1ST SOURCE CORP

Previous wording

The following management’s discussion and analysis is presented to provide information concerning 1st Source Corporation and its subsidiaries’ (collectively referred to as “the Company”, “we”, and “our”) financial condition as of March 31, 2024, as compared to December 31, 2023, and the results of operations for the three months ended March 31, 2024 and 2023. This discussion and analysis should be read in conjunction with our consolidated financial statements and the financial and statistical data appearing elsewhere in this report and our 2023 Annual Report.

Current wording

The following management’s discussion and analysis is presented to provide information concerning 1st Source Corporation and its subsidiaries’ (collectively referred to as “the Company”, “we”, and “our”) financial condition as of June 30, 2024, as compared to December 31, 2023, and the results of operations for the three and six months ended June 30, 2024 and 2023. This discussion and analysis should be read in conjunction with our consolidated financial statements and the financial and statistical data appearing elsewhere in this report and our 2023 Annual Report.

Previous wording

Except for historical information contained herein, the matters discussed in this document express “forward-looking statements.” Generally, the words “believe,” “contemplate,” “seek,” “plan,” “possible,” “assume,” “hope,” “expect,” “intend,” “targeted,” “continue,” “remain,” “estimate,” “anticipate,” “project,” “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. Those statements, including statements, projections, estimates or assumptions concerning future events or performance, and other statements that are other than statements of historical fact, are subject to material risks and uncertainties. We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. We may make other written or oral forward-looking statements from time to time. Readers are advised that various important factors could cause our actual results or circumstances for future periods to differ materially from those anticipated or projected in such forward-looking statements. Such factors include, but are not limited to, changes in law, regulations or GAAP; our competitive position within the markets we serve; increasing consolidation within the banking industry; unforeseen changes in interest rates; unforeseen changes in loan prepayment assumptions; unforeseen downturns in or major events affecting the local, regional or national economies or the industries in which we have credit concentrations; potential impacts of the COVID-19 pandemic; and other matters discussed in our filings with the SEC, including our Annual Report on Form 10-K for 2023, which filings are available from the SEC. We undertake no obligation to publicly update or revise any forward-looking statements.

Current wording

Except for historical information contained herein, the matters discussed in this document express “forward-looking statements.” Generally, the words “believe,” “contemplate,” “seek,” “plan,” “possible,” “assume,” “hope,” “expect,” “intend,” “targeted,” “continue,” “remain,” “estimate,” “anticipate,” “project,” “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. Those statements, including statements, projections, estimates or assumptions concerning future events or performance, and other statements that are other than statements of historical fact, are subject to material risks and uncertainties. We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. We may make other written or oral forward-looking statements from time to time. Readers are advised that various important factors could cause our actual results or circumstances for future periods to differ materially from those anticipated or projected in such forward-looking statements. Such factors include, but are not limited to, changes in law, regulations or GAAP; our competitive position within the markets we serve; increasing consolidation within the banking industry; unforeseen changes in interest rates; unforeseen changes in loan prepayment assumptions; unforeseen downturns in or major events affecting the local, regional or national economies or the industries in which we have credit concentrations; potential impacts of epidemics, pandemics or other infectious disease outbreaks; and other matters discussed in our filings with the SEC, including our Annual Report on Form 10-K for 2023, which filings are available from the SEC. We undertake no obligation to publicly update or revise any forward-looking statements.

Previous wording

Our total assets at March 31, 2024 were $8.67 billion, a decrease of $60.12 million or 0.69% from December 31, 2023. Total investment securities available-for-sale were $1.58 billion, a decrease of $39.36 million or 2.43% from December 31, 2023. The largest contributor to the decrease in investment securities available-for-sale was expected redemptions which were used to fund loan growth and pay down borrowings. Federal funds sold and interest bearing deposits with other banks were $39.38 million, a decrease of $12.81 million or 24.55% from December 31, 2023. The decrease in federal funds sold and interest bearing deposits with other banks was due to lower interest bearing deposits at other banks which were used to purchase securities, fund loan growth, and pay down borrowings.

Current wording

Our total assets at June 30, 2024 were $8.88 billion, an increase of $150.05 million or 1.72% from December 31, 2023. Total investment securities available-for-sale were $1.52 billion, a decrease of $99.05 million or 6.10% from December 31, 2023. The largest contributor to the decrease in investment securities available-for-sale was expected redemptions, which were used to fund loan growth and pay down borrowings. Federal funds sold and interest bearing deposits with other banks were $179.65 million, an increase of $127.46 million or 244.20% from December 31, 2023. The increase in federal funds sold and interest bearing deposits with other banks was due to higher interest bearing deposits at other banks.

Previous wording

Total loans and leases were $6.56 billion, an increase of $44.27 million or 0.68% from December 31, 2023. The largest contributors to the increase in loans and leases was growth in the auto and light truck, aircraft and renewable energy portfolios, offset by a decrease in the commercial and agricultural loan portfolio. Our foreign loan and lease balances, all denominated in U.S. dollars were$291.10 million and $302.41 million as of March 31, 2024 and December 31, 2023, respectively. Foreign loans and leases are in aircraft financing. Loan and lease balances to borrowers in Brazil and Mexico were $118.53 million and $142.10 million as of March 31, 2024, respectively, compared to $119.38 million and $147.61 million as of December 31, 2023, respectively. As of March 31, 2024 and December 31, 2023 there was not a significant concentration in any other country.

Current wording

Total loans and leases were $6.65 billion, an increase of $134.49 million or 2.06% from December 31, 2023. The largest contributors to the increase in loans and leases was growth in the renewable energy, construction equipment, auto and light truck and commercial real estate portfolios, offset by decreases in the commercial and agricultural and aircraft portfolios. Our foreign loan and lease balances, all denominated in U.S. dollars were$282.90 million and $302.41 million as of June 30, 2024 and December 31, 2023, respectively. Foreign loans and leases are in aircraft financing. Loan and lease balances to borrowers in Brazil and Mexico were $106.45 million and $138.76 million as of June 30, 2024, respectively, compared to $119.38 million and $147.61 million as of December 31, 2023, respectively. As of June 30, 2024 and December 31, 2023, there was not a significant concentration in any other country.

Previous wording

Equipment owned under operating leases was $16.69 million, a decrease of $3.68 million, or 18.04% compared to December 31, 2023. The largest contributor to the decrease in equipment owned under operating leases was reduced leasing volume primarily due to a change in customer preferences and continued competitive pricing pressure for new business.

Current wording

Equipment owned under operating leases was $13.89 million, a decrease of $6.48 million, or 31.82% compared to December 31, 2023. The largest contributor to the decrease in equipment owned under operating leases was reduced leasing volume primarily due to a change in customer preferences and continued competitive pricing pressure for new business.

Previous wording

Total deposits were $7.06 billion, an increase of $16.73 million or 0.24% from the end of 2023. The largest contributors to the increase in total deposits was a rise in time deposits and savings deposits offset by a decrease in non-maturity deposits. Rate competition for deposits persisted during the first quarter across our footprint from various sources, including traditional bank and credit union competitors, money market funds, bond markets, and other non-bank alternatives.

Current wording

Total deposits were $7.20 billion, an increase of $157.34 million or 2.24% from the end of 2023. The largest contributors to the increase in total deposits was a rise in public fund and time deposits, offset by a decrease in non-interest bearing deposits. Rate competition for deposits persisted during the second quarter across our footprint from various sources, including traditional bank and credit union competitors, money market funds, bond markets, and other non-bank alternatives.

Previous wording

Short-term borrowings were $249.58 million, a decrease of $62.78 million or 20.10% from December 31, 2023 due primarily to pay downs of short-term FHLB borrowings offset by an increase in federal funds purchased. Long-term debt and mandatorily redeemable securities were $39.41 million, a decrease of $8.51 million from December 31, 2023 due primarily to pay downs of long-term FHLB borrowings. Accrued expenses and other liabilities were $183.23 million, a decrease of $18.85 million or 9.33% from December 31, 2023, mainly due to annual incentive-related payments to employees and decreased unfunded partnership commitments offset by increased accrued interest payables and accrued salaries and wages.

Current wording

Short-term borrowings were $288.22 million, a decrease of $24.14 million or 7.73% from December 31, 2023, due primarily to pay downs of short-term FHLB borrowings offset by an increase in repurchase agreements. Long-term debt and mandatorily redeemable securities were $39.14 million, a decrease of $8.78 million or 18.32% from December 31, 2023, due primarily to maturities of long-term FHLB borrowings. Accrued expenses and other liabilities were $181.11 million, a decrease of $20.97 million or 10.38% from December 31, 2023, mainly due to decreased unfunded partnership commitments and annual incentive-related payments to employees, offset by increased accrued interest payable.

Previous wording

The largest contributor to the decrease in accrued income and other assets from December 31, 2023 was a decrease in partnership investments and accounts receivable offset by an increase in deferred tax assets during the period.

Current wording

The largest contributors to the decrease in accrued income and other assets from December 31, 2023, were decreases in partnership investments, the fair value of interest rate swap contracts with customers, accounts receivable and deferred tax assets, offset by increases in accrued interest receivable and bank owned life insurance cash surrender value during the period.

Previous wording

As of March 31, 2024, total shareholders’ equity was $1.01 billion, up $20.32 million, or 2.05% from the $989.57 million at December 31, 2023. In addition to net income of $29.46 million, other significant changes in shareholders’ equity during the first three months of 2024 included $8.35 million of dividends paid. The accumulated other comprehensive loss component of shareholders’ equity increased to $109.28 million at March 31, 2024, compared to $106.32 million at December 31, 2023 due to changes in market conditions on our available-for-sale investment portfolio. Our shareholders’ equity-to-assets ratio was 11.65% as of March 31, 2024, compared to 11.34% at December 31, 2023. Book value per common share increased to $41.26 at March 31, 2024, from $40.50 at December 31, 2023 primarily due to increased retained earnings.

Current wording

As of June 30, 2024, total shareholders’ equity was $1.04 billion, up $53.95 million, or 5.45% from the $989.57 million at December 31, 2023. In addition to net income of $66.25 million, other significant changes in shareholders’ equity during the first six months of 2024 included $16.69 million of dividends paid. The accumulated other comprehensive loss component of shareholders’ equity decreased to $105.57 million at June 30, 2024, compared to $106.32 million at December 31, 2023, due to changes in market conditions on our available-for-sale investment portfolio. Our shareholders’ equity-to-assets ratio was 11.75% as of June 30, 2024, compared to 11.34% at December 31, 2023. Book value per common share increased to $42.58 at June 30, 2024, from $40.50 at December 31, 2023, primarily due to increased retained earnings.

Previous wording

We declared and paid cash dividends per common share of $0.34 during the first quarter of 2024. The trailing four quarters dividend payout ratio, representing cash dividends per common share divided by diluted earnings per common share, was 26.61%. The dividend payout is continually reviewed by management and the Board of Directors subject to the Company’s capital and dividend policy.

Current wording

We declared and paid cash dividends per common share of $0.34 during the second quarter of 2024. The trailing four quarters dividend payout ratio, representing cash dividends per common share divided by diluted earnings per common share, was 26.02%. The dividend payout is continually reviewed by management and the Board of Directors subject to the Company’s capital and dividend policy.

Previous wording

External sources as listed in the table above are managed to approved guidelines by our Board of Directors. Total net available liquidity was $3.29 billion at March 31, 2024, which accounted for approximately 51% of total deposits net of brokered and listing services certificates of deposit.

Current wording

External sources as listed in the table above are managed to approved guidelines by our Board of Directors. Total net available liquidity was $3.20 billion at June 30, 2024, which accounted for approximately 49% of total deposits net of brokered and listing services certificates of deposit.

Previous wording

Our loan to asset ratio was 75.71% at March 31, 2024 compared to 74.69% at December 31, 2023 and 73.43% at March 31, 2023. Cash and cash equivalents totaled $80.91 million at March 31, 2024 compared to $129.67 million at December 31, 2023 and $94.04 million at March 31, 2023. The decrease in cash and cash equivalents was primarily due to funding loan growth and paying down borrowings. At March 31, 2024, the Consolidated Statements of Financial Condition was rate sensitive by $328.21 million more liabilities than assets scheduled to reprice within one year, or approximately 0.92%. Management believes that the present funding sources provide adequate liquidity to meet our cash flow needs.

Current wording

Our loan to asset ratio was 74.94% at June 30, 2024 compared to 74.69% at December 31, 2023 and 73.86% at June 30, 2023. Cash and cash equivalents totaled $269.24 million at June 30, 2024 compared to $129.67 million at December 31, 2023 and $112.68 million at June 30, 2023. The increase in cash and cash equivalents was primarily due to an increase in core deposits and the expected redemptions of investment securities available-for-sale. At June 30, 2024, the Consolidated Statements of Financial Condition was rate sensitive by $344.09 million more liabilities than assets scheduled to reprice within one year, or approximately 0.92%. Management believes that the present funding sources provide adequate liquidity to meet our cash flow needs.

Previous wording

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 $1.14 billion.

Current wording

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 $1.35 billion.

Previous wording

Net income available to common shareholders for the three month period ended March 31, 2024 was $29.46 million compared to $31.12 million for the same period in 2023. Diluted net income per common share was $1.19 for the three month period ended March 31, 2024, compared to $1.25 earned for the same period in 2023. Return on average common shareholders’ equity was 11.77% for the three months ended March 31, 2024, compared to 14.18% in 2023. The return on total average assets was 1.37% for the three months ended March 31, 2024, compared to 1.52% in 2023.

Current wording

Net income available to common shareholders for the three and six month periods ended June 30, 2024 was $36.79 million and $66.25 million compared to $32.44 million and $63.56 million for the same periods in 2023. Diluted net income per common share was $1.49 and $2.68 for the three and six month periods ended June 30, 2024, compared to $1.30 and $2.55 earned for the same periods in 2023. Return on average common shareholders’ equity was 13.10% for the six months ended June 30, 2024, compared to 14.11% in 2023. The return on total average assets was 1.53% for the six months ended June 30, 2024, compared to 1.54% in 2023.

Previous wording

Net income decreased for the three months ended March 31, 2024 compared to the first three months of 2023. Net interest income increased offset by increases to the provision for credit losses, noninterest expense, and a decrease in noninterest income. Details of the changes in the various components of net income are discussed further below.

Current wording

Net income increased for the six months ended June 30, 2024, compared to the first six months of 2023. Net interest income increased offset by increases to the provision for credit losses and noninterest expense, and a decrease in noninterest income. Details of the changes in the various components of net income are discussed further below.

Previous wording

The taxable-equivalent net interest income for the three months ended March 31, 2024 was $72.06 million, an increase of 3.26% over the same period in 2023. The net interest margin on a fully taxable-equivalent basis was 3.54% for the three months ended March 31, 2024, compared to 3.60% for the three months ended March 31, 2023.

Current wording

The taxable-equivalent net interest income for the three months ended June 30, 2024 was $74.19 million, an increase of 8.00% over the same period in 2023. The net interest margin on a fully taxable-equivalent basis was 3.59% for the three months ended June 30, 2024, compared to 3.48% for the three months ended June 30, 2023.

Previous wording

During the three month period ended March 31, 2024, average earning assets increased $317.57 million, up 4.04% over the comparable period in 2023. Average interest-bearing liabilities increased $437.98 million or 8.19%. The yield on average earning assets increased 85 basis points to 5.73% from 4.88% primarily due to higher rates on loans and leases 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 121 basis points to 3.10% from 1.89% as a result of higher rates on interest-bearing deposits and short-term borrowings. The result to the net interest margin, or the ratio of net interest income to average earning assets, was a decrease of six basis points.

Current wording

During the three month period ended June 30, 2024, average earning assets increased $381.99 million, up 4.82% over the comparable period in 2023. Average interest-bearing liabilities increased $426.80 million or 7.77%. The yield on average earning assets increased 78 basis points to 5.88% from 5.10% at June 30, 2023, primarily due to higher rates on loans and leases 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 86 basis points to 3.20% from 2.34% as a result of higher rates on interest-bearing deposits and short-term borrowings. The result to the tax-equivalent net interest margin, or the ratio of tax-equivalent net interest income to average earning assets, was an increase of 11 basis points.

Previous wording

The largest contributors to the improved yield on average earning assets for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was an increase in yields on loans and leases and other investments, primarily excess reserves held at the Federal Reserve Bank. The yield on loans and leases grew 93 basis points primarily from rising interest rates. Average loans and leases increased $467.87 million or 7.75% primarily in the auto and light truck, construction equipment, and commercial real estate portfolios. Net interest recoveries positively contributed seven basis points to the yield on average loans and leases during the quarter and three basis points to the average loans and leases yield during the prior year first quarter. Average investment securities decreased $160.53 million or 9.08% primarily from utilizing expected redemptions to fund loan growth and pay down borrowings. Average other investments, primarily held at the Federal Reserve Bank, increased $10.81 million or 18.85%.

Current wording

The largest contributors to the improved yield on average earning assets for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, was an increase in yields on loans and leases and other investments, primarily excess reserves held at the Federal Reserve Bank. The yield on loans and leases grew 79 basis points, mainly from rising interest rates. Average loans and leases increased $465.05 million or 7.57%, primarily in the commercial real estate, auto and light truck, and construction equipment portfolios. Net interest recoveries positively contributed five basis points to the yield on average loans and leases during the quarter and one basis point to the average loans and leases yield during the prior year second quarter. Average investment securities decreased $143.34 million or 8.44%, primarily due to leveraging matured securities to fund loan growth. Average other investments, primarily held at the Federal Reserve Bank, increased $57.98 million or 71.76%.

Previous wording

Average interest-bearing deposits increased $406.76 million or 8.15% for the first quarter of 2024 over the same period in 2023 primarily due to public fund deposits, time deposits, and brokered deposits. The effective rate paid on average interest-bearing deposits increased 123 basis points to 2.96% from 1.73% in line with the competitive, rising rate environment. Average noninterest-bearing deposits declined $264.66 million or 14.07% for the first quarter of 2024 over the same period in 2023 primarily due to greater utilization of excess funds by our business customers, and a heightened rate sensitivity in our customer base given the overall level of market yields.

Current wording

Average interest-bearing deposits increased $411.67 million, or 7.93% for the second quarter of 2024 over the same period in 2023 primarily in savings, time and brokered deposits. The effective rate paid on average interest-bearing deposits increased 86 basis points to 3.09% from 2.23%, in line with the competitive, rising rate environment. Average noninterest-bearing deposits declined $167.08 million or 9.56% for the second quarter of 2024 over the same period in 2023, largely due to greater utilization of excess funds by our business customers, and a heightened rate sensitivity in our customer base given the overall level of market yields.

Previous wording

Average short-term borrowings increased $29.38 million or 11.60% for the first quarter of 2024 compared to the same period in 2023. Interest paid on short-term borrowings increased 218 basis points due to higher short-term borrowing rates. Interest paid on subordinated notes increased 22 basis points during the first quarter of 2024 from the same period a year ago due to a variable rate increase on one tranche. Average long-term debt and mandatorily redeemable securities balances increased $1.84 million or 4.05%. Interest paid on long-term debt and mandatorily redeemable securities decreased 536 basis points during the first quarter of 2024 from the same period in 2023 primarily due to lower imputed interest on mandatorily redeemable securities from an smaller increase in book value per share during the quarter compared to the previous year’s first quarter. 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.

Current wording

Average short-term borrowings increased $23.15 million or 11.66% for the second quarter of 2024 compared to the same period in 2023. Interest paid on short-term borrowings increased 64 basis points due to higher short-term borrowing rates. Interest paid on subordinated notes increased 24 basis points during the second quarter of 2024 from the same period a year ago due to a variable rate increase on one tranche. Average long-term debt and mandatorily redeemable securities balances decreased $8.02 million or 17.21%, primarily from the maturity of long-term debt. Interest paid on long-term debt and mandatorily redeemable securities increased 396 basis points during the second quarter of 2024 from the same period in 2023, primarily due to higher imputed interest on mandatorily redeemable securities from a larger increase in book value per share during the quarter compared to the previous year’s second quarter. Mandatorily redeemable securities 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.

Previous wording

The provision for credit losses for the three months ended March 31, 2024, was $6.60 million compared to $3.05 million during the three months ended March 31, 2023. Net charge-offs of $6.12 million or 0.38% of average loans and leases were recorded for the first quarter 2024, compared to net recoveries of $0.19 million or 0.01% of average loans and leases for the same quarter a year ago. Net charge-offs recognized during the quarter were principally concentrated in the commercial and agricultural portfolio.

Current wording

The provision for credit losses for the three and six months ended June 30, 2024, was $0.06 million and $6.65 million compared to $0.05 million and $3.10 million during the three and six months ended June 30, 2023. Net recoveries of $1.99 million or 0.12% of average loans and leases were recorded for the second quarter 2024, compared to net recoveries of $0.98 million or 0.06% of average loans and leases for the same quarter a year ago. Year-to-date net charge-offs of $4.14 million or 0.13% of average loans and leases have been recorded in 2024, compared to net recoveries of $1.18 million or 0.04% of average loans and leases through June 30, 2023. Net charge-offs recognized in 2024 were principally concentrated in the commercial and agricultural portfolio.

Previous wording

The increase of the provision for credit losses for the three months ended March 31, 2024, was driven bymodest loan growth during the quarter, higher loss rates in our commercial and agricultural portfolio, and overall higher special attention outstandings, most notably in the auto and light truck portfolio. Risks include a fragile domestic GDP outlook, tightened credit conditions, elevated inflation, high interest rates, and geopolitical uncertainty. We remain concerned about the potential risks in our small business portfolio, as liquidity provided by government programs afforded to our lending clients dissipates. Consumers remain under stress and economic imbalances are prevalent. Impairment reserves for assets individually evaluated were zero this quarter due to charge-offs recognized during the period.

Current wording

The provision for credit losses for the three months ended June 30, 2024, was driven bymodest loan growth during the quarter, an increase in specific impairments in our commercial and agricultural portfolio, and overall higher special attention outstandings, most notably in the construction equipment portfolio. Risks include a fragile domestic GDP outlook, tightened credit conditions, a softening labor market, elevated inflation, high interest rates, and geopolitical uncertainty. We remain concerned about the potential risks in our small business portfolio, as liquidity provided by government programs afforded to our lending clients dissipates. Consumers remain under stress and economic imbalances are prevalent. Impairment reserves for assets individually evaluated total $1.67 million this quarter, consisting of two accounts within the commercial and agricultural portfolio.

Previous wording

We continually evaluate risks which may impact our loan portfolios. Such risks include a cautious economic outlook and increased uncertainty fueled by ongoing conflicts around the world, and the Federal Reserve’s challenge of taming elevated inflation while maintaining overall economic stability. The possibility for economic disruption remains a concern, as geopolitical events and elevated inflation along with below-trend growth prospects raise the potential for adverse impacts in the domestic and global economies. Higher interest rates could impact valuations of assets which collateralize our loans, and the persistently inverted yield curve may lead to tighter credit market conditions. The growth outlook in the U.S. and abroad is susceptible to disruption caused by global conflicts and an environment of heightened instability. Congressional spending initiatives face multiple challenges and uncompromising partisanship. Political discord is an ever-present threat in our Latin American markets. Corruption scandals persist, fueling U.S. border concerns. Globally, there is an ever-present threat of terrorism.

Current wording

We continually evaluate risks which may impact our loan portfolios. Such risks include a cautious economic outlook and increased uncertainty fueled by ongoing conflicts around the world, and the Federal Reserve’s challenge of easing elevated inflation while maintaining overall economic stability. The possibility for economic disruption remains a concern, as geopolitical events and elevated inflation along with fragile growth prospects raise the potential for adverse impacts in the domestic and global economies. Higher interest rates could impact valuations of assets which collateralize our loans, and the persistently inverted yield curve may exacerbate already tightened credit market conditions. The growth outlook in the U.S. and abroad is susceptible to disruption caused by global conflicts and an environment of heightened instability. Congressional spending initiatives face multiple challenges and uncompromising partisanship. Political discord is an ever-present threat in our Latin American markets. Corruption scandals persist, fueling U.S. border concerns. Globally, there is an ever-present threat of terrorism.

Previous wording

Our aircraft portfolio exhibits collateral concentration and contains $291 million of foreign exposure, the majority of which is in Mexicoand Brazil. We review political and economic data for these countries on a regular basis to assess the impact the environment may have on our customers. Historically, we have experienced volatile and unanticipated losses in both the foreign and domestic segments of our aircraft portfolios. Losses have been primarily attributable to unexpected declines in the value of specific aircraft collateral at a time when the borrower is experiencing financial difficulties. We review and assess aircraft values on an ongoing basis and use a tiered approach to establish advance rates and amortization schedules to limit collateral exposure. We continually monitor individual customer performance and assess risks in the overall portfolio.

Current wording

Our aircraft portfolio exhibits collateral concentration and contains $283 million of foreign exposure, the majority of which is in Mexicoand Brazil. We review political and economic data for these countries on a regular basis to assess the impact the environment may have on our customers. Historically, we have experienced volatile and unanticipated losses in both the foreign and domestic segments of our aircraft portfolios. Losses have been primarily attributable to unexpected declines in the value of specific aircraft collateral at a time when the borrower is experiencing financial difficulties. We review and assess aircraft values on an ongoing basis and use a tiered approach to establish advance rates and amortization schedules to limit collateral exposure. We continually monitor individual customer performance and assess risks in the overall portfolio.

Previous wording

On March 31, 2024, 30 day and over loan and lease delinquency as a percentage of loan and lease balances was 0.08%, compared to 0.06% on March 31, 2023. The allowance for loan and lease losses as a percentage of loans and leases outstanding at the end of the period was 2.26% compared to 2.33% one year ago. A summary of loan and lease loss experience during the three months ended March 31, 2024 and 2023 is located in Note 5 of the Consolidated Financial Statements.

Current wording

On June 30, 2024, 30 day and over loan and lease delinquency as a percentage of loan and lease balances was 0.36%, compared to 0.06% on June 30, 2023. The allowance for loan and lease losses as a percentage of loans and leases outstanding at the end of the period was 2.26% compared to 2.31% one year ago. A summary of loan and lease loss experience during the three and six months ended June 30, 2024 and 2023 is located in Note 5 of the Consolidated Financial Statements.

Previous wording

Nonperforming assets as a percentage of loans and leases were 0.34% at March 31, 2024, 0.37% at December 31, 2023, and 0.30% at March 31, 2023. Nonperforming assets totaled $22.43 million at March 31, 2024, a decrease of 7.44% from the $24.24 million reported at December 31, 2023, and a 20.29% increase from the $18.65 million reported at March 31, 2023. The decrease in nonperforming assets during the first three months of 2024 was related to lower nonaccrual loans and leases and repossessions. The increase in nonperforming assets at March 31, 2024 from March 31, 2023 was related to an increase in nonaccrual loans and leases. There were no properties held in other real estate at March 31, 2024.

Current wording

Nonperforming assets as a percentage of loans and leases were 0.31% at June 30, 2024, 0.37% at December 31, 2023, and 0.33% at June 30, 2023. Nonperforming assets totaled $20.83 million at June 30, 2024, a decrease of 14.03% from the $24.24 million reported at December 31, 2023, and a 0.27% increase from the $20.78 million reported at June 30, 2023. The decrease in nonperforming assets during the first six months of 2024 was related to lower nonaccrual loans and leases and repossessions. The increase in nonperforming assets at June 30, 2024 from June 30, 2023 was related to an increase in repossessions and loans and leases past due 90 days or more, offset by a decrease in nonaccrual loans and leases. There were no properties held in other real estate at June 30, 2024.

Previous wording

The decrease in nonaccrual loans and leases at March 31, 2024 from December 31, 2023 was predominantly related to charge-off activity in the commercial and agricultural portfolio during the quarter, offset partially by an increase in nonaccrual loans in the aircraft portfolio. The increase in nonaccrual loans and leases at March 31, 2024 compared to March 31, 2023 was primarily due to increases in nonaccrual loans and leases in the commercial and agricultural portfolio. A summary of nonaccrual loans and leases and past due aging for the period ended March 31, 2024 and December 31, 2023 is located in Note 4 of the Consolidated Financial Statements.

Current wording

The decrease in nonaccrual loans and leases at June 30, 2024 from December 31, 2023, was largely related to decreases in commercial real estate and auto and light truck portfolios and charge-off activity in the commercial and agricultural portfolio during the year, offset by increases in nonaccrual loans in the construction equipment portfolio. A summary of nonaccrual loans and leases and past due aging for the period ended June 30, 2024, and December 31, 2023, is located in Note 4 of the Consolidated Financial Statements.

Previous wording

Repossessions consisted of a few loans in the consumer, construction equipment, and auto and light truck portfolios at March 31, 2024. At the time of repossession, the recorded amount of the loan or lease is written down to the fair value of the equipment or vehicle by a charge to the allowance for loan and lease losses or other income, if a positive adjustment, unless the equipment is in the process of immediate sale. Any subsequent fair value write-downs or write-ups, to the extent of previous write-downs, are included in noninterest expense.

Current wording

Repossessions consisted of a few loans in the construction equipment, auto and light truck and consumer portfolios at June 30, 2024. At the time of repossession, the recorded amount of the loan or lease is written down to the fair value of the equipment or vehicle by a charge to the allowance for loan and lease losses or other income, if a positive adjustment, unless the equipment is in the process of immediate sale. Any subsequent fair value write-downs or write-ups, to the extent of previous write-downs, are included in noninterest expense.

Previous wording

The following table shows a summary of repossessions.

Current wording

The following table shows a summary of repossessions and other real estate.

Previous wording

Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) increased during the three months ended March 31, 2024 compared with the same period a year ago. 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 March 31, 2024, December 31, 2023, and March 31, 2023, was $5.71 billion, $5.46 billion, and $4.91 billion, respectively. Positive equity market returns and growth in the number of client relationships during the first quarter of 2024 resulted in an increase in assets under management compared to December 31, 2023.

Current wording

Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) increased during the three and six months ended June 30, 2024, compared with the same periods a year ago. 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 June 30, 2024, December 31, 2023, and June 30, 2023, was $5.83 billion, $5.46 billion, and $5.01 billion, respectively. Positive equity market returns and growth in the number of client relationships during the first six months of 2024 resulted in an increase in assets under management compared to December 31, 2023.

Previous wording

Service charges on deposit accounts increased for the three months ended March 31, 2024, over the comparable period in 2023. The increase primarily reflects a higher volume of business deposit account and non-sufficient fund and overdraft fees.

Current wording

Service charges on deposit accounts increased for the three and six months ended June 30, 2024, over the comparable periods in 2023. The increase primarily reflects a higher volume of business deposit account and non-sufficient fund and overdraft fees.

Previous wording

Debit card income decreased during the first quarter of 2024 compared to the same period a year ago. While the volume of debit card transactions and overall spend are on par with prior year, shifts in both client transaction behavior to less lucrative merchant categories, and the networks over which those merchants are routing transactions, were the primary drivers of the income decrease during the first quarter.

Current wording

Debit card income decreased during the three and six months ended June 20, 2024, compared to the same periods a year ago. While the volume of debit card transactions and overall spend are on par with prior year, shifts in both client transaction behavior to less lucrative merchant categories, and the networks over which those merchants are routing transactions, were the primary drivers of the income decrease during 2024.

Previous wording

Mortgage banking income increased in the three months ended March 31, 2024, compared to the same period in 2023. The increase was primarily a result of higher margins on loans originated for the secondary market.

Current wording

Mortgage banking income increased during the three and six months ended June 30, 2024, compared to the same periods in 2023. The increase was primarily a result of higher production and margins on loans originated for the secondary market.

Previous wording

Insurance commissions declined during the three months ended March 31, 2024, compared to the same period a year ago. The decrease during 2024 was mainly due to decreased contingent commissions received.

Current wording

Insurance commissions declined during the three and six months ended June 30, 2024, compared to the same periods a year ago. The decrease was mainly due to decreased contingent commissions received.

Previous wording

Equipment rental income decreased for the three months ended March 31, 2024, over the comparable period in 2023. The decline was the result of a reduction in the average equipment rental portfolio decreasing by 34.95% over the same period a year ago due to changing customer preferences and competitive pricing pressures for new business.

Current wording

Equipment rental income decreased for the three and six months ended June 30, 2024, over the comparable periods in 2023. The decline was the result of a reduction in the average equipment rental portfolio decreasing by 40.3% over the same period a year ago, due to changing customer preferences and competitive pricing pressures for new business.

Previous wording

There were no losses on available-for-sale investment securities during the three months ended March 31, 2024.

Current wording

There were no losses on available-for-sale investment securities during the six months ended June 30, 2024.

Previous wording

Salaries and employee benefits increased during the three months ended March 31, 2024 compared to the same period in 2023. Higher base salaries were a result of normal merit increases, wage inflation as well as a higher headcount due to fewer open positions compared to the previous year. Additionally, increases in contract salaries and incentive compensation was offset by a reduction in group insurance claims.

Current wording

Salaries and employee benefits increased during the three and six months ended June 30, 2024, compared to the same periods in 2023. Higher base salaries were a result of normal merit increases, wage inflation, as well as a higher headcount due to fewer open positions compared to the previous year. Additionally, increases in incentive compensation were offset by a reduction in group insurance claims.

Previous wording

Net occupancy expense increased during the three months ended March 31, 2024 compared to the same period in 2023. The increase for the period was primarily due to increased snow removal costs due to seasonal weather conditions and higher rent.

Current wording

Net occupancy expense increased during the three and six months ended June 30, 2024, compared to the same periods in 2023. The increase for both periods was primarily due to increased premises repairs and higher rent.

Previous wording

Furniture and equipment expense, including depreciation, decreased during the three months ended March 31, 2024 compared to the same period a year ago. The decline is primarily due to lower equipment depreciation and a reduction in equipment repairs.

Current wording

Furniture and equipment expense, including depreciation, decreased during the three and six months ended June 30, 2024, compared to the same periods a year ago. The decline was primarily due to lower equipment depreciation and a reduction in equipment repairs.

Previous wording

Data processing expense grew during the three months ended March 31, 2024 compared to the same period a year ago due primarily to higher software maintenance expense on technology projects.

Current wording

Data processing expense grew during the three and six months ended June 30, 2024, compared to the same periods a year ago due primarily to higher software maintenance expense on technology projects.