At December 31, 2023, these trust assets were comprised of $3.66 billion of personal and agency trusts and estate administration assets, $1.10 billion of employee benefit plan assets, $0.53 million of individual retirement accounts, and $0.17 million of custody assets.
Service charges on deposit accounts increased by $0.60 million or 4.96% in 2023 from 2022 compared to an increase of $1.56 million or 14.70% in 2022 from 2021.
−Removed: The growth in service charges on deposit accounts in 2022 was primarily due to increased consumer and business nonsufficient fund transactions.
−Removed: The increase in service charges on deposit accounts in 2021 was primarily due to a higher customer ATM fees from an increased volume of transactions and a change in the fees charged, as well as increased business deposit account fees offset by a decrease in consumer nonsufficient fund transactions.
−Removed: Economic recovery in 2021 led to a corresponding improvement in consumer and business activity.
−Removed: Debit card income was relatively flat from 2022 to 2021 compared to an increase of $3.14 million or 20.97% in 2021 from 2020.
−Removed: The decline in 2022 to 2021 was mainly the result of decreased discretionary spending and a focus on core expenses by consumers.
−Removed: Debit card transactions in 2021 were helped significantly by the reopened economy driving increased consumer activity.
+Added: The growth in service charges on deposit accounts in 2023 was primarily due to increased consumer and business overdraft transactions.
+Added: The increase during 2022 was primarily due to increased consumer and business nonsufficient fund transactions.
+Added: Debit card income declined slightly during 2023 following a similar slight decrease during 2022.
+Added: The declines in 2023 to 2022 were mainly the result of decreased discretionary spending and a focus on core expenses by consumers.
+Added: Additionally, regulatory changes to web commerce transactions implemented by the Federal Reserve during 2023 had a negative impact.
Mortgage banking income dropped $0.65 million or 15.79% in 2023 over 2022, compared to a $7.70 million or 65.13% decrease in 2022 from 2021.
−Removed: We had $0.81 million of MSR impairment recoveries in 2021 and $0.81 million of MSR impairment charges in 2020.
+Added: We had $0.81 million of MSR impairment recoveries in 2021.
During 2023, 2022 and 2021, we determined that no permanent write-down was necessary for previously recorded impairment on MSRs.
−Removed: During 2022, mortgage banking income decreased primarily due to reduced mortgage origination volumes resulting in lower income on loans sold in the secondary market.
+Added: During 2023 and 2022, mortgage banking income decreased primarily due to reduced mortgage origination volumes resulting in lower income on loans sold in the secondary market.
Demand for mortgages has continued to decline with steep increases in interest rates, limited inventory, and fewer housing starts all of which impacted market activity.
−Removed: During 2021, mortgage banking income decreased primarily due to reduced margins on a lower volume of loan sales.
−Removed: Insurance commissions declined $0.54 million or 7.51% in 2022 compared to 2021 and improved $0.22 million or 3.16% in 2021 compared to 2020.
+Added: Insurance commissions increased $0.21 million or 3.10% in 2023 compared to 2022 and declined $0.54 million or 7.51% in 2022 compared to 2021.
+Added: The rise in 2023 was primarily due to a larger book of business and more contingent commissions received.
The decrease in 2022 was primarily due to a reduced book of business and fewer contingent commissions received.
−Removed: The increase in 2021 was primarily due to higher contingent commissions received due to achieving sales goals set forth by various carrier incentive programs.
Equipment rental income generated from operating leases decreased by $3.44 million or 28.00% during 2023 from 2022 compared to a reduction of $4.37 million or 26.27% during 2022 from 2021.
−Removed: The average equipment rental portfolio decreased 21.27% in 2022 over 2021 and decreased 29.16% in 2021 over 2020 as a result of reduced leasing volume primarily in the construction equipment and the auto and light truck portfolios due to changing customer preferences and competitive pricing pressures for new business.
+Added: The average equipment rental portfolio decreased 29.45% in 2023 over 2022 and decreased 21.27% in 2022 over 2021 as a result of reduced leasing volume primarily in the medium and heavy duty truck, construction equipment and the auto and light truck portfolios due to changing customer preferences and competitive pricing pressures for new business.
In 2023 and 2022, the decline in rental income was offset by a similar decline in depreciation on equipment owned under operating leases.
−Removed: Losses on the sale of investment securities available-for-sale were $0.18 million and $0.68 million in 2022 and 2021, respectively.
−Removed: There were gains of $0.28 million on the sale of investment securities available-for-sale for the year ended 2020.
−Removed: Losses and gains on the sale of investment securities available-for-sale were primarily from the sale of Federal agency securities in 2022 and corporate securities in 2021 and 2020, with the goal of managing portfolio risk and liquidity.
+Added: Losses on the sale of investment securities available-for-sale were $2.93 million in 2023 compared to losses of $0.18 million and $0.68 million in 2022 and 2021, respectively.
+Added: Losses during 2023 of $2.88 million were the result of repositioning the investment securities portfolio.
+Added: In the repositioning, approximately $40 million of securities with an average yield of 1.10% were sold and used to purchase approximately $40 million of securities with an average yield of 4.80%.
+Added: The remaining 2023 losses were the result of sales to support liquidity and fund loan growth during the first quarter.
+Added: Losses during 2022 and 2021 were from the sale of Federal agency securities in 2022 and corporate securities in 2021 with the goal of managing portfolio risk and liquidity.
Other income improved $4.85 million or 32.26% in 2023 from 2022 compared to an increase of $2.48 million or 19.76% in 2022 from 2021.
+Added: The increase in 2023 was mainly a result of partnership investment gains on sale of renewable energy tax equity investments of $3.43 million, increased customer swap fees of $1.23 million and higher bank owned life insurance policy claims.
The increase in 2022 was mainly a result of partnership investment gains on sale of renewable energy tax equity investments of $2.24 million and higher bank owned life insurance policy claims offset by a write down of $0.37 million on small business capital investments and reduced customer swap fees of $0.33 million.
−Removed: The increase in 2021 was mainly a result of higher brokerage fees and commissions and increased partnership investment gains offset by reduced customer swap fees and lower bank owned life insurance policy claims.
−Removed: Noninterest Expense — Noninterest expense decreased $1.45 million or 0.78% in 2022 from 2021 following a $1.22 million or 0.65% decrease in 2021 from 2020.
−Removed: The following table shows noninterest expense for the most recent three years ended December 31.
+Added: Noninterest Expense — Noninterest expense increased $17.03 million or 9.22% in 2023 from 2022 following a $1.45 million or 0.78% decrease in 2022 from 2021.
+Added: The following table shows the components of our noninterest expense for the most recent three years ended December 31.
(Dollars in thousands) 2023 2022 2021
10 unchanged sentences
Total noninterest expense $ 201,724 $ 184,699 $ 186,148
−Removed: Total salaries and employee benefits were relatively flat in 2022 from 2021, following a $4.25 million or 4.19% increase in 2021 from 2020.
+Added: Total salaries and employee benefits increased $10.50 million or 9.99% in 2023 from 2022, following a slight decrease in 2022 from 2021.
Employee salaries grew $7.17 million or 8.31% in 2023 from 2022 compared to an increase of $0.62 million or 0.73% in 2022 from 2021.
+Added: The increase in 2023 was mainly a result of higher base salaries due to normal merit increases, the impact of wage inflation, and an increase in the number of employees from the filling of prior open positions and lower employee turnover.
The increase in 2022 was mainly a result of higher base salaries due to normal merit increases offset by a decrease in incentive compensation and commission compensation primarily in our residential mortgage area.
−Removed: The growth in 2021 was mainly a result of higher base salaries due to normal merit increases and a rise in incentive compensation including a one-time special reward to COVID-19 vaccinated employees announced at the end of 2021 offset by a decrease in commission compensation primarily in our residential mortgage area.
−Removed: Employee benefits decreased $1.32 million or 6.58% in 2022 from 2021, compared to a $1.32 million or 7.05% increase in 2021 from 2020.
+Added: Employee benefits increased $3.33 million or 17.73% in 2023 from 2022, compared to a $1.32 million or 6.58% decrease in 2022 from 2021.
+Added: During 2023, group insurance costs were higher due to a rise in claims experienced and increased company contributions to employee retirement accounts compared to levels in 2022.
During 2022, group insurance costs were lower due to decreased claims experienced compared to levels in 2021.
−Removed: In 2021, company contributions to employee retirement accounts increased due to higher salaries during 2021 and a rise in group insurance costs as healthcare access and usage increased from levels in 2020.
Occupancy expense rose $0.36 million or 3.37% in 2023 from 2022, compared to an increase of $0.20 million or 1.94% in 2022 from 2021.
+Added: The expense increase in 2023 was primarily the result of higher premises repairs.
The elevated expense in 2022 was primarily the result of higher snow removal costs due to inclement weather conditions.
−Removed: The increased expense in 2021 was primarily the result of higher premises repairs and cleaning offset by lower real estate taxes and reduced lease expenses.
−Removed: Furniture and equipment expense, including depreciation, declined by $0.53 million or 8.85% in 2022 from 2021 compared to a decrease of $0.56 million or 8.62% in 2021 from 2020.
+Added: Furniture and equipment expense, including depreciation, increased by $0.21 million or 3.76% in 2023 from 2022 compared to a decrease of $0.53 million or 8.85% in 2022 from 2021.
+Added: The higher expense in 2023 was primarily due to increased equipment replacement costs.
The lower expense in 2022 was primarily due to a reduction in equipment rental and depreciation expenses.
−Removed: The lower expense in 2021 was primarily due to a reduction in furniture and equipment depreciation and lower corporate aircraft maintenance.
Data processing expense rose by $2.68 million or 11.98% in 2023 from 2022, following a $2.50 million or 12.57% increase in 2022 from 2021.
−Removed: The increase in 2022 was due to a rise in software maintenance costs and higher computer processing charges related to a variety of technology projects.
−Removed: The increase in 2021 was a result of increases in software maintenance costs and point of sale computer operating expenses.
+Added: The increases in 2023 and 2022 were due to a rise in software maintenance costs and higher computer processing charges related to a variety of technology projects.
Depreciation on equipment owned under operating leases declined $2.93 million or 29.23% in 2023 from 2022, following a $3.67 million or 26.81% decrease in 2022 from 2021.
In 2023 and 2022, depreciation on equipment owned under operating leases correlated with the change in equipment rental income.
−Removed: Professional fees decreased $1.40 million or 16.09% in 2022 from 2021, compared to a $2.36 million or 37.34% increase in 2021 from 2020.
+Added: Professional fees decreased $0.58 million or 7.90% in 2023 from 2022, compared to a $1.40 million or 16.09% decrease in 2022 from 2021.
+Added: The lower expense in 2023 can primarily be attributed to a decline in the utilization of consulting services for technology projects and compliance services.
The lower expense in 2022 can primarily be attributed to a decline in legal fees offset by increased utilization of consulting services for technology projects and compliance services.
−Removed: The higher expense in 2021 compared to 2020 was primarily due to a rise in legal fees and increased utilization of consulting services for technology projects.
FDIC and other insurance expense grew $2.30 million or 63.48% in 2023 from 2022 and increased $0.95 million or 35.41% in 2022 from 2021.
+Added: The increase in 2023 was mainly the result of higher assessments for FDIC premiums from a two basis point increase in assessment rates during the first quarter of 2023.
The increase in 2022 was mainly the result of higher assessments for FDIC premiums from a larger asset base and a one-time $0.38 million recovery of an incurred but not reported insurance reserve in 2021.
−Removed: The increase in 2021 was mainly the result of $0.55 million in FDIC insurance premium credits received during 2020 which were not present in 2021 offset by a one-time $0.38 million recovery of an incurred but not reported insurance reserve.
−Removed: Business development and marketing expenses declined $2.19 million or 27.33% in 2022 from 2021 and rose $3.86 million or 92.76% in 2021 from 2020.
+Added: Business development and marketing expenses increased $1.33 million or 22.91% in 2023 from 2022 following a decline of $2.19 million or 27.33% in 2022 from 2021.
+Added: The increased expense in 2023 was mainly the result of a charitable contribution of $1.00 million made during 2023 and higher marketing promotions.
The decreased expense in 2022 was mainly the result of a one-time charitable contribution of $3.00 million made during 2021 offset by increased business development expense and marketing promotions.
−Removed: The higher expense in 2021 was mainly the result of a charitable contribution of $3.00 million made during 2021 to support COVID-19 initiatives and increased business development expense as a result of more business entertainment and travel opportunities tied to fewer COVID-19 restrictions.
−Removed: Other expenses increased by $3.39 million or 31.05% in 2022 as compared to 2021 and decreased $5.66 million or 34.18% in 2021 as compared to 2020.
+Added: Other expenses increased by $3.15 million or 22.02% in 2023 as compared to 2022 and increased $3.39 million or 31.05% in 2022 as compared to 2021.
+Added: The higher expense in 2023 was primarily the result of an increase in the provision for unfunded credit commitments, higher postage and shipping costs, and a rise in data communication line charges as bandwidth is improved.
The higher expense in 2022 was primarily the result of an increase in the provision for unfunded loan commitments, a rise in the provision for interest rate swaps with customers, and higher employee training expenses.
−Removed: The reduction in 2021 was primarily the result of lower general collection and repossession expenses, fewer valuation adjustments on repossessed assets, a lower provision for interest rate swaps with customers, a decrease in the provision for unfunded loan commitments, and a reduction in postage and shipping expenses offset by reduced gains on the sale of operating lease equipment and higher employee training expenses due to fewer COVID-19 travel restrictions.
Income Taxes — 1st Source recognized income tax expense in 2023 of $36.75 million, compared to $36.26 million in 2022, and $36.33 million in 2021.
5 unchanged sentences
Commercial and agricultural $ 766,223 $ 812,031
−Removed: Solar 381,163 348,302
+Added: Renewable energy 399,708 381,163
Auto and light truck 966,912 808,117
8 unchanged sentences
Loans and leases, net of unearned discount, at December 31, 2023, were $6.52 billion and were 74.69% of total assets, compared to $6.01 billion and 72.08% of total assets at December 31, 2022.
−Removed: Average loans and leases, net of unearned discount, increased $128.88 million or 2.37% and decreased $25.62 million or 0.47% in 2022 and 2021, respectively.
−Removed: PPP loans, net of unearned discount, at December 31, 2022 and 2021 were $0.90 million and $73.08 million, respectively, and were located in the Commercial and agricultural lending portfolio.
−Removed: Commercial and agricultural lending, excluding those loans secured by real estate but including PPP loans, decreased $106.68 million or 11.61% in 2022 over 2021.
+Added: Average loans and leases, net of unearned discount, increased $637.16 million or 11.45% and increased $128.88 million or 2.37% in 2023 and 2022, respectively.
+Added: Commercial and agricultural lending, excluding those loans secured by real estate, decreased $45.81 million or 5.64% in 2023 over 2022.
Commercial and agricultural lending outstandings were $766.22 million and $812.03 million at December 31, 2023 and December 31, 2022, respectively.
−Removed: Similar to 2021, the decrease during 2022 was largely due to PPP loan forgiveness and customer pay downs which amounted to $74.88 million during 2022.
−Removed: Additionally, one-time reclassifications of loan outstandings from this portfolio into the commercial real estate portfolio of $32.66 million contributed to the balance reduction.
−Removed: Excluding PPP loans, commercial and agricultural outstandings were $811.13 million and $845.63 million as of December 31, 2022 and 2021, respectively.
−Removed: Solar loans and leases increased $32.86 million or 9.43% in 2022 over 2021.
−Removed: Solar loan and lease outstandings were $381.16 million and $348.30 million at December 31, 2022 and 2021, respectively.
−Removed: The increase during 2022 was due to continued positive momentum in this business line.
−Removed: We expect that momentum to continue into 2023.
+Added: The reduction in balances during 2023 can be attributed to reduced borrowings within our working capital and line of credit products as borrowers utilized excess deposits to reduce their line of credit borrowings fueled by elevated interest rates.
+Added: Renewable energy loans and leases increased $18.55 million or 4.87% in 2023 over 2022.
+Added: Renewable energy loan and lease outstandings were $399.71 million and $381.16 million at December 31, 2023 and 2022, respectively.
+Added: The increase during 2023 was due to continued positive momentum from the addition of new clients and repeat business from existing clients.
Auto and light truck loans increased $158.80 million or 19.65% in 2023 over 2022.
At December 31, 2023, auto and light truck loans had outstandings of $966.91 million and $808.12 million at December 31, 2022.
−Removed: This increase was primarily attributable to expanding relationships with existing clients and selectively adding new clients during a time of continued constrained fleet availability.
−Removed: Medium and heavy duty truck loans and leases increased $54.12 million or 20.84% in 2022.
+Added: This increase was primarily attributable to expanding and selectively adding vehicle rental and commercial lessor client relationships as fleet availability continues to improve.
+Added: Medium and heavy duty truck loans and leases decreased $1.92 million or 0.61% in 2023.
Medium and heavy duty truck financing at December 31, 2023 and 2022 had outstandings of $311.95 million and $313.86 million, respectively.
−Removed: The increase at December 31, 2022 from December 31, 2021 can be mainly attributed to expanded relationships with existing clients while fleet availability continues to be constrained.
−Removed: Aircraft financing at year-end 2022 increased $179.32 million or 19.96% from year-end 2021.
−Removed: Aircraft financing at December 31, 2022 and 2021 had outstandings of $1.08 billion and $898.40 million, respectively.
−Removed: The increase during 2022 was due to higher domestic outstandings of $75.17 million and foreign outstandings of $104.15 million.
−Removed: Our 2022 balances increased as demand was bolstered by ongoing health safety concerns sparked by COVID-19 and increasingly less convenient commercial travel.
−Removed: Those concerns as well as customers hoping to take advantage of bonus depreciation, which will begin phasing down during 2023, increased demand for private turbine aircraft especially amongst private business and high net worth market segments.
−Removed: Our foreign outstandings increased 53.88% year over year.
−Removed: Our foreign loan and lease outstandings, all denominated in U.S.
−Removed: dollars were $297.46 million and $193.31 million as of December 31, 2022 and 2021, respectively.
+Added: The decrease at December 31, 2023 from December 31, 2022 can be mainly attributed to competitive factors and a selective credit approach to maintain yield with existing clients while fleet availability continues to improve.
+Added: Aircraft financing at year-end 2023 was relatively flat from year-end 2022.
+Added: Aircraft financing at December 31, 2023 and 2022 had outstandings of $1.08 billion and $1.08 billion, respectively.
+Added: Our 2023 domestic balances remained flat while increasing aircraft inventories and fewer transactions took place in the market.
+Added: Bonus depreciation-motivated purchases are phasing down resulting in lower demand for private turbine aircraft especially amongst private business and high net worth market segments.
+Added: Higher usage of cash for purchases and increased caution with large capital spending was normalizing after the record COVID-era transaction activity.
+Added: We continue to exercise a consistent disciplined approach to aircraft types and client credit profiles.
+Added: Our foreign outstandings, all denominated in U.S.
+Added: dollars, increased 1.66% during 2023 and were $302.41 million and $297.46 million as of December 31, 2023 and 2022, respectively.
Loan and lease outstandings to borrowers in Brazil and Mexico were $119.38 million and $147.61 million as of December 31, 2023, respectively, compared to $129.98 million and $136.68 million as of December 31, 2022, respectively.
1 unchanged sentence
Construction equipment financing increased $146.25 million or 15.58% in 2023 compared to 2022.
−Removed: Construction equipment financing at December 31, 2022 had outstandings of $938.50 million, compared to outstandings of $754.27 million at December 31, 2021.
+Added: Construction equipment financing at December 31, 2023 had outstandings of $1.08 billion, compared to outstandings of $938.50 million at December 31, 2022.
The growth in this category was primarily due to significant new client relationships and continued growth with existing clients.
−Removed: Commercial loans secured by real estate, of which approximately 57% is owner occupied, increased $14.40 million or 1.55% in 2022 over 2021.
−Removed: Commercial loans secured by real estate outstanding at December 31, 2022 were $943.75 million and $929.34 million at December 31, 2021.
−Removed: The increase in 2022 was the result of one-time reclassifications from the commercial and agricultural portfolio of $32.66 million as well as by continued modest growth of owner occupied borrowings within certain business sectors of our markets.
−Removed: Our non-owner occupied real estate portfolio again declined slightly as projects took advantage of low market rates and refinanced via the secondary markets.
−Removed: In addition, some of our newer projects have seen continued delays due to labor and material shortages.
+Added: Commercial loans secured by real estate increased $186.12 million or 19.72% in 2023 over 2022.
+Added: Commercial loans secured by real estate outstanding at December 31, 2023 were $1.13 billion and $943.75 million at December 31, 2022.
+Added: Approximately 55% of loans were owner occupied at December 31, 2023.
+Added: The majority of our non-owner occupied commercial real estate projects are located within our primary market area.
+Added: The increase in 2023 was the result of selective growth within our markets.
+Added: We have financed a minimal amount of commercial real estate secured by non-owner occupied office property where third-party tenant rents are the primary source of repayment and all are performing as agreed.
Residential real estate and home equity loans were $637.97 million at December 31, 2023 and $584.74 million at December 31, 2022.
Residential real estate and home equity loans increased $53.24 million or 9.10% in 2023 from 2022.
−Removed: Residential mortgage and home equity outstandings grew in 2022 as new adjustable-rate mortgage loans were retained rather than being sold into the secondary market along with high demand for home equity lines of credit.
−Removed: The trends from 2021 shifted in 2022 as clients did not want to refinance their first mortgages to pull equity from their homes.
+Added: Residential mortgage and home equity outstandings grew in 2023 as new adjustable-rate mortgage loans were retained rather than being sold into the secondary market.
+Added: Additionally, reduced homeowner liquidity drove continued high demand for home equity lines of credit and loans.
+Added: The trends from 2022 continued in 2023 as clients did not want to refinance their first mortgages to pull equity from their homes.
In addition, a slow housing market and low builder confidence tended to slow home purchases.
−Removed: Consumer loans increased $18.20 million or 13.68% in 2022 over 2021.
+Added: Consumer loans decreased $8.33 million or 5.50% in 2023 over 2022.
Consumer loans outstanding at December 31, 2023, were $142.96 million and $151.28 million at December 31, 2022.
−Removed: Volumes increased as consumer spending improved as restrictions associated with the COVID-19 pandemic were relaxed.
−Removed: In addition, an increase in new and used car prices resulted in an increase in average loan size.
+Added: During 2023, higher vehicle prices, increased interest rates, reduced inventory levels and consumer’s lack of liquidity contributed to the decrease in consumer loans.
The following table shows the contractual maturities of loans and leases outstanding as of December 31, 2023 as well as classification according to the sensitivity to changes in interest rates.
4 unchanged sentences
Total commercial and agricultural 385,501 326,456 54,263 3 766,223
+Added: Renewable energy
Fixed rate 8,912 28,001 28,437 13,940 79,290
Variable rate 125,986 97,175 88,956 8,301 320,418
−Removed: Total solar 128,797 163,577 88,789 — 381,163
+Added: Total renewable energy 134,898 125,176 117,393 22,241 399,708
Auto and light truck
37 unchanged sentences
Our liability for repurchases, included in Accrued Expenses and Other Liabilities on the Statements of Financial Condition, was $0.15 million and $0.17 million as of December 31, 2023 and 2022, respectively.
−Removed: Our (recovery) expense for repurchase losses, included in Loan and Lease Collection and Repossession expense on the Statements of Income, was $(0.05) million in 2022 compared to $(0.09) million in 2021 and $0.03 million in 2020.
+Added: Our recovery for repurchase losses, included in Loan and Lease Collection and Repossession expense on the Statements of Income, was $0.07 million in 2023 compared to $0.05 million in 2022 and $0.09 million in 2021.
The mortgage repurchase liability represents our best estimate of the loss that we may incur.
2 unchanged sentences
CREDIT EXPERIENCE
−Removed: Allowance for Credit Losses — As of December 31, 2020, we adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326):
−Removed: Measurement of Credit Losses on Financial Instruments, as amended, which replaced the incurred loss methodology with an expected loss methodology that is referred to as current expected credit losses (CECL) methodology.
−Removed: The allowance for credit losses considers the historical loss experience, current conditions, and reasonable and supportable forecasts.
−Removed: To estimate expected loan and lease losses under CECL, we use a broader range of data than under previous U.S.
−Removed: We are able to access loan data over a long-time horizon, generally back to the fourth quarter of 2007, thus capturing most of the economic business cycle which includes the Great Recession and the subsequent long slow recovery which supports full lifetime losses.
−Removed: The CECL methodology requires our loan portfolio to be segregated into pools based on similar risk characteristics.
−Removed: We evaluate each portfolio, establishing numerous segments.
−Removed: We then review risk characteristics for each segment, noting that some pools were either too small for meaningful analysis or contained risk characteristics similar to other pools.
−Removed: Thus, some pools were consolidated.
−Removed: Loans and leases within each pool are collectively evaluated using either the cohort cumulative loss rate methodology or the probability of default (PD)/loss given default (LGD) methodology with transition matrix PD/historical average LGD.
−Removed: Our management evaluates the allowance quarterly, reviewing all loans and leases over a fixed-dollar amount ($250,000) where the internal credit quality grade is at or below a predetermined classification, actual and anticipated loss experience, current economic events in specific industries, and other pertinent factors including general economic conditions.
−Removed: Determination of the allowance is inherently subjective as it requires significant estimates and adjustments to historical loss rates to capture differences that may exist between the current and historical conditions, including consideration of environmental factors, principally economic risk which is generally reflected in forecast adjustments, specific industry risk and concentration risk, all of which may be susceptible to significant and unforeseen changes.
−Removed: We review the status of the loan and lease portfolio to identify borrowers that might develop financial problems in order to aid borrowers in the handling of their accounts and to mitigate losses.
−Removed: Our allowance for loan and lease losses is provided for by direct charges to the provision for credit losses.
+Added: Allowance for Credit Losses — The allowance for credit losses considers the historical loss experience, current conditions, and reasonable and supportable forecasts.
+Added: To estimate expected loan and lease losses under the Current Expected Credit Losses (CECL) methodology, we use a broad range of data over a long time horizon, generally back to the fourth quarter of 2007, thus capturing most of the economic business cycle which includes the Great Recession and the subsequent long and slow recovery which supports full lifetime losses.
+Added: CECL requires our loan portfolio to be segregated into pools based on similar risk characteristics.
+Added: Pooled loans and leases are collectively evaluated using either a cohort cumulative loss rate methodology or a transition matrix-based probability of default (PD)/loss given default (LGD) methodology.
+Added: Our management evaluates the allowance quarterly, reviewing all loans and leases over a fixed-dollar amount ($250,000) where the internal credit quality grade is at or below a predetermined classification, considering actual and anticipated loss experience, current economic events in specific industries, and other pertinent factors including general economic conditions.
+Added: Determination of the allowance is inherently subjective as it requires significant estimates and adjustments to historical loss rates to capture differences that may exist between current and historical conditions, including consideration of economic risk which is generally reflected in a forecast adjustment, specific industry risk and concentration risk, all of which may be susceptible to significant and unforeseen changes.
+Added: We review the loan and lease portfolios to identify borrowers that might develop financial problems and to mitigate losses.
+Added: Our allowance for loan and lease losses is provided for by direct charges to the provision for credit losses on the Consolidated Statements of Income.
Losses on loans and leases are charged against the allowance and likewise, recoveries during the period for prior losses are credited to the allowance.
−Removed: Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, we utilize similar processes to estimate our liability for unfunded credit commitments.
−Removed: Our allowance for unfunded credit commitments is included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Position and is provided by direct charges to the provision for unfunded credit commitments located in Other Noninterest Expense on the Consolidated Statements of Income.
+Added: We utilize similar processes to estimate our liability for credit losses on unfunded loan commitments which is included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Position and is provided for by direct charges to the provision for unfunded credit commitments located in Other Noninterest Expense on the Consolidated Statements of Income.
See Part II, Item 8, Financial Statements and Supplementary Data — Note 1 of the Notes to Consolidated Financial Statements for additional information on management’s evaluation of the allowance for credit losses.
−Removed: We perform a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency in order to review portfolio trends, including specific industry risks and economic conditions, which may have an impact on the allowance and allowance ratios applied to various portfolios.
−Removed: We adjust the calculated historical-based ratio as a result of our analysis of environmental factors, principally specific industry risk, collateral risk and concentration risk, in addition to global economic and political issues.
−Removed: We also have a forecast adjustment that includes key economic factors affecting our portfolios such as growth in gross domestic product, unemployment rates, housing market trends, commodity prices, and inflation.
−Removed: Forecasts are difficult to establish and the current environment presents complexity with near 40-year high inflation, markedly higher interest rates, and heightened uncertainty from the protracted war in Ukraine.
−Removed: Residual economic impacts from the pandemic remain an intermittent, but recurrent, headwind for global trade particularly in China and neighboring countries where spiking COVID-19 cases led to lockdown measures and travel restrictions.
−Removed: Economic growth prospects entering the new year are discouraging, with widespread calls for recession in the U.S.
−Removed: GDP forecasts continue to trend downward as persistent inflation, continued hawkishness of the Federal Reserve, and the ongoing war in Ukraine heavily weigh on the outlook.
−Removed: Current political turmoil in Brazil, growing tensions between China and the U.S., and longstanding turmoil in the Middle East, also cause increased uncertainty.
+Added: We perform a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency to review portfolio trends, including specific industry risks and economic conditions, which may have an impact on the allowance and allowance ratios applied to various portfolios.
+Added: We adjust the calculated historical-based ratio based on analysis of environmental factors, principally specific industry risk, collateral risk, and concentration risk, along with global economic and political issues.
+Added: Our forecast adjustment includes key economic factors affecting our portfolios such as growth in gross domestic product, unemployment rates, housing market trends, commodity prices, and inflation.
+Added: Forecasts are difficult to establish and the current environment presents challenges with high interest rates and a persistently inverted yield curve, generally tighter lending conditions, growing signs of consumer stress, and heightened uncertainty from ongoing conflicts around the world.
+Added: Economic growth prospects entering the new year remain below trend, with varied calls ranging from soft landing to recession for the domestic economy.
+Added: GDP forecasts have improved slightly but substantial headwinds remain, and uncertainty is high with growing risks of widening global conflicts, and global supply chain disruption.
Collateral values are significant to underwriting our specialty finance portfolios and volatility or declining values pose a threat.
Concentration risk is impacted primarily by geographic concentration in northern Indiana and southwestern Michigan in our business banking and commercial real estate portfolios and by collateral concentration in our specialty finance portfolios.
−Removed: The outlook for world economies is weak, with decades-high inflation, geopolitical uncertainty, lingering pandemic activity and a consequent slowdown in China impacting the outlook.
−Removed: Current concerns include corruption scandals and political unrest in Latin American countries, the competitive and complex nature of U.S.-China relations, the geopolitical tensions with Russia, and persistent threats of terrorist attacks.
−Removed: In Brazil and Mexico where we have a presence with our aircraft lending, we remain concerned with significant inflation, high interest rates and their resultant economic impact, political unrest most prominently evident in Brazil, and the likelihood of economic weakness in future periods that would parallel an expected slowdown in the U.S.
−Removed: We include a factor in our qualitative adjustments for global risk, as we are increasingly aware of the threat that global concerns may affect our customers.
−Removed: While we are unable to determine with any precision the impact of global economic and political issues on 1st Source Bank’s loan and lease portfolios, we feel the risks are real and significant.
−Removed: We believe there is a risk of negative consequences for our borrowers that would affect their ability to repay their financial obligations.
−Removed: Therefore, we continued to include a factor for global risk in our analysis for 2023.
+Added: We include a factor for global risk in our analysis.
+Added: While difficult to predict with precision, global risks may adversely impact our borrowers impairing their ability to repay their financial obligations.
+Added: The global outlook calls for slowing growth, high sovereign debt levels and continued high interest rates in developing countries pressure growth prospects.
+Added: Rising global geopolitical uncertainty impacts the outlook and the escalation of various ongoing foreign conflicts.
+Added: Global shipping routes are under threat of attack.
+Added: Terrorism remains a persistent concern and risks of a catastrophic event are elevated.
+Added: In Brazil and Mexico where we have a presence with our aircraft lending, we remain concerned with high interest rates and their resultant economic impact, upcoming elections in Mexico, and slowing growth forecasts for both countries.
The following discussion focuses on relevant economic conditions and various circumstances impacting the December 31, 2023 allowance for loan and lease losses of each of our loan and lease segments.
−Removed: Commercial and agricultural – There are several industries represented in the commercial and agricultural portfolio.
−Removed: Loan outstandings have fluctuated in recent years as two rounds of Paycheck Protection Program loans entered and exited the portfolio with loan forgiveness.
−Removed: Our customers have benefited from the monetary and fiscal stimulus, which provided a lifeline during a period of unprecedented market undercurrents.
−Removed: The outlook for the portfolio is guarded.
−Removed: Small business confidence remains below the long term average as fewer business owners expect the economy to improve in the next six months.
−Removed: Wholesalers and manufacturers have generally performed well and most were able to navigate the supply chain difficulties while passing along rising costs to their consumers.
−Removed: The recreational vehicle industry, which is centered in our footprint, is slowing from record high shipment levels with supply and demand dynamics reversing in recent months.
−Removed: Our business customers engaged in manufacturing for, and supplying the industry, performed very well during the recent years.
−Removed: There has been broad consolidation within the industry over the last two decades and industry suppliers and manufacturers are generally stronger and better capitalized than past cycles to navigate a downturn.
−Removed: The outlook in our agricultural portfolio remains cautiously optimistic as commodity prices remain high, although an expiring Farm Bill is cause for uncertainty.
−Removed: Input prices are expected to remain elevated and along with higher borrowing costs and cash rents, will likely result in thin, but still profitable margins on our agricultural business clients next year.
−Removed: Our customers experienced favorable growing and harvesting conditions during the year which resulted in strong crop yields.
−Removed: In the commercial and agricultural portfolio, we have experienced generally stable credit quality trends with low delinquencies and minimal charge-offs.
−Removed: As of the end of 2022, we reviewed the historical loss ratios and assessed the environmental factors and concentration issues affecting these portfolios and believe the qualitative adjustments we made to our allowance ratios are appropriate and adequate.
−Removed: Solar – Our entry into solar financing over six years ago continues to gain momentum in terms of the performance of existing projects financed, loan growth opportunities and overall credit quality.
−Removed: Financing is provided to qualified borrowers throughout the continental United States with an emphasis on the region east of the Rocky Mountains.
−Removed: Risks include construction and developer related risks and delays, site issues, climate and weather risks, regulatory problems and permitting issues, as well as risks related to utility companies and their ability and willingness to facilitate the solar customer tying into the grid, among others.
−Removed: To date, we have not incurred any losses in this portfolio and qualitative adjustments were lowered in the portfolio with the current year-end analysis given continued favorable credit performance.
−Removed: Auto and light truck – The primary auto rental segment of the auto and light truck portfolio experienced a strong year with sizable loan growth as demand for rental vehicles was high and revenue per unit reached a record for the industry.
−Removed: Semiconductor shortages restrained new vehicle production and manufacturers dramatically reduced fleet sales in response.
−Removed: With limited new vehicle availability, used prices skyrocketed and forced operators to forego typical fleet cycles and hold existing inventory for longer periods.
−Removed: The significant increase in vehicle values generally benefited our customers however, elevated valuations increase risk with new fundings which we have attempted to mitigate by maintaining appropriate terms and limiting funding on used units.
−Removed: Wholesale used vehicle prices have declined in nine of the last twelve months and are 15% off the prior year peak, although used values remain well above the historical trendline.
−Removed: Loan growth is strong with operators holding vehicles longer thereby extending fleet cycles.
+Added: Commercial and agricultural – Multiple industries are represented in the commercial and agricultural portfolio and the outlook for the portfolio is guarded.
+Added: Small businesses are challenged to absorb higher interest rates, higher cost of capital, compete for labor, and control expenses.
+Added: In our underlying industries, wholesalers have generally performed well and have been able to pass along rising costs.
+Added: Manufacturers remain under pressure as demand for durable goods remains soft.
+Added: The recreational vehicle industry, which is centered in our footprint, has slowed rapidly from record high shipment levels reached in 2022 with supply and demand dynamics reversing sharply.
+Added: The outlook for 2024 remains weak;
+Added: marginally improved from 2023.
+Added: The outlook in our agricultural portfolio remains cautiously optimistic.
+Added: Crop prices remain comparatively high but are slipping and elevated input prices and borrowing costs could squeeze margins of our agricultural clients.
+Added: We experienced higher charge-offs in the commercial and agricultural portfolio during 2023 after a sustained period of low credit losses.
+Added: Credit quality remains acceptable, but we expect to see some deterioration in the portfolio during the coming year as the impact of higher rates are fully realized.
+Added: Renewable energy – Our renewable energy (predominately solar) portfolio continues to perform well.
+Added: Growth opportunities abound and overall credit quality remains solid.
+Added: Risks include construction and developer related risks and delays, site issues, climate and weather risks, regulatory problems and permitting issues, as well as utility interconnection delays.
+Added: To date, we have not incurred any losses in this portfolio and credit performance continues to be favorable.
+Added: Auto and light truck – The primary auto rental segment of the auto and light truck portfolio reported strong loan growth for a third straight year as demand for rental vehicles and revenue per unit remains elevated.
+Added: Credit quality is generally stable, with limited weakness exhibited with a few smaller operators.
+Added: Used asset valuations have softened but remain above the long-term trend line as constrained original equipment manufacturer (OEM) production volumes have likely provided some pricing support.
+Added: Clients are slowly returning to more normalized fleet cycles, but cycles remain longer than historical norms.
+Added: Increased vehicle values generally benefited our customers however, elevated valuations increase new funding risk which we have attempted to mitigate by maintaining appropriate terms and limiting funding on used units.
+Added: Wholesale used vehicle prices continue to soften, particularly within electric vehicle segments of which we have limited exposure, although overall vehicle values remain above the longer-term trend line.
The auto leasing segment also performed well in 2023 and the portfolio exhibits stable credit quality and low delinquency.
Leasing customers lease to auto rental companies as well as other commercial entities.
−Removed: We have some concern that increasing vehicle prices and higher borrowing costs could lead to leasing companies stretching for yield by lowering credit quality standards on sub-lessees.
−Removed: We remain diligent in setting our terms and residual value appropriately and monitoring fleet mix given the recent volatility in vehicle prices.
−Removed: The portfolio reported a net recovery position for the year in both the auto rental and specialty vehicle portfolios which include the bus, step van, and funeral car segments.
−Removed: The bus segment experienced losses in the prior two years due to the pandemic and collateral values for motor coaches decreasing substantially during that time.
−Removed: Values are showing signs of stabilization, particularly in late-model motor coaches.
−Removed: There remains concern with repossessing bus units should credit quality deteriorate as outlets for repossessed inventory are not well established and markets are limited.
−Removed: Long-term, there remains uncertainty as some bus portfolio customers may struggle to adapt to the new environment and may experience further losses.
−Removed: We reviewed the annual historical incurred losses and the life of the loan calculated historical loss ratios as of year-end and removed the majority of qualitative factors in the bus segment as we believe historical loss rates are sufficient to cover remaining risk in the portfolio as we recognized charge-offs during 2022 and 2021 and our expectation is that future losses will be lower than recent experience.
−Removed: We believe we appropriately recognized the losses in our portfolio and that peak charge-offs occurred in 2021.
−Removed: Special attention balances decreased from $26.26 million at the end of 2021 to $14.56 million at the end of 2022.
−Removed: Credit quality in the auto rental and leasing portions of the portfolio remain stable and we modestly reduced qualitative factors in those segments.
−Removed: Medium and heavy duty truck – Credit quality remains stable in the medium and heavy duty truck portfolio.
−Removed: The industry continues to struggle with driver shortages.
−Removed: However, the highly limited inventory of Class 8 tractors experienced in 2021 due to a semiconductor chip shortage appears to have largely been rectified – inventory levels are rebounding and auction valuations are softening.
−Removed: Loan growth opportunities were improved during 2022 as more equipment became available.
−Removed: We believe our reserve ratios for this portfolio are appropriate.
−Removed: Aircraft – Our domestic and foreign aircraft segments both experienced strong loan growth during the year as high asset valuations and demand for private aircraft increased lending opportunities.
−Removed: The portfolio has been a relatively stable performer of late, but was among the sectors affected most by the sluggish economy following the Great Recession.
−Removed: Our portfolio loss history has been volatile, characterized by lengthy periods of minimal losses or modest recoveries followed by short intervals of higher losses.
−Removed: Aircraft collateral values, particularly those in our niche, have strengthened considerably in this economic cycle.
−Removed: Long, often multi-year, delays for new aircraft have in some instances driven used valuations beyond the price of new aircraft given their immediate availability.
−Removed: In this portfolio we have $297 million of foreign exposure, primarily in Mexico and Brazil.
−Removed: Brazil’s economy continues to struggle to sustain growth and is further hampered by increased inflation fears and political uncertainties.
−Removed: The Mexican economy has fared better of late as its manufacturing rebounded with recovering automotive production.
−Removed: Growth continues to be threatened by drug trafficking and related violence with widespread poverty and income inequality remaining significant concerns.
−Removed: Qualitative adjustments are assigned to Brazil and Mexico’s economic risk as the bulk of foreign aircraft outstandings are domiciled in those markets.
−Removed: Our historical loss ratios reflect our high and volatile loss histories.
−Removed: We adjusted the historical ratios for current conditions, principally, a small increase in collateral concentration risk as we are currently lending into an abnormally strong used aircraft market with increased downside valuation risk on new fundings.
−Removed: Additionally, we increased the qualitative forecast factor adjustment for cohort based pools which is commensurate to the impact of the forecast adjustment in the PD/LGD (probability of default/loss given default) model analysis.
−Removed: We believe the ratios as adjusted are appropriate.
−Removed: Construction equipment – Our construction equipment portfolio historically has been characterized by stable credit quality;
−Removed: however, there have been credit quality concerns in recent periods with a steady undercurrent of unanticipated downgrades to special attention during the last two years.
−Removed: The portfolio recognized the largest singular charge-off in both 2021 and 2022.
−Removed: The construction industry benefited from growth in private residential construction over the last several years, but higher interest rates and a rapidly slowing housing market have weakened the outlook for site developers.
−Removed: Certain sectors are experiencing stress and we continue to monitor for credit weaknesses.
−Removed: Construction equipment remains vulnerable due to volatility and regulation in the oil and gas sector.
−Removed: The general nature of bidding on construction projects can also have unknown costs or delays.
−Removed: Increased energy costs have been harmful to portfolio clients which often operate under long-term contracts that may lack adequate cost escalators.
−Removed: Diesel prices remain elevated and will be a hardship for clients in the construction industry and have impacted margins.
+Added: Our auto leasing portfolio is concentrated in larger client exposures.
+Added: We remain diligent in setting our terms and residual values appropriately and monitoring fleet mix given recent volatility in vehicle prices.
+Added: The auto and light truck portfolio reported a net recovery position for the year.
+Added: We modestly adjusted qualitative factors in the portfolio due to substantial loan growth and the corresponding increase in concentration risk of overall bank capital.
+Added: Medium and heavy duty truck – The industry has weakened as it deals with overcapacity and declining freight rates.
+Added: This portfolio has historically been a barometer for overall economic weakness and 2024 is expected to be a difficult year for the industry.
+Added: In previous downturns, small companies and independent owner-operators have been hit the hardest and asset valuations could be pressured should consolidation accelerate.
+Added: The portfolio exhibited no material loan growth for the year and has decreased as a percentage of capital, comparably to our other portfolios.
+Added: At year-end, we adjusted qualitative factors in our allowance analysis to account for the industry’s increasing risk profile and expected credit deterioration.
+Added: Aircraft – Loan growth in our domestic and foreign aircraft segments was essentially flat after both segments exhibited strong growth in the previous year.
+Added: Aircraft collateral values, particularly those in our niche, strengthened considerably during this economic cycle and are generally holding, although there are signs of softening valuations with select models and increased available inventory.
+Added: OEM backlogs for new units remain healthy and have supported used prices.
+Added: The portfolio has been relatively stable lately, but was among the sectors affected most by the sluggish economy following the Great Recession.
+Added: Our portfolio loss history has been volatile, characterized by lengthy periods of minimal losses or modest recoveries followed by short intervals of high losses.
+Added: In this portfolio, we have $302 million of foreign exposure, primarily domiciled in Mexico and Brazil.
+Added: Brazil’s economy outperformed expectations during 2023, but forecasts are moderating for the coming year as growth in the agricultural sector slows.
+Added: The Mexican economy also fared better than expectations in 2023, although growth is anticipated to moderate in the coming year given heavy dependence on the U.S.
+Added: economy which forecasts slower growth.
+Added: Heavy indebtedness and financial problems with state-owned oil firm Pemex indicate ongoing concern for Mexico’s broader economy.
+Added: Construction equipment – Our construction equipment portfolio has shown strong growth in recent periods and experienced stable credit quality in the years between the Great Recession and the pandemic.
+Added: In recent years, there have been credit quality concerns with unanticipated downgrades to special attention.
+Added: The portfolio recognized the largest single charge off in both 2021 and 2022;
+Added: one of which was subsequently fully recovered during 2023.
+Added: Higher interest rates and a slowed housing market have weakened the outlook for site developers.
+Added: Certain industry segments are experiencing stress and we continue to monitor for credit weaknesses.
+Added: The portfolio remains vulnerable to volatility and regulation in the oil and gas sector.
+Added: The general nature of bidding on construction projects can also have unanticipated costs or delays.
+Added: Volatile energy costs have been harmful to portfolio clients which often operate under long-term contracts that may lack adequate cost escalators.
Historically, we have experienced less volatility in this portfolio than the broader industry as losses have been mitigated by appropriate underwriting and a global market for used construction equipment.
Continued infrastructure spending is expected to have a positive impact for many contractors within the segment and for the industry’s used equipment markets.
−Removed: We modified our qualitative factors as of 2021 year-end to recognize the increased volume of accounts moving into special attention, and qualitative factors were largely maintained with the 2022 portfolio review given continued special attention activity.
−Removed: Commercial real estate – Similar to the commercial portfolio, our commercial real estate loans are concentrated in our local market with local customers.
−Removed: Approximately 57% of the Bank’s exposure in this portfolio is from owner occupied facilities where we are the primary relationship bank for our customers.
−Removed: We reviewed our qualitative adjustments as of year-end, and made some modifications as we are concerned about higher interest and capitalization rates within the segment and the potential negative impact on real estate valuations.
−Removed: We believe our ratios as adjusted are appropriate and adequate as of December 31, 2022.
+Added: We modestly adjusted qualitative factors for concentration risk of overall bank capital due to substantial loan growth, while also easing an adjustment for elevated problem loan activity in the segment given reduced special attention volume.
+Added: Commercial real estate – Similar to the commercial portfolio, our commercial real estate loans are concentrated in our local market with local customers although we do fund select projects outside our market with multi-state developers that are headquartered in our footprint.
+Added: Approximately 55% of the Bank’s exposure in this portfolio is from owner occupied facilities where we are the primary relationship bank for our clients.
+Added: We reviewed our qualitative adjustments as of year-end and made adjustments to address interest rate maturity risk and added a factor for construction risk in select segments as the loan volume of projects under construction is much higher than prior periods.
+Added: We continue to be concerned about higher interest and capitalization rates within the segment and the potential negative impact on both real estate valuations and projected cash flows.
Residential real estate and home equity – Our residential real estate and home equity portfolio consists of loans to individuals in the communities we serve.
1 unchanged sentence
Home equity loans are also advanced in compliance with regulatory guidelines and the Bank’s credit policy.
−Removed: Losses in these portfolios have been immaterial since 2013, but we did experience losses during the housing crises and recognized one loss of $0.23 million during 2022 which is related to a commercial special attention account.
−Removed: We reviewed our qualitative adjustments at the end of 2022 which are primarily for reasonable and supportable forecasts, and believe they are appropriate and adequate.
+Added: Losses in these portfolios have been immaterial since 2013.
+Added: Qualitative factors in the portfolio are primarily for reasonable and supportable forecasts, although we made an adjustment at the end of 2023 to account for an increase of non-salable adjustable-rate mortgages in the loan mix with repricing risk at maturity.
Consumer – Our consumer loan portfolio consists of loans to individuals in the communities we serve.
1 unchanged sentence
Losses are stable during good economic times and tend to increase when there is deterioration in local economic factors and employment rates.
−Removed: We reviewed our qualitative adjustments at the end of the 2022 which are primarily for reasonable and supportable forecasts, and believe they are appropriate.
+Added: Loss rates have been modest since 2013, but we experienced higher write-downs within the portfolio during the year.
+Added: We reviewed our qualitative adjustments at the end of the 2023 which primarily consist of reasonable and supportable forecasts and made an adjustment to account for increasing delinquency and nonperforming activity within the portfolio.
The allowance for loan and lease losses at December 31, 2023, totaled $147.55 million and was 2.26% of loans and leases, compared to $139.27 million or 2.32% of loans and leases at December 31, 2022 and $127.49 million or 2.38% of loans and leases at December 31, 2021.
1 unchanged sentence
Charge-offs for loan and lease losses were $6.65 million for 2023, compared to $3.41 million for 2022 and $12.52 million for 2021.
−Removed: In order to accommodate net charge offs and strong loan and lease growth, we added $13.25 million to the provision for credit losses for 2022, compared to a recovery of provision of $(4.30) million for 2021 and a provision of $36.00 million for 2020.
+Added: Reflective of our strong loan and lease growth, partially offset by a net recovery position, we added $5.87 million to the provision for credit losses for 2023, compared to a provision of $13.25 million for 2022 and a recovery of provision of $4.30 million for 2021.
The following table summarizes our loan and lease loss experience for each of the last three years ended December 31.
4 unchanged sentences
Balance of allowance for loan and lease losses at beginning of period $ 139,268 $ 127,492 $ 140,654
−Removed: Impact from adoption of ASC 326 — — 2,584
−Removed: Adjusted balance of allowance for loan and lease losses at beginning of period 127,492 140,654 113,838
Commercial and agricultural 4,305 625 2,930
+Added: Renewable energy — — —
Auto and light truck 729 118 7,797
7 unchanged sentences
Commercial and agricultural 243 56 812
+Added: Renewable energy — — —
Auto and light truck 5,591 417 1,316
6 unchanged sentences
Total recoveries 9,066 1,940 3,664
−Removed: Net charge-offs (recoveries) 1,469 8,859 9,185
+Added: Net (recoveries) charge-offs (2,418) 1,469 8,859
Provision (recovery of provision) for loan and lease losses 5,866 13,245 (4,303)
Balance at end of period $ 147,552 $ 139,268 $ 127,492
−Removed: Ratio of net charge-offs (recoveries) to average net loans and leases outstanding 0.03 % 0.16 % 0.17 %
+Added: Ratio of net (recoveries) charge-offs to average net loans and leases outstanding (0.04) % 0.03 % 0.16 %
Ratio of allowance for loan and lease losses to net loans and leases outstanding end of period 2.26 % 2.32 % 2.38 %
Coverage ratio of allowance for loan and lease losses to nonperforming loans and leases 627.08 % 526.06 % 327.28 %
−Removed: The following table shows net charge-offs (recoveries) as a percentage of average loans and leases by portfolio type:
+Added: The following table shows net (recoveries) charge-offs as a percentage of average loans and leases by portfolio type:
2023 2022 2021
Commercial and agricultural 0.52 % 0.07 % 0.19 %
+Added: Renewable energy — — —
Auto and light truck (0.55) (0.04) 1.11
5 unchanged sentences
Consumer 0.66 0.19 0.28
−Removed: Total net charge-offs (recoveries) to average portfolio loans and leases 0.03 % 0.16 % 0.17 %
+Added: Total net (recoveries) charge-offs to average portfolio loans and leases (0.04) % 0.03 % 0.16 %
The allowance for loan and lease losses has been allocated according to the amount deemed necessary to provide for the estimated current expected credit losses.
2 unchanged sentences
Commercial and agricultural $ 17,385 11.76 % $ 14,635 13.51 %
−Removed: Solar 7,217 6.34 6,585 6.51
+Added: Renewable energy 6,610 6.13 7,217 6.34
Auto and light truck 16,858 14.83 18,634 13.44
10 unchanged sentences
During 2023, interest income on nonaccrual loans and leases would have increased by approximately $1.47 million compared to $2.68 million in 2022 if these loans and leases had earned interest at their full contractual rate.
−Removed: Nonperforming assets at December 31, 2022 decreased from December 31, 2021, mainly due to declines in nonaccrual loans and leases in the bus segment of the auto and light truck portfolio along with modestly lower nonaccrual loans in construction equipment.
−Removed: Repossessions consisted mainly of units in the bus and step van segments of the auto and light truck portfolio.
−Removed: Other real estate consists of one residential real estate property.
+Added: Nonperforming assets at December 31, 2023 decreased from December 31, 2022, mainly due to declines in nonaccrual loans and leases in the auto and light truck and construction equipment portfolios offset by an increase in the commercial and agricultural portfolio.
+Added: Repossessions consisted mainly of units in the specialty finance segments of the auto and light truck portfolio.
+Added: There were no properties held in other real estate.
Nonperforming assets at December 31 (Dollars in thousands)
2 unchanged sentences
Commercial and agricultural 13,267 864
+Added: Renewable energy — —
Auto and light truck 4,666 14,153
21 unchanged sentences
0.37 % 0.45 %
−Removed: Potential Problem Loans — Potential problem loans consist of loans that are performing but for which management has concerns about the ability of a borrower to continue to comply with repayment terms because of the borrowers’ potential operating or financial difficulties.
+Added: Potential Problem Loans — Potential problem loans consist of loans that are performing but for which management has concerns about the ability of a borrower to continue to comply with repayment terms because of potential operating or financial difficulties.
Management monitors these loans closely and reviews their performance on a regular basis.
As of December 31, 2023 and 2022, we had $34.04 million and $7.83 million, respectively, in loans of this type which are not included in either of the non-accrual or 90 days past due loan categories.
−Removed: At December 31, 2022, potential problem loans consisted of one credit relationship in the commercial and agricultural portfolio.
−Removed: Weakness in the borrower’s operating performance have caused us to heighten attention given to this credit.
+Added: At December 31, 2023, potential problem loans consisted of five relationships;
+Added: one relationship in the commercial and agricultural portfolio, one relationship in the aircraft portfolio, one relationship in the medium and heavy duty truck portfolio, and two relationships in the construction portfolio.
+Added: Weakness in the borrowers’ operating performance have caused us to give heighten attention to these credits.
INVESTMENT PORTFOLIO
−Removed: The amortized cost of securities available-for-sale at year-end 2022 increased 4.96% from 2021, following a 59.90% increase from year-end 2020 to year-end 2021.
−Removed: The amortized cost of securities available-for-sale at December 31, 2022 was $1.97 billion or 23.61% of total assets, compared to $1.88 billion or 23.17% of total assets at December 31, 2021.
+Added: The amortized cost of securities available-for-sale at year-end 2023 decreased 10.50% from 2022, following a 4.96% increase from year-end 2021 to year-end 2022.
+Added: The amortized cost of securities available-for-sale at December 31, 2023 was 20.19% of total assets, compared to 23.61% of total assets at December 31, 2022.
The following table shows the amortized cost of investment securities available-for-sale as of December 31.
65 unchanged sentences
Also provided are the maximum amount of borrowings and the average amount of borrowings, as well as weighted average interest rates for the last two years.
−Removed: (Dollars in thousands) Federal Funds Purchased and Securities Repurchase Agreements Commercial Paper Federal Home Loan Bank Advances Other
+Added: (Dollars in thousands) Federal Funds Purchased and Securities Repurchase Agreements Commercial Paper Federal Home Loan Bank Advances Federal Reserve Advances Other
Short-Term Borrowings Total Borrowings
8 unchanged sentences
Weighted average interest rate during the year 0.12 % 0.04 % 3.22 % — % — % 0.70 %
−Removed: Weighted average interest rate for outstanding amounts at December 31, 2021 0.04 % 0.04 % N/A — % 0.04 %
+Added: Weighted average interest rate for outstanding amounts at December 31, 2022 0.05 % 0.03 % 4.16 % — % — % 1.39 %
+Added: During December 2023, we borrowed $100.00 million from the Federal Reserve’s Bank Term Funding Program based on the economics of the borrowing relative to our other funding sources.
LIQUIDITY AND CAPITAL RESOURCES
2 unchanged sentences
The effective rate of core deposits in 2023 was 1.45%, compared to 0.32% in 2022 and 0.12% in 2021.
−Removed: Average noninterest bearing core deposits increased 8.27% in 2022 compared to an increase of 22.96% in 2021.
+Added: Average noninterest bearing core deposits decreased 13.97% in 2023 compared to an increase of 8.27% in 2022.
These represented 28.24% of total core deposits in 2023, compared to 31.71% in 2022, and 31.20% in 2021.
−Removed: Purchased Funds — We use purchased funds to supplement core deposits, which include certain certificates of deposit over $250,000, brokered certificates of deposit, listing services certificates of deposit, over-night borrowings, securities sold under agreements to repurchase, commercial paper, and other short-term borrowings.
+Added: Purchased Funds — We use purchased funds to supplement core deposits, which include certain certificates of deposit over $250,000, brokered certificates of deposit, listing services certificates of deposit, over-night borrowings, securities sold under agreements to repurchase, commercial paper, and other short-term borrowings which includes Federal Home Loan Bank and Federal Reserve Bank borrowings.
Purchased funds are raised from customers seeking short-term investments and are used to manage the Bank’s interest rate sensitivity.
−Removed: During 2022, our reliance on purchased funds decreased to 6.19% of average total assets from 6.41% in 2021.
+Added: During 2023, our reliance on purchased funds increased to 11.45% of average total assets from 6.19% in 2022.
Shareholders’ Equity — Average shareholders’ equity equated to 11.02% of average total assets in 2023, compared to 10.81% in 2022.
28 unchanged sentences
The contingency plan provides for ongoing monitoring of unused borrowing capacity and available sources of contingent liquidity to prepare for unexpected liquidity needs and to cover unanticipated events that could affect liquidity.
−Removed: We have borrowing sources available to supplement deposits and meet our funding needs.
−Removed: 1st Source Bank has established relationships with several banks to provide short term borrowings in the form of federal funds purchased.
−Removed: At December 31, 2022, we had no borrowings in the federal funds market.
−Removed: We could borrow $245.00 million in additional funds for a short time from these banks on a collective basis.
−Removed: As of December 31, 2022, we had $91.31 million outstanding in FHLB advances and could borrow an additional $464.70 million contingent on the FHLB activity-based stock ownership requirement.
−Removed: We also had no outstandings with the FRB and could borrow $444.99 million as of December 31, 2022.
+Added: We maintain prudent strategies to support a strong liquidity position.
+Added: The following table represents our sources of liquidity as of December 31, 2023.
+Added: (Dollars in thousands) Available
+Added: Internal Sources
+Added: Unencumbered securities $ 1,211,222
+Added: External Sources
+Added: FHLB advances (1)
+Added: FRB borrowings (2)
+Added: Fed funds purchased (3)
+Added: Brokered deposits (4)
+Added: Listing services deposits (4)
+Added: Total liquidity $ 3,172,375
+Added: % of Total deposits net brokered and listing services certificates of deposit 49.51 %
+Added: (1) Availability is shown net of required stock purchases under the FHLB activity-based stock ownership requirement, which is currently 4.50%, and may vary
+Added: (2) Includes access to discount window and Bank Term Funding Program
+Added: (3) Availability contingent on correspondent bank approvals at time of borrowing
+Added: (4) Availability contingent on internal borrowing guidelines
+Added: External sources as listed in the table above are managed to approved guidelines by our Board of Directors.
+Added: Total net available liquidity was $3.17 billion at December 31, 2023, which accounted for approximately 50% of total deposits net of brokered and listing services certificates of deposits.
Interest Rate Risk Management — ALCO monitors and manages the relationship of earning assets to interest bearing liabilities and the responsiveness of asset yields, interest expense, and interest margins to changes in market interest rates.
33 unchanged sentences
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.