What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-18 compared with 2024-02-20 · 188 added, 175 removed, 619 unchanged (37% of the section changed)

44 unchanged sentences

We have identified the following two policies as being critical because they require management to make particularly difficult, subjective, and/or complex estimates or judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

These policies relate to the determination of the allowance for loan and lease losses and fair value measurements.

These policies relate to the determination of the allowance for credit losses and fair value measurements.

Management believes it has used the best information available to make the estimations or judgments necessary to value the related assets and liabilities.

13 unchanged sentences

Additionally, we are required to use forecasts about future economic conditions to determine the expected credit losses over the remaining life of the asset.

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.

Forecast adjustments are fundamentally difficult to establish and the current environment presents challenges with widespread geopolitical uncertainty, continued elevated inflation, and high interest rates.

We endeavor to apply a forecast adjustment that is directionally consistent, reasonable, supportable, and reflective of current expectations and conditions.

4 unchanged sentences

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.

Nonetheless, if management’s underlying assumptions prove to be inaccurate, the allowance for credit losses would have to be adjusted.

Our accounting policies related to the allowance for credit losses is disclosed in Note 1 under the heading “Allowance for Credit Losses.”

18 unchanged sentences

Return on average common shareholders’ equity was 12.54% in 2024 versus 13.48% in 2023, and 13.81% in 2022.

Net income in 2024, as compared to 2023, was positively impacted by a $22.17 million or 7.96% increase in net interest income, which was offset by a $6.60 million increase in provision for credit losses, a $4.32 million or 4.76% decrease in noninterest income and a $1.88 million or 0.93% increase in noninterest expense.

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.

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 2024 amounted to $1.40 per share, compared to $1.30 per share in 2023, and $1.26 per share in 2022.

9 unchanged sentences

During 2024, average earning assets increased $327.89 million or 4.12% while average interest-bearing liabilities increased $315.75 million or 5.72% over the comparable period in 2023.

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.

The result to the fully taxable-equivalent net interest margin was an increase of six basis points.

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.

The yield on average earning assets increased 60 basis points to 5.85% for 2024 from 5.25% for 2023 primarily due to higher rates and average balances on loans and leases, higher rates on taxable investment securities and higher average balances on 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 64 basis points to 3.14% during 2024 from 2.50% in 2023 as a result of the higher interest rate environment and its impact on deposit competition.

The result to the fully taxable-equivalent net interest margin was an increase of 13 basis points.

The largest contributor to the increase in the yield on average earning assets in 2024 was the 59 basis point improvement in the loan and lease portfolio yield primarily from rising interest rates and higher average balances.

Average loans and leases increased $394.47 million or 6.36% in 2024 from 2023 while the yield increased to 6.84%.

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.

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.

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.

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.

Strong growth primarily within our Construction Equipment, Auto and Light Truck and Renewable Energy portfolios, and selective growth in our Commercial Real Estate portfolio drove total average loans and leases higher during the year.

Net interest recoveries positively contributed five basis points to the yield on average loans and leases during 2024 and four basis points to the average loans and leases yield during 2023.

During 2024, the tax-equivalent yield on investment securities available-for-sale increased 15 basis points to 1.72% while the average balance decreased $106.29 million or 6.34% with the largest decreases in U.S.

treasury and federal agency securities and state and municipal securities.

Average mortgages held for sale increased $0.87 million or 36.53% during 2024 while the yield increased seven basis points.

Average other investments increased $38.83 million or 52.67% during 2024 while the yield increased 29 basis points.

The average balance increase in other investments was primarily a result of higher balances held at the Federal Reserve Bank.

Average interest-bearing deposits increased $305.86 million or 5.88% during 2024 while the effective rate paid on those deposits increased 66 basis points.

The increased average balance was primarily due to increases in time deposits, public fund, and brokered deposits.

The increased average balance was primarily due to increases in time deposits, money market accounts, 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.

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.

The deposit mix change which began during 2022 carried over into 2023 and 2024 with clients moving their funds from non-maturity accounts to higher yielding certificates of deposit and money market accounts due to the elevated interest rate environment.

Average noninterest-bearing demand deposits decreased $144.15 million or 8.22% during 2024 due primarily to persistent rate competition for deposits and greater utilization of excess funds by our business customers.

Average short-term borrowings decreased $1.36 million or 0.63% during 2023 while the effective rate paid increased 259 basis points.

The decrease in short-term borrowings was primarily the result of lower repurchase agreements offset by increased borrowings with the FHLB.

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.

Average short-term borrowings increased $15.24 million or 7.13% during 2024 while the effective rate paid increased 63 basis points due to higher Federal Reserve Bank Term Funding Program borrowings offset with decreased FHLB borrowings and lower securities sold under agreements to repurchase balances.

Average long-term debt and mandatorily redeemable securities balances decreased $5.35 million or 11.55% during 2024 while the effective rate decreased 68 basis points primarily due to a lower imputed interest on mandatorily redeemable securities from a reduced improvement in book value per share during 2024 compared to 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.

99 unchanged sentences

Net interest income - FTE $ 20,393 $ (5,102) $ 15,291

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.

Noninterest Income — Noninterest income decreased in 2024 from 2023 following a decrease in 2023 from 2022.

The following table shows the components of our noninterest income for the most recent three years ended December 31.

(Dollars in thousands) 2024 2023 2022 2024

from 2023 2024

from 2023 2023

from 2022 2023

Noninterest income:

5 unchanged sentences

Equipment rental 5,171 8,837 12,274 (3,666) (41.48) % (3,437) (28.00) %

Losses on investment securities available-for-sale (2,926) (184) (680)

Losses on investment securities available-for-sale (3,889) (2,926) (184) (963) (32.91) % (2,742) NM

Other 16,714 19,895 15,042 (3,181) (15.99) % 4,853 32.26 %

Total noninterest income $ 86,307 $ 90,623 $ 91,262 $ (4,316) (4.76) % $ (639) (0.70) %

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.

NM = Not Meaningful

Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) increased in 2024 from 2023 compared to an increase in 2023 over 2022.

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, 2024 and 2023 was $5.97 billion and $5.46 billion, respectively.

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.

The positive performance of the stock and bond markets primarily during the first nine months of 2024 resulted in an increase in the market value of trust assets under management compared to 2023.

At December 31, 2024, these trust assets were comprised of $4.03 billion of personal and agency trusts and estate administration assets, $1.18 billion of employee benefit plan assets, $0.59 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.

Service charges on deposit accounts increased in 2024 from 2023 compared to an increase in 2023 from 2022.

The growth in service charges on deposit accounts in 2024 was primarily due to a higher volume of business deposit account fees.

The growth in service charges on deposit accounts in 2023 was primarily due to increased consumer and business overdraft transactions.

The increase during 2022 was primarily due to increased consumer and business nonsufficient fund transactions.

Debit card income declined slightly during 2023 following a similar slight decrease during 2022.

The declines in 2023 to 2022 were mainly the result of decreased discretionary spending and a focus on core expenses by consumers.

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.

We had $0.81 million of MSR impairment recoveries in 2021.

Debit card income declined during 2024 following a slight decrease during 2023.

The decline in 2024 to 2023 was related to shifts in both client transaction behavior and the networks over which those merchants are routing transactions.

During 2023, regulatory changes to web commerce transactions implemented by the Federal Reserve had a negative impact.

Mortgage banking income increased in 2024 over 2023, compared to a decrease in 2023 from 2022.

During 2024, 2023, and 2022, we determined that no permanent write-down was necessary for previously recorded impairment on MSRs.

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.

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.

During 2024 mortgage banking income increased due to higher production of loans originated for the secondary market resulting in increased income on loans sold into the secondary market.

During 2023, mortgage banking income decreased primarily due to reduced mortgage origination volumes resulting in lower income on loans sold in the secondary market.

Insurance commissions decreased in 2024 compared to 2023 and increased in 2023 compared to 2022.

The decrease in 2024 was primarily due to fewer contingent commissions received.

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.

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.

Equipment rental income generated from operating leases decreased during 2024 from 2023 compared to a similar reduction during 2023 from 2022.

The average equipment rental portfolio decreased in 2024 over 2023 and decreased in 2023 over 2022 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 2024 and 2023, the decline in rental income was offset by a similar decline in depreciation on equipment owned under operating leases.

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.

Losses during 2023 of $2.88 million were the result of repositioning the investment securities portfolio.

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%.

Losses on investment securities available-for-sale during 2024 were exclusively the result of repositioning the portfolio during the fourth quarter.

In the repositioning, approximately $63 million of securities with a weighted average yield of 0.71% were sold and used to purchase approximately $63 million of securities with a weighted average yield of 4.64%.

Losses during 2023 were primarily the result of repositioning the investment securities portfolio.

In the 2023 repositioning, approximately $40 million of securities with a weighted average yield of 1.10% were sold and used to purchase approximately $40 million of securities with a weighted average yield of 4.80%.

The remaining 2023 losses were the result of sales to support liquidity and fund loan growth during the first quarter.

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.

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.

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.

Losses during 2022 were from the sale of Federal agency securities with the goal of managing portfolio risk and liquidity.

Other income decreased in 2024 from 2023 compared to an increase in 2023 from 2022.

The decrease in 2024 was mainly a result of lower partnership investment gains on sale of renewable energy tax equity investments, a writedown of $0.86 million on a small business capital investment and a reduction in customer interest rate swap fees of $0.48 million, offset by increased brokerage commissions and fees of $0.84 million and rental income of $0.23 million related to a repossessed asset.

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 interest rate swap fees of $1.23 million and higher bank owned life insurance policy claims.

Noninterest Expense — Noninterest expense increased in 2024 from 2023 following an increase in 2023 from 2022.

The following table shows the components of our noninterest expense for the most recent three years ended December 31.

(Dollars in thousands) 2024 2023 2022 2024

from 2023 2024

from 2023 2023

from 2022 2023

Noninterest expense:

7 unchanged sentences

Business development and marketing 6,876 7,157 5,823 (281) (3.93) % 1,334 22.91 %

Provision for unfunded loan commitments — 2,566 1,420 NM NM 1,146 80.70 %

Other 12,385 14,867 12,867 (2,482) (16.69) % 2,000 15.54 %

Total noninterest expense $ 203,601 $ 201,724 $ 184,699 $ 1,877 0.93 % $ 17,025 9.22 %

Total salaries and employee benefits increased $10.50 million or 9.99% in 2023 from 2022, following a slight decrease in 2022 from 2021.

NM = Not Meaningful

Total salaries and employee benefits increased in 2024 from 2023, following an increase in 2023 from 2022.

Employee salaries grew $7.45 million or 7.97% in 2024 from 2023 compared to an increase of $7.17 million or 8.31% in 2023 from 2022.

The increase in 2024 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 as well as an increase in incentive compensation.

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.

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.

Employee benefits decreased $1.15 million or 5.20% in 2024 from 2023, compared to a $3.33 million or 17.73% increase in 2023 from 2022.

During 2024, group insurance costs were lower due to fewer claims experienced and the utilization of accumulated plan forfeitures of $0.65 million to offset current year employer contribution expense.

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.

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.

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.

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.

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.

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.

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.

Occupancy expense rose in 2024 from 2023, compared to an increase in 2023 from 2022.

The expense increase in 2024 was primarily the result of increased premises expenses and higher rents.

The elevated expense in 2023 was primarily the result of higher premises repairs.

Furniture and equipment expense, including depreciation, was relatively flat in 2024 from 2023 compared to an increase in 2023 from 2022.

The higher expense in 2023 was primarily due to increased computer-related hardware replacement costs.

Data processing expense rose in 2024 from 2023, following an increase in 2023 from 2022.

The increases in 2024 and 2023 were both 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 in 2024 from 2023, following a similar decrease in 2023 from 2022.

In 2024 and 2023, depreciation on equipment owned under operating leases correlated with the change in equipment rental income.

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.

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.

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.

Professional fees increased in 2024 from 2023, compared to a decrease in 2023 from 2022.

The higher expense in 2024 can primarily be attributed to a $1.08 million reversal of accrued legal fees in the first quarter of 2023, as well as an increase in audit and examination fees and the utilization of consulting services for technology projects and compliance services during the year.

The lower expense in 2023 can primarily be attributed to a decline in the utilization of consulting services for technology projects and compliance services as well as the aforementioned reversal of accrued legal fees during the first quarter of 2023.

FDIC and other insurance expense grew in 2024 from 2023 and increased in 2023 from 2022.

The increase in 2024 was mainly the result of higher general insurance premiums during 2024 and higher blanket bond insurance premiums.

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.

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.

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.

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.

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.

Business development and marketing expenses decreased in 2024 from 2023 following an increase in 2023 from 2022.

The decreased expense in 2024 was mainly the result of a charitable contribution of $1.00 million made during 2023 offset with higher marketing promotions during the year.

The increased expense in 2023 was mainly the result of a charitable contribution of $1.00 million and higher marketing promotions.

During 2024, we reclassified the provision for unfunded loan commitments out of Other Noninterest Expense and into the Provision for Credit Losses in the Consolidated Statements of Income.

We believe this reclassification more appropriately reflects the nature of this expense item and will enhance comparability for peer comparison purposes.

We have not reclassified the 2023 and 2022 presentation.

The increase in 2023 compared to 2022 was primarily the result of an increase in non-cancelable outstanding loan commitments and a lengthening of the average contractual draw period.

Other expenses decreased in 2024 as compared to 2023 and increased in 2023 as compared to 2022.

The lower expense in 2024 was primarily the result of higher gains on the sale of fixed assets and leased equipment, lower printing and postage costs, reduced data communication line charges and a reduction in employment and relocation costs offset by a $0.85 million stolen check fraud loss.

The higher expense in 2023 was primarily the result of higher postage and shipping costs and a rise in data communication line charges as bandwidth was improved.

Income Taxes — 1st Source recognized income tax expense in 2024 of $38.44 million, compared to $36.75 million in 2023, and $36.26 million in 2022.

17 unchanged sentences

Average loans and leases, net of unearned discount, increased $394.47 million or 6.36% and increased $637.16 million or 11.45% in 2024 and 2023, respectively.

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, excluding those loans secured by real estate, increased $6.75 million or 0.88% in 2024 over 2023.

Commercial and agricultural lending outstandings were $772.97 million and $766.22 million at December 31, 2024 and December 31, 2023, respectively.

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.

Consistent with what we saw in 2023, loan growth continued to be difficult as higher interest rates caused borrowers to manage their cash closely.

We saw this in the form of reduced line of credit (LOC) balances throughout the year although we did experience an increase from a small number of specialty finance borrowers at year end.

Further, the agriculture sector is in its second consecutive year of depressed commodity prices which caused lower LOC usage as well as reduced investment in equipment from these borrowers.

Finally, our commercial and industrial loan outstandings were impacted by the acquisition and subsequent pay-off of three of our larger credit exposures.

Renewable energy loans and leases increased $87.56 million or 21.91% in 2024 over 2023.

1 unchanged sentence

The increase during 2024 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.

Demand for renewable energy loans and leases remained accelerated during 2024 from the incentives associated with the Inflation Reduction Act.

Auto and light truck loans decreased $18.48 million or 1.91% in 2024 over 2023.

At December 31, 2024, auto and light truck loans had outstandings of $948.44 million and $966.91 million at December 31, 2023.

This increase was primarily attributable to expanding and selectively adding vehicle rental and commercial lessor client relationships as fleet availability continues to improve.

This decrease was primarily attributable to vehicle rental and commercial lessor clients’ reaction to elevated interest rates by cycling into lower cost units with increased vehicle availability, and shorter fleet holds which reflect a return to more seasonal trends.

Medium and heavy duty truck loans and leases decreased $22.32 million or 7.16% in 2024.

Medium and heavy duty truck financing at December 31, 2024 and 2023 had outstandings of $289.62 million and $311.95 million, respectively.

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.

Aircraft financing at year-end 2023 was relatively flat from year-end 2022.

The decrease at December 31, 2024 from December 31, 2023 can be mainly attributed to a slow trucking industry recovery coupled with a selective credit approach to maintain risk adjusted yields, with minimal changes in competitive environment, for existing customers.

Aircraft financing at year-end 2024 increased $45.63 million or 4.23% from year-end 2023.

Aircraft financing at December 31, 2024 and 2023 had outstandings of $1.12 billion and $1.08 billion, respectively.

Our 2023 domestic balances remained flat while increasing aircraft inventories and fewer transactions took place in the market.

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.

Higher usage of cash for purchases and increased caution with large capital spending was normalizing after the record COVID-era transaction activity.

Domestic outstandings were driven by the addition of new clients and select expansions of existing aviation relationships against a background of normalizing demand post COVID-era.

We continue to exercise a consistent disciplined approach to aircraft types and client credit profiles.

Our foreign outstandings, all denominated in U.S.

dollars, increased 1.66% during 2023 and were $302.41 million and $297.46 million as of December 31, 2023 and 2022, respectively.

dollars, remained stable during 2024 and were $301.18 million and $302.41 million as of December 31, 2024 and 2023, respectively.

Loan and lease outstandings to borrowers in Brazil and Mexico were $129.12 million and $145.85 million as of December 31, 2024, respectively, compared to $119.38 million and $147.61 million as of December 31, 2023, respectively.

1 unchanged sentence

Construction equipment financing increased $119.16 million or 10.98% in 2024 compared to 2023.

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.

Construction equipment financing at December 31, 2024 had outstandings of $1.20 billion, compared to outstandings of $1.08 billion at December 31, 2023.

The growth in this category was primarily due to significant new client relationships and continued growth with existing clients primarily amongst crane rental, aggregate producers and haulers, and site development clients.

Commercial loans secured by real estate increased $85.40 million or 7.56% in 2024 over 2023.

Commercial loans secured by real estate outstanding at December 31, 2023 were $1.13 billion and $943.75 million at December 31, 2022.

Commercial loans secured by real estate outstanding at December 31, 2024 were $1.22 billion and $1.13 billion at December 31, 2023.

Approximately 62% of loans were owner occupied at December 31, 2024.

The majority of our non-owner occupied commercial real estate projects are located within our primary market area.

The increase in 2023 was the result of selective growth within our markets.

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.

Funding increases in 2024 was the result of selective growth within our markets as liquidity concerns which impacted many of our competitors and their willingness to lend into commercial real estate gave us an opportunity as underwriting and yields improved.

As a result, there was a number of construction projects that were approved in 2023 and 2024 that will provide steady growth into 2025.

Through 2024, our non-owner occupied portfolio has performed well with minimal credit issues noted.

We have financed a minimal amount of commercial real estate secured by non-owner occupied office property where third-party tenants are the primary source of repayment and all are performing as agreed.

Residential real estate and home equity loans were $680.07 million at December 31, 2024 and $637.97 million at December 31, 2023.

Residential real estate and home equity loans increased $42.10 million or 6.60% in 2024 from 2023.

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.

Additionally, reduced homeowner liquidity drove continued high demand for home equity lines of credit and loans.

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.

Residential mortgage and home equity outstandings grew in 2024 as clients began to turn back to home equity loans as variable rates began to decrease.

In addition, increased cost of home repairs and improvements resulted in larger loan amounts.

Consumer loans decreased $9.49 million or 6.64% in 2024 over 2023.

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Our liability for repurchases, included in Accrued Expenses and Other Liabilities on the Statements of Financial Condition, was $0.18 million and $0.15 million as of December 31, 2024 and 2023, respectively.

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.

Our expense for repurchase losses, included in Loan and Lease Collection and Repossession expense on the Statements of Income, was $0.02 million of expense in 2024 compared to recoveries of $0.07 million in 2023 and $0.05 million in 2022.

The mortgage repurchase liability represents our best estimate of the loss that we may incur.

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Allowance for Credit Losses — The allowance for credit losses considers the historical loss experience, current conditions, and reasonable and supportable forecasts.

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.

To estimate expected loan and lease losses under the Current Expected Credit Losses (CECL) methodology, we use a broad range of data over a lengthy 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.

CECL requires our loan portfolio to be segregated into pools based on similar risk characteristics.

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Losses on loans and leases are charged against the allowance and likewise, recoveries during the period for prior losses are credited to the allowance.

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.

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 loan commitments located in Provision for Credit Losses 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.

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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.

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.

Economic growth prospects entering the new year remain below trend, with varied calls ranging from soft landing to recession for the domestic economy.

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.

Forecasts are difficult to establish and the current environment presents challenges with high interest rates and continued elevated inflation, generally tighter lending conditions, growing signs of consumer stress, and heightened uncertainty from ongoing conflicts around the world.

There is considerable uncertainty surrounding economic growth prospects as we enter the new year, with varied calls ranging from soft landing to recession for the domestic economy.

GDP growth exceeded previous forecasts in 2024 but substantial headwinds remain in the forward outlook.

Uncertainty is high as global conflicts broadened, and significant changes in both the domestic and global political environments add uncertainty.

Collateral values are significant to underwriting our specialty finance portfolios and volatility or declining values pose a threat.

We actively review and adjust our amortization and down payment requirements as necessary in response to our outlook for future equipment values.

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.

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While difficult to predict with precision, global risks may adversely impact our borrowers impairing their ability to repay their financial obligations.

The global outlook calls for slowing growth, high sovereign debt levels and continued high interest rates in developing countries pressure growth prospects.

Rising global geopolitical uncertainty impacts the outlook and the escalation of various ongoing foreign conflicts.

Global shipping routes are under threat of attack.

The global outlook calls for slow growth as high sovereign debt levels and continued high interest rates in developing countries pressure growth prospects.

Global geopolitical uncertainty impacts the outlook and various ongoing foreign conflicts bring downside risk.

Trade tensions are rising which increases the potential for supply chain disruptions.

Terrorism remains a persistent concern and risks of a catastrophic event are elevated.

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.

In Brazil and Mexico where we have a presence with our aircraft lending, we remain concerned with persistent inflation, high interest rates and their resultant economic impact.

Inflation is concerning in Brazil where a weakening currency and fiscal expansion are fueling an inflationary rebound.

Mexico also faces an uncertain inflationary outlook and modest growth prospects.

The following discussion focuses on relevant economic conditions and various circumstances impacting the December 31, 2024 allowance for loan and lease losses of each of our loan and lease segments.

Commercial and agricultural – Multiple industries are represented in the commercial and agricultural portfolio and the outlook for the portfolio is guarded.

Commercial and agricultural – Multiple industries are represented in the commercial and agricultural portfolio and the outlook for the portfolio remains guarded.

Small businesses are challenged to absorb higher interest rates, higher cost of capital, compete for labor, and control expenses.

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Manufacturers remain under pressure as demand for durable goods remains soft.

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.

The recreational vehicle industry, which is centered in our footprint, continues to struggle with lower demand and production overcapacity as it navigates a sharp decline from record high shipment levels reached in 2022.

The outlook for 2025 remains weak;

marginally improved from 2023.

The outlook in our agricultural portfolio remains cautiously optimistic.

Crop prices remain comparatively high but are slipping and elevated input prices and borrowing costs could squeeze margins of our agricultural clients.

We experienced higher charge-offs in the commercial and agricultural portfolio during 2023 after a sustained period of low credit losses.

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.

minimally improved from 2024.

Pressures in the agricultural markets are becoming evident, as sharp declines in commodity prices coupled with continued high input costs hurt 2024 results and dampened prospects for the upcoming year.

We experienced higher charge-offs in the commercial and agricultural portfolio for a second consecutive year after a previously sustained period of low credit losses.

Credit quality remains acceptable, but we have seen increased special attention activity within the portfolio.

Renewable energy – Our renewable energy (predominately solar) portfolio continues to perform well.

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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.

Maturity risk and refinancing costs are elevated given the higher interest rate environment.

To date, we have not incurred any losses in this portfolio and credit performance continues to be favorable.

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.

Credit quality is generally stable, with limited weakness exhibited with a few smaller operators.

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.

Clients are slowly returning to more normalized fleet cycles, but cycles remain longer than historical norms.

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.

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.

Auto and light truck – The primary auto rental segment of the auto and light truck portfolio reported lower loan demand and weakening credit metrics after several years of strong performance.

We are seeing evidence of industry struggles in the portfolio as higher interest rates, higher vehicle costs, and shrinking rental rates take their toll.

Credit quality weakened during the year evidenced by an increase in special attention downgrades, delinquency, and requests for payment relief.

Wholesale used vehicle valuations softened through the first half of 2024 but stabilized in the second half, ending the year generally flat overall.

Prices did soften within the electric vehicle segment of which we have limited exposure.

Overall, vehicle values remain above the longer-term trend line and constrained original equipment manufacturer (OEM) production volumes have likely provided some pricing support.

Clients are returning to more normalized fleet cycles, but increased vehicle costs have strained performance and extended inventory holding times.

We have tightened our underwriting standards to maintain appropriate terms in an attempt to limit our exposure to downward price movements in the underlying vehicle collateral.

The auto leasing segment performed well in 2024 and the portfolio exhibits stable credit quality and low delinquency.

Leasing customers lease to auto rental companies as well as other commercial entities.

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We remain diligent in setting our terms and residual values appropriately and monitoring fleet mix given recent volatility in vehicle prices.

The auto and light truck portfolio reported a net recovery position for the year.

We modestly adjusted qualitative factors in the portfolio due to substantial loan growth and the corresponding increase in concentration risk of overall bank capital.

Medium and heavy duty truck – The industry has weakened as it deals with overcapacity and declining freight rates.

This portfolio has historically been a barometer for overall economic weakness and 2024 is expected to be a difficult year for the industry.

In previous downturns, small companies and independent owner-operators have been hit the hardest and asset valuations could be pressured should consolidation accelerate.

The portfolio exhibited no material loan growth for the year and has decreased as a percentage of capital, comparably to our other portfolios.

At year-end, we adjusted qualitative factors in our allowance analysis to account for the industry’s increasing risk profile and expected credit deterioration.

Aircraft – Loan growth in our domestic and foreign aircraft segments was essentially flat after both segments exhibited strong growth in the previous year.

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.

OEM backlogs for new units remain healthy and have supported used prices.

The portfolio has been relatively stable lately, but was among the sectors affected most by the sluggish economy following the Great Recession.

Despite signs of weakening credit metrics, the auto and light truck portfolio reported a net recovery position for the year.

To account for weakening credit metrics in our auto rental segment, we adjusted qualitative factors for elevated special attention risk within our allowance for loan and lease losses.

Medium and heavy duty truck – The industry continues to struggle with overcapacity and weak freight rates.

This portfolio has historically been a barometer for overall economic weakness and the industry has experienced several high-profile carrier bankruptcies and generally difficult conditions.

In previous downturns, small companies and independent owner-operators were hit the hardest and asset valuations were pressured.

Asset valuations have weakened.

The portfolio reported a slight decline in loan balances for the year and has exhibited some credit weakness, although it has likely outperformed the industry as a whole and the Company did not incur any credit losses in the portfolio during the period.

The possibility of labor unrest within the shipping industry raises the potential for volatility in the segment and we continue to monitor for signs of credit deterioration in our portfolio given the industry’s increased risk profile.

Aircraft – The Company experienced modest loan growth in the domestic aircraft segment during the period while growth in our foreign portfolio was essentially flat.

Aircraft collateral values, particularly those in our niche, strengthened considerably early in this economic cycle but are now showing signs of softening with increasing available inventory.

The portfolio has maintained stable credit quality in recent years, but was among the sectors affected most by the sluggish economy following the Great Recession.

Our portfolio loss history has been volatile, characterized by lengthy periods of minimal losses or modest recoveries followed by short intervals of high losses.

In this portfolio, we have $301 million of foreign exposure, primarily domiciled in Mexico and Brazil.

Brazil’s economy outperformed expectations during 2023, but forecasts are moderating for the coming year as growth in the agricultural sector slows.

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.

economy which forecasts slower growth.

Heavy indebtedness and financial problems with state-owned oil firm Pemex indicate ongoing concern for Mexico’s broader economy.

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.

In recent years, there have been credit quality concerns with unanticipated downgrades to special attention.

The portfolio recognized the largest single charge off in both 2021 and 2022;

one of which was subsequently fully recovered during 2023.

Higher interest rates and a slowed housing market have weakened the outlook for site developers.

Certain industry segments are experiencing stress and we continue to monitor for credit weaknesses.

The portfolio remains vulnerable to volatility and regulation in the oil and gas sector.

The general nature of bidding on construction projects can also have unanticipated costs or delays.

Volatile energy costs have been harmful to portfolio clients which often operate under long-term contracts that may lack adequate cost escalators.

Brazil’s economy generally outperformed expectations during 2024, but faces increasing inflationary and fiscal concerns, higher interest rates, and a sharply weakening currency.

The Mexican economy experienced modest growth in 2024, and remains highly dependent on the U.S.

Heavy indebtedness and financial problems with state-owned oil firm Pemex are an ongoing concern for Mexico’s broader growth prospects.

Construction equipment – Our construction equipment portfolio reported another year of solid growth, but at a slower rate as compared to previous periods.

Infrastructure spending has had a positive impact for many contractors within the segment.

The portfolio experienced stable credit quality in the time period between the Great Recession and the pandemic, but there have been credit quality concerns with unanticipated downgrades to special attention in recent years.

The portfolio reported increased monthly delinquency activity during the period and currently accounts for the Company’s highest share of nonperforming assets.

The portfolio has also recognized several sizeable losses in recent years which have been successfully mitigated, achieving fairly high recovery rates with time.

There remains elevated concern for construction contractors as the portfolio is inherently vulnerable to energy price volatility, high interest rates, and changes in the regulatory environment.

Construction projects can have unknown costs or delays and large project risk is ever-present.

Volatile energy, labor, and material prices create difficulties for cost structures in an industry that often operates under longer-term contracts lacking adequate cost escalators.

Our portfolio has seen multiple instances of contractors having difficulty managing and collecting receivables which resulted in severe payment difficulties.

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.

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.

We reviewed our qualitative adjustments at year-end, and maintained factors for concentration risk of overall bank capital given the portfolio’s loan growth, elevated problem loan activity in the segment given steady special attention volumes, and added a factor for increasing delinquency and nonperforming asset trends.

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.

Approximately 62% of the Bank’s exposure in this portfolio is from owner-occupied facilities where we are the primary relationship bank for our clients.

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.

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.

We reviewed our qualitative adjustments as of year-end and made slight adjustments to factors addressing interest rate maturity risk along with construction risk in select segments as the loan volume of projects under construction remains much higher than prior periods.

We have seen an uptick in special attention activity in our owner-occupied segment, while our non-owner-occupied segment has maintained generally stable credit quality.

We continue to be concerned about higher interest and capitalization rates within the non-owner-occupied 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.

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Losses in these portfolios have been immaterial since 2013.

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.

Qualitative factors in the portfolio are primarily for reasonable and supportable forecasts, although we maintained a previous adjustment to account for an elevated amount 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.

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Losses are stable during good economic times and tend to increase when there is deterioration in local economic factors and employment rates.

Loss rates have been modest since 2013, but we experienced higher write-downs within the portfolio during the year.

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.

Loss rates had been modest from 2013 through the end of the pandemic, but we experienced higher write-downs within the portfolio in each of the last two years.

We reviewed our qualitative adjustments at the end of the 2024 which primarily consist of reasonable and supportable forecasts and made an upward adjustment to account for increasing delinquency and nonperforming activity within the portfolio.

Allowance for loan and lease losses – The allowance for loan and lease losses at December 31, 2024, totaled $155.54 million and was 2.27% of loans and leases, compared to $147.55 million or 2.26% of loans and leases at December 31, 2023 and $139.27 million or 2.32% of loans and leases at December 31, 2022.

It is our opinion that the allowance for loan and lease losses was appropriate to absorb current expected credit losses inherent in the loan and lease portfolio as of December 31, 2024.

Charge-offs for loan and lease losses were $13.73 million for 2024, compared to $6.65 million for 2023 and $3.41 million for 2022.

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.

Primarily reflective of our strong loan and lease growth and qualitative adjustments, we added $13.66 million to the provision for credit losses on loans and leases for 2024, compared to a provision of $5.87 million for 2023 and a provision of $13.25 million for 2022.

The following table summarizes our loan and lease loss experience for each of the last three years ended December 31.

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Average amount of net loans and leases outstanding during period $ 6,598,329 $ 6,203,857 $ 5,566,701

Amount of unfunded loan commitments at end of period (1)

$ 1,326,724 $ 1,478,840 $ 1,255,289

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Total recoveries 8,055 9,066 1,940

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

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 %

The following table shows net (recoveries) charge-offs as a percentage of average loans and leases by portfolio type:

Net charge-offs (recoveries) 5,675 (2,418) 1,469

Provision for credit losses - loans and leases 13,663 5,866 13,245

Balance of allowance for loan and lease losses at end of period $ 155,540 $ 147,552 $ 139,268

Balance of liability for unfunded loan commitments at beginning of period $ 8,182 $ 5,616 $ 4,196

(Recovery of) provision for credit losses - unfunded loan commitments (1,197) 2,566 1,420

Balance of liability for unfunded loan commitments at end of period $ 6,985 $ 8,182 $ 5,616

Asset Quality Ratios:

Net charge-offs (recoveries) to average net loans and leases outstanding 0.09 % (0.04) % 0.03 %

Allowance for loan and lease losses to net loans and leases outstanding end of period 2.27 % 2.26 % 2.32 %

Liability for unfunded loan commitments to unfunded loan commitments end of period 0.53 % 0.55 % 0.45 %

Allowance for loan and lease losses and liability for unfunded loan commitments to net loans and leases outstanding and unfunded loan commitments end of period

1.99 % 1.95 % 1.99 %

(1) Represents noncancelable commitments

The following table shows net charge-offs (recoveries) as a percentage of average loans and leases by portfolio type:

2024 2023 2022

Commercial and agricultural 1.29 % 0.52 % 0.07 %

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Consumer 0.81 0.66 0.19

Total net (recoveries) charge-offs to average portfolio loans and leases (0.04) % 0.03 % 0.16 %

Total net charge-offs (recoveries) to average portfolio loans and leases 0.09 % (0.04) % 0.03 %

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.

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During 2024, interest income on nonaccrual loans and leases would have increased by approximately $2.06 million compared to $1.47 million in 2023 if these loans and leases had earned interest at their full contractual rate.

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.

Repossessions consisted mainly of units in the specialty finance segments of the auto and light truck portfolio.

There were no properties held in other real estate.

Nonperforming assets at December 31, 2024 increased from December 31, 2023, mainly due to increases in nonaccrual loans and leases in the construction equipment portfolio and to a lesser extent, the residential real estate and home equity portfolio offset by a decrease in nonaccrual loans and leases in the commercial and agricultural portfolio.

Repossessions consisted mainly of units in the construction equipment portfolio.

There is currently one property held in other real estate related to our construction equipment portfolio.

Nonperforming assets at December 31 (Dollars in thousands)

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Medium and heavy duty truck — —

Aircraft — 571

Construction equipment 17,976 176

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Nonperforming loans and leases to loans and leases, net of unearned discount 0.45 % 0.36 %

0.36 % 0.44 %

Nonperforming assets to loans and leases and operating leases, net of unearned discount 0.46 % 0.37 %

0.37 % 0.45 %

Coverage ratio of allowance for loan and lease losses to nonperforming loans and leases 506.33 % 627.08 %

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.

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INVESTMENT PORTFOLIO

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.

The amortized cost of securities available-for-sale at year-end 2024 decreased 6.34% from 2023, following a 10.50% decrease from year-end 2022 to year-end 2023.

The amortized cost of securities available-for-sale at December 31, 2024 was 18.48% of total assets, compared to 20.19% of total assets at December 31, 2023.

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States and political subdivisions securities 86,305 3.46

Corporate debt securities

Under 1 year 8,448 2.32

1 – 5 years — —

5 – 10 years — —

Over 10 years — —

Total Corporate debt securities 8,448 2.32

Foreign government securities

Under 1 year 600 2.12

1 – 5 years — —

5 – 10 years — —

Over 10 years — —

Total Foreign government securities 600 2.12

Mortgage-backed securities — Federal agencies 777,962 2.63

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6% in the years 2017 and 2018;

4% in the years 2015 prior.

7% in the years 2016 and prior.

The following table shows the average daily amounts of deposits and rates paid on such deposits.

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During December 2023, we borrowed $100 million from the Federal Reserve’s Bank Term Funding Program based on the economics of the borrowing relative to our other funding sources.

During January 2024, we refinanced the borrowing at a lower rate for another one year period.

LIQUIDITY AND CAPITAL RESOURCES

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The effective rate of core deposits in 2024 was 1.97%, compared to 1.45% in 2023 and 0.32% in 2022.

Average noninterest bearing core deposits decreased 13.97% in 2023 compared to an increase of 8.27% in 2022.

Average noninterest bearing core deposits decreased 8.22% in 2024 compared to a decrease of 13.97% in 2023.

These represented 25.79% of total core deposits in 2024, compared to 28.24% in 2023, and 31.71% in 2022.

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During 2024, our reliance on purchased funds increased to 12.69% of average total assets from 11.45% in 2023.

Shareholders’ Equity — Average shareholders’ equity equated to 11.02% of average total assets in 2023, compared to 10.81% in 2022.

Shareholders’ Equity — Average shareholders’ equity equated 12.10% of average total assets in 2024, compared to 11.02% in 2023.

Shareholders’ equity was 12.44% of total assets at year-end 2024, compared to 11.34% at year-end 2023.

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The unrealized losses occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase.

Additionally, we do not intend to sell these investments and it is more likely than not that we will not be required to sell these investments before recovery of the amortized cost basis, which may be the maturity dates of the securities.

Additionally, we do not intend to sell these available-for-sale investment securities and it is more likely than not that we will not be required to sell these investments before recovery of the amortized cost basis, which may be the maturity dates of the securities.

Other Liquidity — Under Indiana law governing the collateralization of public fund deposits, the Indiana Board of Depositories determines which financial institutions are required to pledge collateral based on the strength of their financial ratings.

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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 7. Management’s Discussion and Analysis