Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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
This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.
All statements other than statements of historical fact are statements that could be forward-looking statements. Words such as “believe,” “contemplate,” “seek,” “estimate,” “plan,” “project,” “anticipate,” “possible,” “assume,” “expect,” “intend,” “targeted,” “continue,” “remain,” “will,” “should,” “indicate,” “would,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date.
All written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation, and do not undertake, to update, revise, or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made. We have expressed our expectations, beliefs, and projections in good faith and we believe they have a reasonable basis. However, we make no assurances that our expectations, beliefs, or projections will be achieved or accomplished. The results or outcomes indicated by our forward-looking statements may not be realized due to a variety of factors, including, without limitation, the following:
• Local, regional, national, and international economic conditions and the impact they may have on us and our clients and our assessment of that impact.
• Changes in the level of nonperforming assets and charge-offs.
• Changes in estimates of future cash reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.
• The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board.
• Inflation, interest rate, securities market, and monetary fluctuations, including substantial changes in the cost of fuel.
• Political instability, acts of war or terrorism, or cybersecurity threats.
• The spread of infectious diseases or pandemics.
• The timely development and acceptance of new products and services and perceived overall value of these products and services by others.
• Changes in consumer spending, borrowings, and savings habits.
• Changes in the financial performance and/or condition of our borrowers.
• Technological changes.
• The impact of climate change.
• Acquisitions and integration of acquired businesses.
• The ability to increase market share and control expenses.
• The ability to expand effectively into new markets that we target.
• 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.
• The effect of changes in accounting policies and practices and auditing requirements, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters.
• Changes in our organization, compensation, and benefit plans.
• The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquires and the results of regulatory examinations or reviews.
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• Greater than expected costs or difficulties related to the integration of new products and lines of business.
• Our success at managing the risks described in Item 1A. Risk Factors.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) and follow general practices within the industries in which we operate. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates or judgments reflect management’s view of the most appropriate manner in which to record and report our overall financial performance. Because these estimates or judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. As such, changes in these estimates, judgments, and/or assumptions may have a significant impact on our financial statements. All accounting policies are important, and all policies described in Part II, Item 8, Financial Statements and Supplementary Data – Note 1 of the Notes to Consolidated Financial Statements (Note 1), should be reviewed for a greater understanding of how our financial performance is recorded and reported.
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 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. Actual performance that differs from estimates or judgments and future changes in the key variables could change future valuations and impact net income. Management has reviewed the application of these policies with the Audit, Finance and Risk Committee of the Board of Directors. Following is a discussion of the areas we view as our most critical accounting policies.
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. Determining the appropriateness of the allowance is complex and requires judgement by management about the effect of matters that are inherently uncertain. In determining an appropriate allowance, management makes numerous judgments, assumptions, and estimates which are inherently subjective, as they require material estimates that may be susceptible to significant change. These estimates are derived based on continuous review of the loan and lease portfolio, assessments of client performance, movement through delinquency stages, probability of default, losses given default, collateral values, and disposition, as well as expected cash flows, economic forecasts, and qualitative factors, such as changes in current economic conditions.
As stated in Note 1, we segment our loan and lease portfolios based on similar risk characteristics for collective evaluation using a non-discounted cash flow approach to estimate expected losses. We use a cohort cumulative loss methodology for select loan and lease segments. The cohort methodology has a steady state assumption. For other segments, we use a PD/LGD (probability of default/loss given default) model which aligns well with our internal risk rating system. When we observe limitations in the data or models, we use model overlays to make adjustments to model outputs to capture a particular risk or compensate for a known limitation, or in the case of the cohort model, changes in the steady state assumptions. Actual losses may differ from estimated amounts due to model inefficiencies or management’s inability to adequately determine appropriate model adjustment factors.
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 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. We use a two-year reasonable and supportable period across all loan and lease segments to forecast economic conditions. We believe the two-year time horizon aligns with available industry guidance and various forecasting sources. Following this two-year forecasting period, we use a two-year reversion period to revert forecast rates to historical loss rates.
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. 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 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.”
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Fair Value Measurements — We use fair value measurements to record certain financial instruments and to determine fair value disclosures. Available-for-sale securities, trading account securities, mortgage loans held for sale, and interest rate swap agreements are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other financial assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve write-downs of, or specific reserves against, individual assets. GAAP establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable. Observable inputs reflect market-driven or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data.
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market data. For financial instruments that trade actively and have quoted market prices or observable market data, there is minimal subjectivity involved in measuring fair value. When observable market prices and data are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value measurement. Fair value is discussed further in Note 1 under the heading “Fair Value Measurements” and in Note 21, “Fair Value Measurements.”
EARNINGS SUMMARY
Net income available to common shareholders in 2024 was $132.62 million, up from $124.93 million in 2023 and up from $120.51 million in 2022. Diluted net income per common share was $5.36 in 2024, $5.03 in 2023, and $4.84 in 2022. Return on average total assets was 1.52% in 2024 compared to 1.48% in 2023, and 1.49% in 2022. 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.
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. The level of earnings reinvested and dividend payouts are determined by the Board of Directors based on various considerations, including liquidity needs, capital requirements, and management’s assessment of future growth opportunities and the level of capital necessary to support them.
Net Interest Income — Our primary source of earnings is net interest income, the difference between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and securities while deposits and borrowings represent the major portion of interest-bearing liabilities. For purposes of the following discussion, comparison of net interest income is done on a tax-equivalent basis, which provides a common basis for comparing yields on earning assets exempt from federal income taxes to those which are fully taxable.
Net interest margin (the ratio of net interest income to average earning assets) is significantly affected by movements in interest rates and changes in the mix of earning assets and the liabilities that fund those assets. Net interest margin on a fully taxable- equivalent basis was 3.64% in 2024, compared to 3.51% in 2023 and 3.45% in 2022. Net interest income was $300.82 million for 2024, compared to $278.65 million for 2023 and $263.47 million for 2022. Tax-equivalent net interest income totaled $301.40 million for 2024, up $22.02 million from the $279.39 million reported in 2023. Tax-equivalent net interest income for 2023 was up $15.29 million from the $264.10 million reported for 2022.
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 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.
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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 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, 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 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 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.
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The following table provides an analysis of net interest income and illustrates interest income earned and interest expense charged for each major component of interest earning assets and the interest bearing liabilities. Yields/rates are computed on a tax-equivalent basis, using a 21% rate. Nonaccrual loans and leases are included in the average loan and lease balance outstanding.
2024 2023 2022
(Dollars in thousands) Average Balance Interest Income/Expense Yield/Rate Average Balance Interest Income/Expense Yield/Rate Average Balance Interest Income/Expense Yield/Rate
ASSETS
Investment securities available-for-sale:
Taxable $ 1,539,900 $ 25,720 1.67 % $ 1,632,567 $ 24,501 1.50 % $ 1,805,041 $ 26,294 1.46 %
Tax-exempt (1)
30,464 1,312 4.31 % 44,083 1,805 4.09 % 40,310 1,311 3.25 %
Mortgages held for sale 3,233 214 6.62 % 2,368 155 6.55 % 5,178 217 4.19 %
Loans and leases, net of unearned discount (1)
6,598,329 451,432 6.84 % 6,203,857 387,524 6.25 % 5,566,701 264,043 4.74 %
Other investments 112,563 5,925 5.26 % 73,729 3,663 4.97 % 243,938 2,579 1.06 %
Total earning assets (1)
8,284,489 484,603 5.85 % 7,956,604 417,648 5.25 % 7,661,168 294,444 3.84 %
Cash and due from banks 65,285 70,304 75,836
Allowance for loan and lease losses (151,050) (144,183) (133,028)
Other assets 540,815 532,072 469,135
Total assets $ 8,739,539 $ 8,414,797 $ 8,073,111
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits $ 5,509,956 $ 166,842 3.03 % $ 5,204,095 $ 123,162 2.37 % $ 4,673,494 $ 25,231 0.54 %
Short-term borrowings:
Securities sold under agreements to repurchase 60,388 542 0.90 % 78,928 136 0.17 % 166,254 85 0.05 %
Other short-term borrowings 168,460 8,434 5.01 % 134,683 6,896 5.12 % 48,716 1,412 2.90 %
Subordinated notes 58,764 4,217 7.18 % 58,764 4,174 7.10 % 58,764 3,550 6.04 %
Long-term debt and mandatorily redeemable securities 40,971 3,165 7.72 % 46,323 3,892 8.40 % 54,940 69 0.13 %
Total interest-bearing liabilities 5,838,539 183,200 3.14 % 5,522,793 138,260 2.50 % 5,002,168 30,347 0.61 %
Noninterest-bearing deposits 1,609,001 1,753,149 2,037,882
Other liabilities 161,657 151,659 103,740
Shareholders’ equity 1,057,331 926,935 872,721
Noncontrolling interests 73,011 60,261 56,600
Total liabilities and equity $ 8,739,539 $ 8,414,797 $ 8,073,111
Less: Fully tax-equivalent adjustments (586) (741) (628)
Net interest income/margin (GAAP-derived) (1)
$ 300,817 3.63 % $ 278,647 3.50 % $ 263,469 3.44 %
Fully tax-equivalent adjustments 586 741 628
Net interest income/margin - FTE (1)
$ 301,403 3.64 % $ 279,388 3.51 % $ 264,097 3.45 %
(1) See “Reconciliation of Non-GAAP Financial Measures” for more information on this performance measure/ratio.
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Reconciliation of Non-GAAP Financial Measures — Our accounting and reporting policies conform to GAAP in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures are used by management to evaluate and measure the Company’s performance. These include taxable-equivalent net interest income (including its individual components) and net interest margin (including its individual components). Management believes that these measures provide users of the Company’s financial information a more meaningful view of the performance of the interest-earning assets and interest-bearing liabilities.
Management reviews yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries on a fully taxable-equivalent (“FTE”) basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. The following table shows the reconciliation of non-GAAP financial measures for the most recent three years ended December 31.
(Dollars in thousands) 2024 2023 2022
Calculation of Net Interest Margin
(A) Interest income (GAAP) $ 484,017 $ 416,907 $ 293,816
Fully tax-equivalent adjustments:
(B) - Loans and leases 317 381 366
(C) - Tax-exempt investment securities 269 360 262
(D) Interest income - FTE (A+B+C) 484,603 417,648 294,444
(E) Interest expense (GAAP) 183,200 138,260 30,347
(F) Net interest income (GAAP) (A-E) 300,817 278,647 263,469
(G) Net interest income - FTE (D-E) 301,403 279,388 264,097
(H) Total earning assets $ 8,284,489 $ 7,956,604 $ 7,661,168
Net interest margin (GAAP-derived) (F/H) 3.63 % 3.50 % 3.44 %
Net interest margin - FTE (G/H) 3.64 % 3.51 % 3.45 %
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The change in interest due to both rate and volume illustrated in the following table has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The following table shows changes in tax-equivalent interest earned and interest paid, resulting from changes in volume and changes in rates.
Increase (Decrease) due to
(Dollars in thousands) Volume Rate Net
2024 compared to 2023
Interest earned on:
Investment securities available-for-sale:
Taxable $ (1,443) $ 2,662 $ 1,219
Tax-exempt (582) 89 (493)
Mortgages held for sale 57 2 59
Loans and leases, net of unearned discount 25,580 38,328 63,908
Other investments 2,032 230 2,262
Total earning assets $ 25,644 $ 41,311 $ 66,955
Interest paid on:
Interest-bearing deposits $ 7,590 $ 36,090 $ 43,680
Short-term borrowings:
Securities sold under agreements to repurchase (39) 445 406
Other short-term borrowings 1,694 (156) 1,538
Subordinated notes — 43 43
Long-term debt and mandatorily redeemable securities (428) (299) (727)
Total interest-bearing liabilities $ 8,817 $ 36,123 $ 44,940
Net interest income - FTE $ 16,827 $ 5,188 $ 22,015
2023 compared to 2022
Interest earned on:
Investment securities available-for-sale:
Taxable $ (2,570) $ 777 $ (1,793)
Tax-exempt 131 363 494
Mortgages held for sale (150) 88 (62)
Loans and leases, net of unearned discount 32,763 90,718 123,481
Other investments (2,856) 3,940 1,084
Total earning assets $ 27,318 $ 95,886 $ 123,204
Interest paid on:
Interest-bearing deposits $ 3,179 $ 94,752 $ 97,931
Short-term borrowings:
Securities sold under agreements to repurchase (64) 115 51
Other short-term borrowings 3,823 1,661 5,484
Subordinated notes — 624 624
Long-term debt and mandatorily redeemable securities (13) 3,836 3,823
Total interest-bearing liabilities $ 6,925 $ 100,988 $ 107,913
Net interest income - FTE $ 20,393 $ (5,102) $ 15,291
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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
$ Change
from 2023 2024
% Change
from 2023 2023
$ Change
from 2022 2023
% Change
from 2022
Noninterest income:
Trust and wealth advisory $ 26,709 $ 23,706 $ 23,107 $ 3,003 12.67 % $ 599 2.59 %
Service charges on deposit accounts 12,877 12,749 12,146 128 1.00 % 603 4.96 %
Debit card 17,785 17,980 18,052 (195) (1.08) % (72) (0.40) %
Mortgage banking 4,210 3,471 4,122 739 21.29 % (651) (15.79) %
Insurance commissions 6,730 6,911 6,703 (181) (2.62) % 208 3.10 %
Equipment rental 5,171 8,837 12,274 (3,666) (41.48) % (3,437) (28.00) %
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) %
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 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 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.
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 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.
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 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 were from the sale of Federal agency securities with the goal of managing portfolio risk and liquidity.
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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
$ Change
from 2023 2024
% Change
from 2023 2023
$ Change
from 2022 2023
% Change
from 2022
Noninterest expense:
Salaries and employee benefits $ 121,909 $ 115,612 $ 105,110 $ 6,297 5.45 % $ 10,502 9.99 %
Net occupancy 11,939 11,090 10,728 849 7.66 % 362 3.37 %
Furniture and equipment 5,612 5,653 5,448 (41) (0.73) % 205 3.76 %
Data Processing 27,567 25,055 22,375 2,512 10.03 % 2,680 11.98 %
Depreciation — leased equipment 4,073 7,093 10,023 (3,020) (42.58) % (2,930) (29.23) %
Professional fees 7,098 6,705 7,280 393 5.86 % (575) (7.90) %
FDIC and other insurance 6,142 5,926 3,625 216 3.64 % 2,301 63.48 %
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 %
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.
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.
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 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.
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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.
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. The effective tax rate in 2024 was 22.47% compared to 22.73% in 2023, and 23.12% in 2022.
For a detailed analysis of 1st Source’s income taxes see Part II, Item 8, Financial Statements and Supplementary Data — Note 17 of the Notes to Consolidated Financial Statements.
FINANCIAL CONDITION
Loan and Lease Portfolio — The following table shows 1st Source’s loan and lease distribution at the end of each of the last two years as of December 31.
(Dollars in thousands) 2024 2023
Commercial and agricultural $ 772,974 $ 766,223
Renewable energy 487,266 399,708
Auto and light truck 948,435 966,912
Medium and heavy duty truck 289,623 311,947
Aircraft 1,123,797 1,078,172
Construction equipment 1,203,912 1,084,752
Commercial real estate 1,215,265 1,129,861
Residential real estate and home equity 680,071 637,973
Consumer 133,465 142,957
Total loans and leases $ 6,854,808 $ 6,518,505
At December 31, 2024, there were no concentrations within the loan portfolio of 10% or more of total loans and leases.
Loans and leases, net of unearned discount, at December 31, 2024, were $6.85 billion and were 76.74% of total assets, compared to $6.52 billion and 74.69% of total assets at December 31, 2023. 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, 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. 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.
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Renewable energy loans and leases increased $87.56 million or 21.91% in 2024 over 2023. Renewable energy loan and lease outstandings were $487.27 million and $399.71 million at December 31, 2024 and 2023, respectively. The increase during 2024 was due to continued positive momentum from the addition of new clients and repeat business from existing clients. 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 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, 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. 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, 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. Outstanding balances to other borrowers in other countries were insignificant.
Construction equipment financing increased $119.16 million or 10.98% in 2024 compared to 2023. 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, 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. 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 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. Consumer loans outstanding at December 31, 2024, were $133.47 million and $142.96 million at December 31, 2023. During 2024, higher vehicle prices, increased interest rates, reduced inventory levels and consumer’s lack of liquidity contributed to the decrease in consumer loans.
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The following table shows the contractual maturities of loans and leases outstanding as of December 31, 2024 as well as classification according to the sensitivity to changes in interest rates.
(Dollars in thousands) 0-1 Year 1-5 Years 5-15 Years Over 15 Years Total
Commercial and agricultural
Fixed rate $ 76,187 $ 149,266 $ 9,349 $ — $ 234,802
Variable rate 309,516 180,018 48,638 — 538,172
Total commercial and agricultural 385,703 329,284 57,987 — 772,974
Renewable energy
Fixed rate 2,564 36,164 38,992 2,405 80,125
Variable rate 206,942 111,640 88,559 — 407,141
Total renewable energy 209,506 147,804 127,551 2,405 487,266
Auto and light truck
Fixed rate 156,648 295,709 5,892 — 458,249
Variable rate 192,071 298,115 — — 490,186
Total auto and light truck 348,719 593,824 5,892 — 948,435
Medium and heavy duty truck
Fixed rate 92,913 187,681 6,495 — 287,089
Variable rate 2,038 496 — — 2,534
Total medium and heavy duty truck 94,951 188,177 6,495 — 289,623
Aircraft
Fixed rate 156,395 622,262 — — 778,657
Variable rate 78,580 182,335 84,225 — 345,140
Total aircraft 234,975 804,597 84,225 — 1,123,797
Construction equipment
Fixed rate 382,518 765,055 19,808 — 1,167,381
Variable rate 9,452 24,071 3,008 — 36,531
Total construction equipment 391,970 789,126 22,816 — 1,203,912
Commercial real estate
Fixed rate 106,226 433,321 52,296 238 592,081
Variable rate 45,189 378,152 192,930 6,913 623,184
Total commercial real estate 151,415 811,473 245,226 7,151 1,215,265
Residential real estate and home equity
Fixed rate 77,631 179,010 170,640 7,466 434,747
Variable rate 53,155 125,039 66,016 1,114 245,324
Total residential real estate and home equity 130,786 304,049 236,656 8,580 680,071
Consumer
Fixed rate 57,546 63,552 93 — 121,191
Variable rate 8,691 3,563 20 — 12,274
Total consumer 66,237 67,115 113 — 133,465
Total loans and leases
Fixed rate 1,108,628 2,732,020 303,565 10,109 4,154,322
Variable rate 905,634 1,303,429 483,396 8,027 2,700,486
Total loans and leases $ 2,014,262 $ 4,035,449 $ 786,961 $ 18,136 $ 6,854,808
During 2024, approximately 37% of the Bank’s residential mortgage originations were sold into the secondary market. Mortgage loans held for sale were $2.57 million at December 31, 2024 and were $1.44 million at December 31, 2023.
1st Source Bank sells residential mortgage loans to Fannie Mae as well as FHA-insured and VA-guaranteed loans in Ginnie Mae mortgage-backed securities. Additionally, we have sold loans on a service released basis to various other financial institutions in the past. The agreements under which we sell these mortgage loans contain various representations and warranties regarding the acceptability of loans for purchase. On occasion, we may be asked to indemnify the loan purchaser for credit losses on loans that were later deemed ineligible for purchase or we may be asked to repurchase a loan. Both circumstances are collectively referred to as “repurchases.” Within the industry, repurchase demands have decreased during recent years. We believe the loans we have underwritten and sold to these entities have met or exceeded applicable transaction parameters.
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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 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. The estimate is based on specific loan repurchase requests and a historical loss ratio with respect to origination dollar volume. Because the level of mortgage loan repurchase losses is dependent on economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment.
CREDIT EXPERIENCE
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 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.
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. 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. 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. We review the loan and lease portfolios to identify borrowers that might develop financial problems and to mitigate losses. 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. 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.
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. 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. 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 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.
We include a factor for global risk in our analysis. 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 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 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.
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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 remains guarded. Small businesses are challenged to absorb higher interest rates, higher cost of capital, compete for labor, and control expenses. In our underlying industries, wholesalers have generally performed well and have been able to pass along rising costs. Manufacturers remain under pressure as demand for durable goods remains soft. 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; 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. Growth opportunities abound and overall credit quality remains solid. 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 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. Our auto leasing portfolio is concentrated in larger client exposures. We remain diligent in setting our terms and residual values appropriately and monitoring fleet mix given recent volatility in vehicle prices. 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 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. economy. Heavy indebtedness and financial problems with state-owned oil firm Pemex are an ongoing concern for Mexico’s broader growth prospects.
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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. 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 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. Generally, residential mortgage loans are originated using standards that result in salable mortgages. Home equity loans are also advanced in compliance with regulatory guidelines and the Bank’s credit policy. Losses in these portfolios have been immaterial since 2013. 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. This portfolio consists primarily of loans secured by autos with advances in compliance with the Bank’s underwriting standards. Losses are stable during good economic times and tend to increase when there is deterioration in local economic factors and employment rates. 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. 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.
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The following table summarizes our loan and lease loss experience for each of the last three years ended December 31.
(Dollars in thousands) 2024 2023 2022
Amounts of loans and leases outstanding at end of period $ 6,854,808 $ 6,518,505 $ 6,011,162
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
Balance of allowance for loan and lease losses at beginning of period $ 147,552 $ 139,268 $ 127,492
Charge-offs:
Commercial and agricultural 9,825 4,305 625
Renewable energy — — —
Auto and light truck 730 729 118
Medium and heavy duty truck — — —
Aircraft 68 — —
Construction equipment 1,692 54 1,114
Commercial real estate — 248 538
Residential real estate and home equity 66 101 284
Consumer 1,349 1,211 730
Total charge-offs 13,730 6,648 3,409
Recoveries:
Commercial and agricultural 418 243 56
Renewable energy — — —
Auto and light truck 3,273 5,591 417
Medium and heavy duty truck — 12 —
Aircraft 1,279 967 785
Construction equipment 2,100 1,656 17
Commercial real estate 724 11 45
Residential real estate and home equity 26 334 160
Consumer 235 252 460
Total recoveries 8,055 9,066 1,940
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 %
Renewable energy — — —
Auto and light truck (0.26) (0.55) (0.04)
Medium and heavy duty truck — — —
Aircraft (0.11) (0.09) (0.08)
Construction equipment (0.04) (0.16) 0.13
Commercial real estate (0.06) 0.02 0.05
Residential real estate and home equity 0.01 (0.04) 0.02
Consumer 0.81 0.66 0.19
Total net charge-offs (recoveries) to average portfolio loans and leases 0.09 % (0.04) % 0.03 %
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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. The following table shows the amount of such components of the allowance for loan and lease losses at December 31 and the ratio of such loan and lease categories to total outstanding loan and lease balances.
2024 2023
(Dollars in thousands) Allowance Amount Percentage of Loans and Leases in Each Category to Total Loans and Leases Allowance Amount Percentage of Loans and Leases in Each Category to Total Loans and Leases
Commercial and agricultural $ 21,316 11.28 % $ 17,385 11.76 %
Renewable energy 8,562 7.11 6,610 6.13
Auto and light truck 18,437 13.84 16,858 14.83
Medium and heavy duty truck 7,292 4.22 8,965 4.79
Aircraft 36,663 16.39 37,653 16.54
Construction equipment 28,258 17.56 26,510 16.64
Commercial real estate 24,821 17.73 23,690 17.33
Residential real estate and home equity 7,976 9.92 7,698 9.79
Consumer 2,215 1.95 2,183 2.19
Total $ 155,540 100.00 % $ 147,552 100.00 %
Nonperforming Assets — Nonperforming assets include loans past due over 90 days, nonaccrual loans and leases, other real estate, repossessions and other nonperforming assets we own. Our policy is to discontinue the accrual of interest on loans and leases where principal or interest is past due and remains unpaid for 90 days or more, or when an individual analysis of a borrower’s credit worthiness indicates a credit should be placed on nonperforming status, except for residential real estate and home equity loans, which are placed on nonaccrual at the time the loan is placed in foreclosure and consumer loans that are both well secured and in the process of collection.
Nonperforming assets amounted to $31.33 million at December 31, 2024, compared to $24.24 million at December 31, 2023, and $26.93 million at December 31, 2022. 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, 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.
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Nonperforming assets at December 31 (Dollars in thousands)
2024 2023
Loans past due over 90 days $ 106 $ 149
Nonaccrual loans and leases:
Commercial and agricultural 4,715 13,267
Renewable energy — —
Auto and light truck 2,806 4,666
Medium and heavy duty truck — —
Aircraft — —
Construction equipment 17,976 176
Commercial real estate 1,595 2,970
Residential real estate and home equity 2,711 1,812
Consumer 810 490
Total nonaccrual loans and leases 30,613 23,381
Total nonperforming loans and leases 30,719 23,530
Other real estate 460 —
Repossessions:
Commercial and agricultural — —
Auto and light truck — 689
Medium and heavy duty truck — —
Aircraft — —
Construction equipment 134 —
Consumer 21 16
Total repossessions 155 705
Operating leases — —
Total nonperforming assets $ 31,334 $ 24,235
Nonperforming loans and leases to loans and leases, net of unearned discount 0.45 % 0.36 %
Nonperforming assets to loans and leases and operating leases, net of unearned discount 0.46 % 0.37 %
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. Management monitors these loans closely and reviews their performance on a regular basis. As of December 31, 2024 and 2023, we had $20.60 million and $34.04 million, respectively, in loans of this type which are not included in either of the non-accrual or 90 days past due loan categories. At December 31, 2024, potential problem loans consisted of five relationships; 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. Weakness in the borrowers’ operating performance have caused us to give heighten attention to these credits.
INVESTMENT PORTFOLIO
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.
The following table shows the amortized cost of investment securities available-for-sale as of December 31.
(Dollars in thousands) 2024 2023
U.S. Treasury and Federal agencies securities $ 786,417 $ 979,530
U.S. States and political subdivisions securities 86,305 97,522
Mortgage-backed securities — Federal agencies 777,962 676,257
Corporate debt securities — 8,448
Foreign government securities — 600
Total investment securities available-for-sale $ 1,650,684 $ 1,762,357
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Yields on tax-exempt obligations are calculated on a fully tax-equivalent basis assuming a 21% tax rate. The following table shows the maturities of securities available-for-sale at December 31, 2024, at the amortized costs and weighted average yields of such securities.
(Dollars in thousands) Amount Yield
U.S. Treasury and Federal agencies securities
Under 1 year $ 264,572 0.77 %
1 – 5 years 492,814 1.53
5 – 10 years 29,031 4.67
Over 10 years — —
Total U.S. Treasury and Federal agencies securities 786,417 1.39
U.S. States and political subdivisions securities
Under 1 year 8,716 2.30
1 – 5 years 37,999 1.94
5 – 10 years 23,615 4.89
Over 10 years 15,975 5.60
Total U.S. States and political subdivisions securities 86,305 3.46
Mortgage-backed securities — Federal agencies 777,962 2.63
Total investment securities available-for-sale $ 1,650,684 2.08 %
At December 31, 2024, the residential mortgage-backed securities we held consisted of GNMA, FNMA and FHLMC pass-through certificates (Government Sponsored Enterprise, GSEs). The type of loans underlying the securities were all conforming loans at the time of issuance. The underlying GSEs backing these mortgage-backed securities are rated Aaa or AA+ from the rating agencies. At December 31, 2024, the vintage (years originated) of the underlying loans comprising our securities are: 10% in the year 2024; 3% in the year 2023; 53% in the years 2021 and 2022; 21% in the years 2019 and 2020; 6% in the years 2017 and 2018; 7% in the years 2016 and prior.
DEPOSITS
The following table shows the average daily amounts of deposits and rates paid on such deposits.
2024 2023 2022
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
Noninterest bearing demand $ 1,609,001 — % $ 1,753,149 — % $ 2,037,882 — %
Interest bearing demand 2,463,386 2.73 2,481,362 2.33 2,554,945 0.69
Savings 1,255,111 1.45 1,181,314 0.68 1,283,143 0.08
Time 1,791,459 4.55 1,541,419 3.73 835,406 0.79
Total deposits $ 7,118,957 $ 6,957,244 $ 6,711,376
The following table shows the estimated scheduled maturities of the portion of time deposits in U.S. offices in excess of the FDIC insurance limit and time deposits that are otherwise uninsured.
(Dollars in thousands)
Under 3 Months $ 191,631
4 – 6 Months 197,654
7 – 12 Months 231,523
Over 12 Months 228,075
Total $ 848,883
See Part II, Item 8, Financial Statements and Supplementary Data — Note 10 of the Notes to Consolidated Financial Statements for additional information on deposits.
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SHORT-TERM BORROWINGS
The following table shows the distribution of our short-term borrowings and the weighted average interest rates thereon at the end of each of the last two years. 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.
(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
2024
Balance at December 31, 2024 $ 72,346 $ — $ 75,000 $ 100,000 $ 1,852 $ 249,198
Maximum amount outstanding at any month-end 82,591 — 170,000 100,000 2,450 355,041
Average amount outstanding 61,956 — 64,987 100,027 1,878 228,848
Weighted average interest rate during the year 1.01 % — % 5.40 % 4.84 % — % 3.92 %
Weighted average interest rate for outstanding amounts at December 31, 2024 1.15 % — % 4.50 % 4.76 % — % 3.60 %
2023
Balance at December 31, 2023 $ 55,809 $ — $ 155,000 $ 100,000 $ 1,550 $ 312,359
Maximum amount outstanding at any month-end 189,138 3,491 225,000 100,000 1,694 519,323
Average amount outstanding 81,904 2,373 121,003 7,123 1,208 213,611
Weighted average interest rate during the year 0.36 % 0.09 % 5.28 % 4.98 % — % 3.29 %
Weighted average interest rate for outstanding amounts at December 31, 2023 0.37 % — % 5.51 % 4.83 % — % 4.35 %
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
Core Deposits — Our major source of investable funds is provided by stable core deposits consisting of all interest bearing and noninterest bearing deposits, excluding brokered certificates of deposit, listing services certificates of deposit and certain certificates of deposit over $250,000 based on established FDIC insured deposits. In 2024, average core deposits equaled 71.39% of average total assets, compared to 73.77% in 2023 and 79.60% in 2022. 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 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.
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. 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 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. We include unrealized gains (losses) on available-for-sale securities, net of income taxes, in accumulated other comprehensive income (loss) which is a component of shareholders’ equity. While regulatory capital adequacy ratios exclude unrealized gains (losses), it does impact our equity as reported in the audited financial statements. The unrealized losses on available-for-sale securities, net of income taxes, were $87.23 million and $106.32 million at December 31, 2024 and 2023, respectively. 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 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.
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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. We have been informed that no collateral is required for our public fund deposits. However, the Board of Depositories could alter this requirement in the future and adversely impact our liquidity. Our potential liquidity exposure if we must pledge collateral is approximately $1.36 billion.
Liquidity Risk Management — The Bank’s liquidity is monitored and closely managed by the Asset/Liability Management Committee (ALCO), whose members are comprised of the Bank’s senior management. Asset and liability management includes the management of interest rate sensitivity and the maintenance of an adequate liquidity position. The purpose of interest rate sensitivity management is to stabilize net interest income during periods of changing interest rates.
Liquidity management is the process by which the Bank ensures that adequate liquid funds are available to meet short-term and long-term financial commitments on a timely basis. Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, take advantage of market opportunities and provide a cushion against unforeseen needs.
Liquidity of the Bank is derived primarily from core deposits, principal payments received on loans, the sale and maturity of investment securities, net cash provided by operating activities, and access to other funding sources. The most stable source of liability-funded liquidity is deposit growth and retention of the core deposit base. The principal source of asset-funded liquidity is available-for-sale investment securities, cash and due from banks, overnight investments, securities purchased under agreements to resell, and loans and interest bearing deposits with other banks maturing within one year. Additionally, liquidity is provided by repurchase agreements, and the ability to borrow from the Federal Reserve Bank (FRB) and the Federal Home Loan Bank (FHLB).
The Bank’s liquidity strategy is guided by internal policies and the Interagency Policy Statement on Funding and Liquidity Risk Management. Internal guidelines consist of:
(i) Available Liquidity (sum of short term borrowing capacity) greater than $500 million;
(ii) Liquidity Ratio (total of net cash, short term investments and unpledged marketable assets divided by the sum of net deposits and short term liabilities) greater than 15%;
(iii) Dependency Ratio (net potentially volatile liabilities minus short term investments divided by total earning assets minus short term investments) less than 15%; and
(iv) Loans to Deposits Ratio less than 100%
At December 31, 2024, we were in compliance with the foregoing internal policies and regulatory guidelines.
The Bank also maintains a contingency funding plan that assesses the liquidity needs under various scenarios of market conditions, asset growth and credit rating downgrades. The plan includes liquidity stress testing which measures various sources and uses of funds under the different scenarios. 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.
We maintain prudent strategies to support a strong liquidity position. The following table represents our sources of liquidity as of December 31, 2024.
(Dollars in thousands) Available
Internal Sources
Unencumbered securities $ 1,177,201
External Sources
FHLB advances (1)
665,100
FRB borrowings (2)
404,573
Fed funds purchased (3)
410,000
Brokered deposits (4)
394,909
Listing services deposits (4)
446,039
Total liquidity $ 3,497,822
% of Total deposits net brokered and listing services certificates of deposit 51.96 %
(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
(2) Includes access to discount window and Bank Term Funding Program
(3) Availability contingent on correspondent bank approvals at time of borrowing
(4) Availability contingent on internal borrowing guidelines
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External sources as listed in the table above are managed to approved guidelines by our Board of Directors. Total net available liquidity was $3.50 billion at December 31, 2024, which accounted for approximately 52% 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. In the normal course of business, we face ongoing interest rate risks and uncertainties. We may utilize interest rate swaps to partially manage the primary market exposures associated with the interest rate risk related to underlying assets, liabilities, and anticipated transactions.
A hypothetical change in net interest income was modeled by calculating an immediate 200 basis point (2.00%) and 100 basis point (1.00%) increase and a 100 basis point (1.00%) decrease in interest rates across all maturities. The following table shows the aggregate hypothetical impact to pre-tax net interest income.
Percentage Change in Net Interest Income
December 31, 2024 December 31, 2023
Basis Point Interest Rate Change 12 Months 24 Months 12 Months 24 Months
Up 200 (2.19)% 2.79% (1.40)% 3.01%
Up 100 (1.11)% 1.35% (0.66)% 1.52%
Down 100 0.89% (2.10)% (0.18)% (2.42)%
The earnings simulation model excludes the earnings dynamics related to how fee income and noninterest expense may be affected by changes in interest rates. Actual results may differ materially from those projected. The use of this methodology to quantify the market risk of the balance sheet should not be construed as an endorsement of its accuracy or the accuracy of the related assumptions.
At December 31, 2024 and 2023, the impact of these hypothetical fluctuations in interest rates on our derivative holdings was not significant, and, as such, separate disclosure is not presented. We manage the interest rate risk related to mortgage loan commitments by entering into contracts for future delivery of loans with outside parties. See Part II, Item 8, Financial Statements and Supplementary Data — Note 18 of the Notes to Consolidated Financial Statements.
Commitments and Contractual Obligations — In the ordinary course of operations, we enter into certain contractual obligations. Such obligations include customer deposits, the funding of operations through debt issuances as well as operating leases for the rent of premises and equipment. Additionally, we routinely enter into contracts for services that may require payment to be provided in the future and may contain penalty clauses for early termination of the contract. Further discussion of commitments and contractual obligations is included in Part II, Item 8, Financial Statements and Supplementary Data — Notes 10, 11, 12 and 18 of the Notes to Consolidated Financial Statements.
We also enter into derivative contracts under which we are required to either receive cash from, or pay cash to, counterparties depending on changes in interest rates. Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The fair value of the contracts changes daily as market interest rates change. Further discussion of derivative contracts is included in Part II, Item 8, Financial Statements and Supplementary Data — Note 19 of the Notes to Consolidated Financial Statements.
OFF-BALANCE SHEET ARRANGEMENTS
Assets under management and assets under custody are held in fiduciary or custodial capacity for our clients. In accordance with U.S. generally accepted accounting principles, these assets are not included on our balance sheet.
We are also party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our clients. These financial instruments include commitments to extend credit and standby letters of credit. Further discussion of these commitments is included in Part II, Item 8, Financial Statements and Supplementary Data — Note 18 of the Notes to Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
For information regarding Quantitative and Qualitative Disclosures about Market Risk, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Interest Rate Risk Management.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.