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Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.12pp more bullish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
+0.11pp
Flat
Net-tone change vs last year's 10-K.
MD&A
+0.13pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
challenges+2
adversely+1
inability+1
unforeseen+1
shutdowns+1
Positive rising
able+1
assure+1
innovative+1
Risk Factors (Item 1A)
4,977 words
Item 1A. Risk Factors.
An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that we believe affect us are described below. See “Forward Looking Statements” under Item 7 of this report for a discussion of other important factors that can affect our business.
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Credit Risks
We are subject to credit risks relating to our loan and lease portfolios — Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans. Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets, repayment of such loans may be influenced to a great extent by conditions in the market or the economy. We seek to mitigate these risks through our underwriting standards. Most commercial and industrial loans are secured by the assets being financed or other business assets; however, some loans may be made on an unsecured basis.
We offer both fixed-rate and adjustable-rate consumer mortgage loans secured by properties, substantially all of which are located in our primary market area. Adjustable-rate mortgage loans help reduce our exposure to changes in interest rates; however, during periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase as a result of repricing and the increased payments required from the borrower. Additionally, some residential mortgages are sold into the secondary market and serviced by our principal banking subsidiary, 1st Source Bank.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
loss+5
slowing+2
decline+1
concern+1
declined+1
Positive rising
stable+1
effective+1
gains+1
opportunities+1
enhances+1
MD&A (Item 7)
13,673 words
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.
Consumer loans are primarily all other non-real estate loans to individuals in our regional market area. Consumer loans can entail risk, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets. In these cases, any repossessed collateral may not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy.
The 1st Source Specialty Finance Group loan and lease portfolio consists of commercial loans and leases secured by construction and transportation equipment, including aircraft, autos, trucks, and vans.
Our construction and transportation related businesses could be adversely affected by slowdowns in the economy. Clients who rely on the use of assets financed through the Specialty Finance Group to produce income could be negatively affected, and we could experience substantial loan and lease losses. By the nature of the businesses these clients operate in, we could be adversely affected by rapid increases or decreases in fuel costs, terrorist and other potential attacks, and other destabilizing events. These factors could contribute to the deterioration of the quality of our loan and lease portfolio, as they could have a negative impact on the travel and transportation sensitive businesses for which our Specialty Finance Group provides financing.
Our aircraft portfolio has foreign exposure, particularly in Mexico and Brazil. Currency fluctuations could have a negative impact on our client’s cost of paying dollar denominated debts and, as a result, we could experience higher delinquency in this portfolio. Also, since some of the relationships in this portfolio are large, a slowdown in these markets could have a significant adverse impact on our performance.
In addition, our leasing and equipment financing activity is subject to the risk of cyclical downturns, industry concentration and clumping, and other adverse economic developments affecting these industries and markets. This area of lending, with transportation in particular, is dependent upon general economic conditions and the strength of the travel, construction, and transportation industries.
Our allowance for credit losses may prove to be insufficient to absorb losses in our loan and lease portfolio — There is always a risk that borrowers may not repay borrowings. The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Our allowance for credit losses may not be sufficient to cover the loan and lease losses that we may actually incur. If we experience defaults by borrowers in any of our businesses, our earnings could be negatively affected. Changes in local economic conditions could adversely affect credit quality, particularly in our local business loan and lease portfolio. Changes in national or international economic conditions could also adversely affect the quality of our loan and lease portfolio and negate, to some extent, the benefits of national or international diversification through our Specialty Finance Group’s portfolio. In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan or lease charge-offs based upon their judgments, which may be different from ours.
The soundness of other financial institutions could adversely affect us — Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due us. Any such losses could have a material adverse effect on our financial condition and results of operations.
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We may be adversely affected by climate change and related legislative and regulatory initiatives — Federal and state legislatures and regulatory agencies continue to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. As a financial institution, it is unclear how future governmental regulations and shifts in business trends resulting from increased concern about climate change will affect our operations, however, natural or man-made disasters and severe weather events may cause operational disruptions and damage to both our properties and properties securing our loans. Losses resulting from these disasters and severe weather events may make it more difficult for borrowers to timely repay their loans. Additionally, our customers who finance vehicles and equipment reliant on fossil fuels could face cost increases, asset value reductions, operating process changes, and the like. If these events occur, we may experience a decrease in the value of our loan and lease portfolio and our revenue, and may incur additional operational expenses, each of which could have a material adverse effect on our financial condition and results of operations.
Market Risks
Fluctuations in interest rates could reduce our profitability and affect the value of our assets — Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which is the difference between interest earned on loans and leases and investments, and interest paid on deposits and borrowings. We expect that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the relationships of various interest rates to each other. Over any defined period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice-versa. In addition, the individual market interest rates underlying our loan and lease and deposit products may not change to the same degree over a given time period. If market interest rates should move contrary to our position, earnings may be negatively affected. In addition, loan and lease volume and quality and deposit volume and mix can be affected by market interest rates as can the businesses of our clients. Changes in levels of market interest rates could have a material adverse effect on our net interest spread, asset quality, origination volume, and overall profitability. Additionally, changes in levels of market interest rates could cause our debt securities available-for-sale to move into unrealized loss positions which is a negative component of total shareholders’ equity.
Market interest rates are beyond our control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, may negatively affect our ability to originate loans and leases, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately could affect our earnings.
Elevated levels of inflation, or the aggregate effects of previous periods of elevated inflation, can have complex effects on our business and results of operations, some of which could be materially adverse. Governmental responses to elevated levels of inflation, or the aggregate effects of previous inflationary periods, such as severe monetary and fiscal policy, can result in increased market interest rates or volatility in interest rate levels. The duration and severity of a prolonged inflationary period and the resulting impact on us cannot be predicted with precision.
Adverse changes in economic conditions could impair our financial condition and results of operations — We are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, unemployment, government shutdowns, debt ceilings or funding for the government, tariffs and other trade policies, infectious disease epidemics or outbreaks and the strength of the U.S. economy and the local economies in which we operate, all of which are beyond our control. A deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services.
Changes in economic conditions may negatively impact the fees generated by our trust and wealth advisory business — Trust and wealth advisory fees are largely based on the size of client relationships and the market value of assets held under management. Changes in general economic conditions and in the financial and securities markets may negatively impact the value of our clients’ wealth management accounts and the market value of assets held under management. Market declines, reductions in the value of our clients’ accounts, and the loss of wealth management clients may negatively impact the fees generated by our trust and wealth management business and could have an adverse effect on our business, financial condition and results of operations.
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Liquidity/Capital Risks
We could experience an unexpectedinability to obtain needed liquidity which could adversely affect our business, profitability, and viability as a going concern — The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities and is essential to a financial institution’s business. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds. The bank failures in the Spring of 2023 exemplify the potential serious results of the unexpectedinability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution’s ability to satisfy its obligations to depositors. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management. If we become unable to obtain funds when needed, it could have a material adverse effect on our business, financial condition, and results of operations. Additionally, under Indiana law governing the collateralization of public fund deposits, the Indiana Board for 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, which could adversely affect our liquidity depending on the amount of collateral we may be required to pledge.
Unrealized losses in our available-for-sale investment securities portfolio could adversely affect liquidity — As market interest rates increased during 2022 and 2023, we experienced increased unrealized losses within our available-for-sale investment securities portfolio. Our available-for-sale investment securities portfolio consists of obligations of the U.S. Treasury and federal agencies, obligations of state and local municipalities and federal agency mortgage obligations. We held no held-to-maturity or equity securities at December 31, 2025. Many of the instruments in our securities portfolio are particularly sensitive to interest rate fluctuations, especially long-term fixed-income securities. The unrealized losses of our securities portfolio are reflected in Accumulated Other Comprehensive Income on our Consolidated Statements of Financial Condition and reduces our book capital and tangible common equity ratio. However, unrealized losses do not affect our regulatory capital ratios.
Management continues to actively monitor the investment portfolio and may continue to take advantage of opportunisticrestructuring alternatives from time to time. If we sell securities from our investment portfolio before the full recovery of their amortized cost bases (which is typically at maturity), then we may incur losses.
We rely on dividends from our subsidiaries — We receive substantially all of our revenue from dividends from our subsidiaries, including, primarily, the Bank. These dividends are the principal source of funds we use to pay dividends on our common stock and interest and principal on our debt. Various federal and state laws and regulations limit the amount of dividends our subsidiaries may pay to us. In the event our subsidiaries are unable to pay dividends to us, we may not be able to service debt, pay other obligations, or pay dividends on our common stock. Our inability to receive dividends from our subsidiaries could have a material adverse effect on our business, financial condition and results of operations.
We are required to maintain capital to meet regulatory requirements — The Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. We face significant capital and other regulatory requirements as a financial institution, which were heightened with the implementation of the Basel III Rule and the phase-in of the capital conservation buffer requirement. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.
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Strategic/Operational Risks
Our risk management framework could prove ineffective which could have a material adverse effect on our ability to mitigate risks and/or losses — We have established a risk management framework to identify and manage our risk exposure. This framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, credit, market, liquidity/capital, strategic/operational, legal/compliance, and reputational risks. Our framework also includes financial, analytical and forecasting modeling methodologies which involve significant management assumptions and judgment that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Additionally, our Board of Directors has adopted a risk appetite statement in consultation with management which sets forth certain thresholds and limits to govern our overall risk profile. There can be no assurance that our risk management framework will be effective under all circumstances or that it will adequately identify, manage or limit any risk of loss to us. Any such failure in our risk management framework could have a material adverse effect on our business, financial condition, and results of operations.
We are dependent upon the services of our management team and other key personnel — Our future success and profitability is substantially dependent upon our management and the banking acumen of our senior executives and other key personnel. We believe that our future results will also depend in part upon our ability to attract and retain highly skilled and qualified management. We are especially dependent on a limited number of key management personnel, many of whom do not have employment agreements with us. The loss of the chief executive officer and other senior management and key personnel could have a material adverse impact on our operations because other officers may not have the experience and expertise to readily replace these individuals. Many of these senior officers have primary contact with our clients and are important in maintaining personal relationships with our client base. The unexpectedloss of services of one or more of these key employees could have a material adverse effect on our operations and possibly result in reduced revenues if we were unable to find suitable replacements promptly. Competition for senior personnel is intense, and we may not be successful in attracting and retaining such personnel. Changes in key personnel and their responsibilities may be disruptive to our businesses and could have a material adverse effect on our businesses, financial condition, and results of operations.
Technology security breaches — Information security risks have increased due to the sophistication and activities of organized crime, hackers, terrorists and other external parties and the use of online, telephone, and mobile banking channels by clients. Any compromise of our security could impair our reputation and deter our clients from using our banking services. Information security breaches can also disrupt the operation of information systems on which we depend, adversely affecting our business operations. Such events can result in costly remediation measures and litigation or governmental investigation and responding to security breaches can place unanticipated demands on the time and attention of management. We rely on security systems to provide the protection and authentication necessary to secure transmission of data againstdamage by theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, ransomware, denial of service attacks, viruses, worms, use of artificial intelligence (AI) and other disruptiveproblems caused by hackers. Computer break-ins, phishing and other disruptions of customer or vendor systems could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure. We maintain a cyber insurance policy that is designed to cover a majority of loss resulting from cyber security breaches, but there is no assurance such coverage or other protective measures we employ will be adequate to address all potential material adverse impacts.
We also confront the risk of being compromised by emails sent by perpetrators posing as company executives or vendors in order to dupe company personnel into sending large sums of money to accounts controlled by the perpetrators. We require all our employees to complete annual information security awareness training to increase their awareness of these risks and to engage them in our mitigation efforts. If these precautions are not sufficient to protect our systems from data breaches or compromises, our reputation and business could be adversely affected.
We depend on the services of a variety of third-party vendors to meet data processing and communication needs and we have contracted with third parties to run their proprietary software on our behalf. While we perform reviews of security controls instituted by the vendor in accordance with industry standards and institute our own internal security controls, we rely on continued maintenance of the controls by the outside party to safeguard our customer data.
Additionally, we issue debit cards which are susceptible to compromise at the point of sale via the physical terminal through which transactions are processed and by other means of hacking. The security and integrity of these transactions are dependent upon the retailers’ vigilance and willingness to invest in technology and upgrades. Issuing debit cards to our clients exposes us to potential losses which, in the event of a data breach at one or more major retailers may adversely affect our business, financial condition, and results of operations.
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Furthermore, there continues to be heightened legislative and regulatory focus on privacy, data protection and information security. New or revised laws and regulations may significantly impact our current and planned privacy, data protection and information security-related practices, the collection, use, sharing, retention and safeguarding of consumer and employee information, and current or planned business activities. Compliance with current or future privacy, data protection and information security laws could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have an adverse effect on our business, financial condition and results of operations.
We continually encounter technological change — The financial services industry is constantly undergoing rapid technological change with frequent introductions of new technology-driven products and services, including innovative ways that customers can make payments or manage their accounts, such as through the use of mobile payments, digital wallets or digital currencies. In recent years, competition has increased from institutions not subject to the same regulatory restrictions as domestic banks and holding companies, including financial technology companies, or ‘fintechs,’ which may offer bank-like products or services that compete directly with the Company’s products and services. Our future success depends, in part, upon our ability to address the needs of our clients competitively by using technology to provide products and services that will satisfy client demands, as well as create additional efficiencies within our operations. Many of our large competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services quickly or be successful in marketing these products and services to our clients.
In addition, our implementation of certain new technologies, such as those related to AI, automation and algorithms, in our business processes may have unintended consequences due to their limitations or our failure to use them effectively. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations. We are in the early stages of incorporating AI into our business activities to increase employee productivity. We have not yet deployed AI-driven systems in critical decision-making or client-facing processes. Our vendors or third parties may develop or incorporate AI technology in certain business processes, services, or products. Any reliance on AI presents a number of risks and challenges to our business. Furthermore, the legal and regulatory landscape impacting new technologies such as AI is evolving rapidly, and the inability to predict how this regulation will take shape and the absence of a uniform regulatory framework for AI may present unforeseenchallenges in applying and relying on existing compliance systems. Complying with existing and new AI and data usage laws, and inconsistencies in regulation from jurisdiction to jurisdiction, could increase expenses and exposure to legal or regulatory proceedings.
Our business is subject to fraud attempts — As a financial institution, we are susceptible to fraudulent activity rendered against us or our customers that may result in financial loss, increased costs, privacy breaches, misappropriation of assets, litigation, or damage to our reputation. These acts may take many forms including check fraud, wire fraud, phishing, social engineering, and other dishonest proceedings. There have been instances where banks have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts. Although we have policies and procedures in place to verify the authenticity of our customers, we cannot assure that such policies and procedures will prevent all fraudulent transfers.
Our accounting estimates rely on analytical and forecasting models — The processes we use to estimate our allowance for credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depend upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations.
Legal/Compliance Risks
We are subject to extensive government regulation and supervision — Our operations are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible change. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulation or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs and limit the types of financial services and products we may offer. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations.
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As we continue to grow in size and complexity, regulatory expectations and scrutiny will likely increase and could have a potential impact on our operations and business — As financial institutions grow, so do the expectations of regulatory agencies regarding the financial institution’s ability to control for increasingly complex and sophisticated business operations. Certain regulations and laws have embedded asset thresholds that change regulatory expectations, have different financial statement impacts, require different committee and management compositions, or enhanced reporting requirements. For example, the Durbin Amendment to the Dodd-Frank Act limits the amount of interchange fees that banks with assets of $10.0 billion or more may charge to process electronic debit transactions. Banks must comply with the Durbin Amendment no later than July 1 of the next calendar year after the bank crosses the $10.0 billion asset threshold. While we do not currently have $10.0 billion or more in total consolidated assets, we have begun analyzing these requirements to ensure we are prepared to comply with the rules when and if they become applicable. There is potential that changes in the regulatory expectations from asset growth could impact the business operationally, strategically, or financially.
Our investments and/or financings in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on our financial results — We invest and/or finance certain tax-advantaged projects promoting affordable housing, community redevelopment and renewable energy sources. Our investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. We are subject to the risk that previously recorded tax credits will not be able to be fully realized. Such credits are subject to recapture by taxing authorities based on compliance features required to be met at the project level which may not be met. The possible inability to realize these tax credits and other tax benefits can have a negative impact on our financial results. The risk of not being able to realize the tax credits and other tax benefits depends on many factors outside of our control, including changes in the applicable tax code and the ability of the projects to be completed and properly managed.
Substantial ownership concentration — Our directors, executive officers and 1st Source Bank, as trustee, collectively hold a significant ownership concentration of our common shares. Due to this significant level of ownership among our affiliates, our directors, executive officers, and 1st Source Bank, as trustee, may be able to influence the outcome of director elections or impact significant transactions, such as mergers or acquisitions, or any other matter that might otherwise be favored by other shareholders.
Reputational Risks
Competition from other financial services providers could adversely impact our results of operations — The banking and financial services business is highly competitive. We face competition in making loans and leases, attracting deposits and providing insurance, investment, trust and wealth advisory, and other financial services. Increased competition in the banking and financial services businesses may reduce our market share, impair our growth or cause the prices we charge for our services to decline. Our results of operations may be adversely impacted in future periods depending upon the level and nature of competition we encounter in our various market areas.
Managing reputational risk is important to attracting and maintaining customers, investors, and employees — Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, data security failures, compliance deficiencies, and questionable or fraudulent activities of our customers. We have policies and procedures in place that seek to protect our reputation and promote ethical conduct. Nonetheless, negative publicity may arise regarding our business, employees, or customers, with or without merit, and could result in the loss of customers, investors, or employees, costlylitigation, a decline in revenues, increased government regulation, and could adversely affect the trading price of our shares.
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 judgment 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 inherently challenging for many reasons including, the current macroeconomic environment, a softening labor market, heightened geopolitical uncertainty, inflation which remains above long-term policy targets, and interest rates that are still restrictive despite recent easing. 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 2025 was $158.28 million, up from $132.62 million in 2024 and up from $124.93 million in 2023. Diluted net income per common share was $6.41 in 2025, $5.36 in 2024, and $5.03 in 2023. Return on average total assets was 1.76% in 2025 compared to 1.52% in 2024, and 1.48% in 2023. Return on average common shareholders’ equity was 13.16% in 2025 versus 12.54% in 2024, and 13.48% in 2023.
Net income in 2025, as compared to 2024, was positively impacted by a $47.36 million or 15.74% increase in net interest income, which was partially offset by a $13.24 million or 6.50% increase in noninterest expense. 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.
Dividends paid on common stock in 2025 amounted to $1.52 per share, compared to $1.40 per share in 2024, and $1.30 per share in 2023. 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 leases and investment 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 4.07% in 2025, compared to 3.64% in 2024 and 3.51% in 2023. Net interest income was $348.18 million for 2025, compared to $300.82 million for 2024 and $278.65 million for 2023. Tax-equivalent net interest income totaled $348.79 million for 2025, up $47.38 million from the $301.40 million reported in 2024. Tax-equivalent net interest income for 2024 was up $22.02 million from the $279.39 million reported for 2023.
During 2025, average earning assets increased $279.10 million or 3.37% while average interest-bearing liabilities increased $128.46 million or 2.20% over the comparable period in 2024. The yield on average earning assets increased 16 basis points to 6.01% for 2025 from 5.85% for 2024 primarily due to higher loan and lease average balances and higher rates on investment securities offset by lower rates 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 decreased 35 basis points to 2.79% during 2025 from 3.14% in 2024 mainly as a result of repricing of interest-bearing deposits and lower rates and average balances of other short-term borrowings which is primarily short-term FHLB borrowings offset by higher rates on mandatorily redeemable securities. The result to the fully taxable-equivalent net interest margin was an increase of 43 basis points.
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The largest contributors to the increase in the yield on average earning assets in 2025 was an increase in average loan and lease balances and higher rates on taxable investment securities. During 2025, average loans and leases increased $336.29 million or 5.10% from 2024 while the yield decreased to 6.79% from 6.84% in 2024. Strong growth primarily within our Renewable Energy portfolio and selective growth in our Commercial Real Estate portfolio drove total average loans and leases higher during the year. Net interest recoveries positively contributed seven basis points to the yield on average loans and leases during 2025 and three basis points to the average loans and leases yield during 2024. The tax-equivalent yield on investment securities increased 81 basis points to 2.53% while the average balance decreased $73.56 million or 4.68% with the largest decreases in U.S. treasury and federal agency securities and state and municipal securities. Average mortgages held for sale increased $0.66 million or 20.45% during 2025 while the yield decreased 33 basis points. Average other investments increased $15.71 million or 13.96% during 2025 while the yield decreased 72 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 $270.38 million or 4.91% during 2025 while the effective rate paid on those deposits decreased 33 basis points. The increased average balance was primarily due to increases in non-brokered time deposits and money market accounts. The decrease in the average cost of interest-bearing deposits was primarily the result of Fed rate cuts during the second half of 2024 and second half of 2025 . Average noninterest-bearing demand deposits decreased $7.05 million or 0.44% during 2025 due primarily to persistent rate competition for deposits and greater utilization of excess funds by our business customers.
Average short-term borrowings decreased $142.22 million or 62.15% during 2025 while the effective rate paid decreased 209 basis points primarily due to the maturity and pay off of $100 million in borrowings from the Federal Reserve’s Bank Term Funding Program. Average long-term debt and mandatorily redeemable securities balances increased $0.31 million or 0.75% during 2025 while the effective rate increased 364 basis points primarily due to a higher imputed interest on mandatorily redeemable securities from an increased improvement in book value per share during 2025 compared to 2024. 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.
(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
Tax-exempt (1)
Mortgages held for sale
Loans and leases, net of unearned discount (1)
Other investments
Total earning assets (1)
Cash and due from banks
Allowance for loan and lease losses
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits
Short-term borrowings:
Securities sold under agreements to repurchase
Other short-term borrowings
Subordinated notes
Long-term debt and mandatorily redeemable securities
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Shareholders’ equity
Noncontrolling interests
Total liabilities and equity
Less: Fully tax-equivalent adjustments
Net interest income/margin (GAAP-derived) (1)
Fully tax-equivalent adjustments
Net interest income/margin - FTE (1)
(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)
Calculation of Net Interest Margin
Interest income (GAAP)
Fully tax-equivalent adjustments:
- Loans and leases
- Tax-exempt investment securities
Interest income - FTE (A+B+C)
Interest expense (GAAP)
Net interest income (GAAP) (A-E)
Net interest income - FTE (D-E)
Total earning assets
Net interest margin (GAAP-derived) (F/H)
Net interest margin - FTE (G/H)
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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
2025 compared to 2024
Interest earned on:
Investment securities available-for-sale:
Taxable
Tax-exempt
Mortgages held for sale
Loans and leases, net of unearned discount
Other investments
Total earning assets
Interest paid on:
Interest-bearing deposits
Short-term borrowings:
Securities sold under agreements to repurchase
Other short-term borrowings
Subordinated notes
Long-term debt and mandatorily redeemable securities
Total interest-bearing liabilities
Net interest income - FTE
2024 compared to 2023
Interest earned on:
Investment securities available-for-sale:
Taxable
Tax-exempt
Mortgages held for sale
Loans and leases, net of unearned discount
Other investments
Total earning assets
Interest paid on:
Interest-bearing deposits
Short-term borrowings:
Securities sold under agreements to repurchase
Other short-term borrowings
Subordinated notes
Long-term debt and mandatorily redeemable securities
Total interest-bearing liabilities
Net interest income - FTE
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Noninterest Income — Noninterest income decreased in 2025 from 2024 following a decrease in 2024 from 2023. The following table shows the components of our noninterest income for the most recent three years ended December 31.
(Dollars in thousands)
$ Change
from 2024
% Change
from 2024
$ Change
from 2023
% Change
from 2023
Noninterest income:
Trust and wealth advisory
Service charges on deposit accounts
Debit card
Mortgage banking
Insurance commissions
Equipment rental
Losses on investment securities available-for-sale
Other
Total noninterest income
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 2025 from 2024, compared to an increase in 2024 over 2023. 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, 2025 and 2024 was $6.28 billion and $5.97 billion, respectively. The positive performance of the stock and bond markets during 2025 resulted in an increase in the market value of trust assets under management compared to 2024. At December 31, 2025, these trust assets were comprised of $4.37 billion of personal and agency trusts and estate administration assets, $1.05 billion of employee benefit plan assets, $0.66 billion of individual retirement accounts, and $0.20 billion of custody assets.
Service charges on deposit accounts increased in 2025 from 2024, compared to an increase in 2024 from 2023. The growth in service charges on deposit accounts in 2025 was primarily due to higher consumer nonsufficient fund and overdraft transactions. The growth in service charges on deposit accounts in 2024 was primarily due to a higher volume of business deposit account fees.
Debit card income remained relatively flat during 2025 following a slight decrease during 2024. 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.
Mortgage banking income decreased in 2025 over 2024, compared to an increase in 2024 from 2023. During 2025, 2024, and 2023, we determined that no permanent write-down was necessary for previously recorded impairment on MSRs. During 2025, mortgage banking income decreased due to lower margins on loans originated for the secondary market and a reduction in servicing fees resulting from fewer loans being serviced for others. 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.
Insurance commissions increased in 2025 compared to 2024, and decreased in 2024 compared to 2023. The increase in 2025 was primarily due to higher contingent commissions received and an increased book of business. The decrease in 2024 was primarily due to fewer contingent commissions received.
Equipment rental income generated from operating leases decreased during 2025 from 2024, compared to a similar reduction during 2024 from 2023. The average equipment rental portfolio decreased in 2025 and 2024 as a result of reduced leasing volume primarily in the medium and heavy duty truck and construction equipment portfolios due to changing customer preferences and competitive pricing pressures for new business. In 2025 and 2024, 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 2025 were exclusively the result of repositioning the portfolio during the second, third, and fourth quarters. In the combined repositioning trades, approximately $256 million of securities with a weighted average yield of 0.92% were sold and used to purchase approximately $254 million of securities with a weighted average yield of 3.66%. In the 2024 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%. 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.
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Other income increased in 2025 from 2024, compared to a decrease in 2024 from 2023. The increase in 2025 was mainly a result of higher partnership investment gains on sale of renewable energy tax equity investments of $2.07 million, an increase in brokerage commissions and fees of $0.41 million, and increased customer interest rate swap fees of $0.54 million offset by a write-down of $0.77 million on a small business capital investment. 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.
Noninterest Expense — Noninterest expense increased in 2025 from 2024 following an increase in 2024 from 2023. The following table shows the components of our noninterest expense for the most recent three years ended December 31.
(Dollars in thousands)
$ Change
from 2024
% Change
from 2024
$ Change
from 2023
% Change
from 2023
Noninterest expense:
Salaries and employee benefits
Net occupancy
Furniture and equipment
Data Processing
Depreciation — leased equipment
Professional fees
FDIC and other insurance
Business development and marketing
Provision (recovery of provision) for unfunded
loan commitments
Other
Total noninterest expense
NM = Not Meaningful
Total salaries and employee benefits increased in 2025 from 2024, following an increase in 2024 from 2023.
Employee salaries grew $5.21 million or 5.16% in 2025 from 2024, compared to an increase of $7.45 million or 7.97% in 2024 from 2023. The increase in 2025 was mainly a result of higher base salaries due to normal merit increases and a rise in incentive compensation. 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.
Employee benefits increased $2.45 million or 11.67% in 2025 from 2024, compared to a $1.15 million or 5.20% decrease in 2024 from 2023. During 2025, group insurance costs were higher due to overall higher health insurance claims experienced and an increase in employer profit sharing contribution expense due to the utilization of accumulated plan forfeitures to offset employer contributions in the prior year. 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.
Occupancy expense rose in 2025 from 2024, compared to an increase in 2024 from 2023. The expense increase in 2025 was primarily the result of higher building depreciation and increased premises expenses. The expense increase in 2024 was primarily the result of increased premises expenses and higher rents.
Furniture and equipment expense, including depreciation, increased in 2025 from 2024, and was relatively flat in 2024 from 2023. The increase in 2025 was primarily due to an increase in equipment repairs and maintenance and higher equipment depreciation.
Data processing expense rose in 2025 from 2024, following an increase in 2024 from 2023. The increases in both 2025 and 2024 were due to a rise in software maintenance costs and higher computer processing charges related to a variety of technology projects.
Depreciation on equipment owned under operating leases declined in 2025 from 2024, following a similar decrease in 2024 from 2023. In 2025 and 2024, depreciation on equipment owned under operating leases correlated with the change in equipment rental income.
Professional fees remained flat in 2025 from 2024, compared to an increase in 2024 from 2023. 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.
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FDIC and other insurance expense decreased in 2025 from 2024, and increased in 2024 from 2023. The decrease in 2025 was mainly the result of lower insurance premiums due to a more cost effective policy renewal. The increase in 2024 was mainly the result of higher insurance premiums during 2024. FDIC insurance premiums remained relatively stable during 2025 and 2024.
Business development and marketing expenses increased in 2025 from 2024, following a decrease in 2024 from 2023. The increased expense in 2025 was mainly the result of a $1.00 million dollar charitable contribution, increased business development expenses, and marketing promotions. 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.
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 reflected the nature of this expense item and enhances comparability for peer comparison purposes.
Other expenses increased in 2025 as compared to 2024, and decreased in 2024 as compared to 2023. The higher expense in 2025 was primarily the result of fewer gains related to the sale of fixed assets and off-lease equipment, higher collection and repossession expenses, and increased intangible asset amortization offset by a reduction in fraudlosses. 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 fraudloss.
Income Taxes — 1st Source recognized income tax expense in 2025 of $46.12 million, compared to $38.44 million in 2024, and $36.75 million in 2023. The effective tax rate in 2025 was 22.57% compared to 22.47% in 2024, and 22.73% in 2023.
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)
Commercial and agricultural
Renewable energy
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total loans and leases
At December 31, 2025, 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, 2025, were $7.05 billion and were 77.82% of total assets, compared to $6.85 billion and 76.74% of total assets at December 31, 2024. Average loans and leases, net of unearned discount, increased $336.29 million or 5.10% and increased $394.47 million or 6.36% in 2025 and 2024, respectively.
Commercial and agricultural lending, excluding those loans secured by real estate, increased $24.62 million or 3.18% in 2025 over 2024. Commercial and agricultural lending outstandings were $797.59 million and $772.97 million at December 31, 2025 and December 31, 2024, respectively. Commercial loan growth continued to be somewhat constrained as our clients dealt with higher costs and tighter gross margins. Tariff impact is partially to blame as well as slowing consumer demand. Loan growth was particularly constrained in the small business sector. We saw this in the form of reduced line of credit (LOC) balances throughout the year. Further, the agricultural and recreational vehicle sectors are entering their fourth consecutive year of depressed commodity prices and demand, which caused lower LOC usage and reduced investments by these borrowers. Finally, our commercial and industrial loan outstandings continue to be impacted by the acquisition and subsequent pay-offs by private equity firms and larger competitors.
Renewable energy loans and leases increased $165.53 million or 33.97% in 2025 over 2024. Renewable energy loan and lease outstandings were $652.80 million and $487.27 million at December 31, 2025 and 2024, respectively. The increase during 2025 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 2025 from the incentives associated with the Inflation Reduction Act and the shortened phase out period of these incentives with the passage of the One Big Beautiful Bill.
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Auto and light truck loans decreased $60.56 million or 6.39% in 2025 over 2024. At December 31, 2025, auto and light truck loans had outstandings of $887.88 million and $948.44 million at December 31, 2024. This decrease was primarily attributable to vehicle rental clients’ reaction to cyclical market adjustments resulting in the downsizing of total fleet and transition into lower capital cost units along with our selective credit approach.
Medium and heavy duty truck loans and leases decreased $19.87 million or 6.86% in 2025. Medium and heavy duty truck financing at December 31, 2025 and 2024 had outstandings of $269.75 million and $289.62 million, respectively. The decrease at December 31, 2025 from December 31, 2024 can be mainly attributed to reduced equipment demand related to an ongoing trucking industry recession, selective credit approach, and maintenance of our adjusted yields.
Aircraft financing at year-end 2025 decreased $36.98 million or 3.29% from year-end 2024. Aircraft financing at December 31, 2025 and 2024 had outstandings of $1.09 billion and $1.12 billion, respectively. Domestic aircraft average outstandings increased modestly, while end-of-period balances declined year-over-year. The decline was driven by elevated client payoffs as aircraft owners capitalized on strong market pricing by divesting assets or aviation-related businesses during 2025. We continue to exercise a consistent disciplined approach to aircraft types and client credit profiles. Our foreign outstandings, all denominated in U.S. dollars, increased 6.23% during 2025 and were $319.93 million and $301.18 million as of December 31, 2025 and 2024, respectively. Loan and lease outstandings to borrowers in Brazil and Mexico were $136.98 million and $163.70 million as of December 31, 2025, respectively, compared to $129.12 million and $145.85 million as of December 31, 2024, respectively. Outstanding balances to other borrowers in other countries were insignificant.
Construction equipment financing increased $17.22 million or 1.43% in 2025 compared to 2024. Construction equipment financing at December 31, 2025 had outstandings of $1.22 billion, compared to outstandings of $1.20 billion at December 31, 2024. The growth in this category was primarily due to significant new client relationships and continued growth with existing clients primarily amongst road builders and site development clients.
Commercial loans secured by real estate increased $54.50 million or 4.48% in 2025 over 2024. Commercial loans secured by real estate outstanding at December 31, 2025 were $1.27 billion and $1.22 billion at December 31, 2024. Approximately 61% of loans were owner occupied at December 31, 2025. We continue to have solid loan demand within our markets as liquidity concerns, which have impacted many of our competitors’ willingness to lend as aggressively as they had been into commercial real estate, gave us more opportunities while underwriting standards and yields also improved. The majority of our non-owner occupied commercial real estate (CRE) projects are located within our primary market area. We had good CRE loan growth in 2025, fueled by continued funding of in-process projects nearing completion throughout the year. This new project funding was partially offset by an increasing number of CRE payoffs, via the sale of projects or refinancing in secondary markets. We continue to have very minimal exposure to non-owner occupied office property.
Residential real estate and home equity loans were $740.78 million at December 31, 2025 and $680.07 million at December 31, 2024. Residential real estate and home equity loans increased $60.71 million or 8.93% in 2025 from 2024. Residential mortgage and home equity outstandings grew in 2025 as clients began to turn back to home equity loans as variable rates began to decrease. Also, our fixed rate term second mortgages grew as clients looked to pull equity from increased home values instead of doing cash out refinances, which would impact their low mortgage rates that were locked in during COVID. In addition, the overall increase in home values, as well as home repairs and improvements, has resulted in more loans in our portfolio.
Consumer loans decreased $13.31 million or 9.97% in 2025 over 2024. Consumer loans outstanding at December 31, 2025, were $120.16 million and $133.47 million at December 31, 2024. During 2025, higher vehicle prices, 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, 2025 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
Variable rate
Total commercial and agricultural
Renewable energy
Fixed rate
Variable rate
Total renewable energy
Auto and light truck
Fixed rate
Variable rate
Total auto and light truck
Medium and heavy duty truck
Fixed rate
Variable rate
Total medium and heavy duty truck
Aircraft
Fixed rate
Variable rate
Total aircraft
Construction equipment
Fixed rate
Variable rate
Total construction equipment
Commercial real estate
Fixed rate
Variable rate
Total commercial real estate
Residential real estate and home equity
Fixed rate
Variable rate
Total residential real estate and home equity
Consumer
Fixed rate
Variable rate
Total consumer
Total loans and leases
Fixed rate
Variable rate
Total loans and leases
During 2025, approximately 38% of the Bank’s residential mortgage originations were sold into the secondary market. Mortgage loans held for sale were $4.87 million at December 31, 2025 and were $2.57 million at December 31, 2024.
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 $0.12 million and $0.18 million as of December 31, 2025 and 2024, respectively. Our expense for repurchase losses, included in Loan and Lease Collection and Repossession expense on the Statements of Income, was $0.07 million of recoveries in 2025 compared to $0.02 million of expense in 2024 and recoveries of $0.07 million in 2023. 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 GreatRecession and the subsequent 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 ongoing challenges. The domestic economic outlook remains uncertain amid shifting trade/tariff policies, still-elevated inflation and interest rates, softening labor conditions, signs of consumer stress and weakening sentiment, and heightened geopolitical risks. GDP growth has largely exceeded forecasts in recent quarters, in large part due to front loading of inventory purchases in preparation for the implementation of tariffs. However, substantial headwinds remain in the forward outlook. Uncertainty is elevated given broadening global conflicts and significant political shifts domestically and internationally. U.S. tariff policy remains fluid, which has created volatility in the operating backdrop for our borrowers and markets. Collateral values are significant to underwriting our specialty finance portfolios and there is heightened potential for future policy changes to impact asset valuations. Management cannot predict the timing or magnitude of future policy changes but actively monitors developments and adjusts underwriting, including amortization and down payment requirements, as conditions evolve. Concentration risk is impacted primarily by geographic concentration in northern Indiana and southwestern Michigan in our business banking and commercial real estate portfolios and by collateral concentration in our specialty finance portfolios.
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We include a factor for global risk in our analysis. While difficult to predict with precision, global risks may adversely impact our borrowers, weakening their ability to repay their financial obligations. The global outlook calls for slowing growth, pressured by high sovereign debt levels and fiscal vulnerabilities, rising protectionism and trade tensions, and still-elevated interest rates and inflation. Global geopolitical uncertainty impacts the outlook and various ongoing foreign conflicts introduce downside risk. Trade tensions are rising which increases the potential for supply chain disruptions. Terrorism remains a persistentconcern and risks of a catastrophic event are elevated. In Brazil and Mexico, where we have a presence with our aircraft lending, there are concerns with deteriorating economic growth prospects, persistent inflation and high interest rates, and long-standing structural issues including income inequality, poverty, and crime. Inflation remains a headline concern in Brazil where central bank rates are currently at a nearly two-decade high, and a heavy public debt burden pressures fiscal policy. Mexico is facing prospects of weakened economic growth, elevated inflation, and ongoing U.S. trade tensions.
The following discussion focuses on relevant economic conditions and various circumstances impacting the December 31, 2025 allowance for loan and lease losses of each of our loan and lease segments.
Commercial and agricultural – The allowance increased year-over-year due to modest loan growth, partially offset by a slight decline in special attention balances which carry higher reserves, and lower historical loss rates within the portfolio prior to the impact of the forecast adjustment. Multiple industries are represented in the commercial and agricultural portfolio and the outlook for the portfolio remains guarded. Small businesses remain challenged to absorb still-elevated interest rates, higher cost of capital, compete for labor, and control expenses. In our underlying industries, wholesalers have generally performed well, while manufacturers remain under pressure. The recreational vehicle industry, which is centered in our footprint, continues to struggle with low demand as it navigates a sharp pullback from record high shipment levels reached in 2022. The outlook for 2026 reflects ongoing weak demand and only modest improvement as compared to 2025. Pressures in the agricultural sector remain evident, although grain did find some footing in 2025 after experiencing sharp declines the previous year. Charge-off rates in the commercial and agricultural portfolio were modest in 2025 and credit quality remains acceptable, but we continue to see elevated special attention activity within the portfolio, particularly in small dollar accounts.
Renewable energy – Our allowance increased primarily due to loan growth, along with a slight increase in qualitative adjustments to address changes in the regulatory environment applicable to the portfolio. 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 elevated 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 remains under stress as the industry struggles with overcapacity, higher vehicle prices, elevated interest costs, and weak rental rates. Our allowance increased due to higher special attention balances, which are reserved at higher rates, an increase in historical loss rates, and an increase in qualitative adjustments to address continued elevated risk within the auto rental segment. The decline in loan balances within the portfolio is largely due to borrowers’ de-fleeting activity in the auto rental segment to address overcapacity. Credit quality weakened for a second consecutive year in the auto rental segment, as average delinquency and non-performing rates increased year-over-year. Wholesale used vehicle prices have held up better than in past industry downturns and stable asset valuations, along with tighter underwriting standards, have limited charge-off exposures. Overall, wholesale vehicle prices ended the year relatively stable and remain above the longer-term valuation trend line. Somewhat muted original equipment manufacturers’ (“OEM”) production volumes have also likely provided pricing support to used vehicle markets. The auto leasing segment performed well in 2025 and the portfolio continues to exhibit 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 our underwriting, setting residual values appropriately and monitoring fleet mix given the potential for volatility in vehicle prices.
Medium and heavy duty truck – The portfolio’s allowance decreased due to lower loan balances. The industry remains challenged by overcapacity, but freight rates appear to be stabilizing. 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 over the last several years. In previous downturns, small companies and independent owner-operators were hit the hardest and asset valuations were pressured. Asset valuations have weakened in the segment. We did not incur any credit losses in the portfolio during the period.
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Aircraft – The portfolio’s allowance decreased as we experienced a modest decline in loan balances year-over-year in our domestic aircraft segment, while growth in our foreign aircraft segment was essentially flat. Credit quality metrics remain stable. Aircraft collateral values, particularly those in our niche, strengthened considerably early in this economic cycle but have leveled off with more 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 GreatRecession. We experienced minimal loss in the portfolio this year, but our portfolio loss history has experienced past volatility, characterized by lengthy periods of minimal losses or modest recoveries followed by short intervals of high losses. In this portfolio, we have $320 million of foreign exposure, primarily domiciled in Mexico and Brazil. Brazil’s economy remains burdened by high sovereign debt levels and high interest rates. Mexico’s economic growth is expected to be somewhat weak as it manages through ongoing U.S. trade tensions. Heavy indebtedness and financial problems with state-owned oil firm Pemex are an ongoing concern for Mexico’s broader growth prospects.
Construction equipment – Our construction equipment portfolio reported more muted loan growth in 2025, compared to relatively high growth rates in previous years since the end of the pandemic. The allowance decrease was primarily driven by a reduction in qualitative factors for elevated problem loan activity in the segment due to improving credit quality trends. Infrastructure spending continues to have a positive impact on many contractors within the segment. Credit quality generally improved as delinquency rates were muted, special attention balances, which are reserved at higher rates, ended the year lower and non-performing balances also declined. The portfolio has experienced some elevated loss activity in recent years which has been successfully mitigated, achieving fairly high recovery rates with time. There is ongoing 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. Shifting trade policies add uncertainty, potentially increasing raw material and equipment costs. 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.
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. The allowance increase was due to loan growth in both owner and non-owner-occupied segments. We continue to monitor construction risk and maturity repricing risk in the elevated interest rate environment. Approximately 61% of the Bank’s exposure in this portfolio is from owner-occupied facilities where we are the primary relationship bank for our clients. Special attention activity in both the owner-occupied and non-owner-occupied segments remains modest with generally stable credit quality. We have seen limited evidence of slow lease-up and rental rate pressures in select markets in the multi-family segment. We reviewed our qualitative adjustments as of year-end and made slight adjustments to a factor addressing interest rate maturity risk and a slight increase to our construction risk factor as the loan volume of projects under construction remains higher than prior periods.
Residential real estate and home equity – Our residential real estate and home equity portfolio consists of loans to individuals in the communities we serve. The allowance increased due to loan growth. 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 maintain an 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. The allowance was minimally changed year-over-year as lower loan balances were offset by higher historical loss rates in the portfolio. Delinquency rates remain manageable but are trending upward. Loss rates were modest from 2013 through the end of the pandemic, but we have experienced higher write-downs in each of the last three years. We review our qualitative adjustments each quarter, which primarily consist of reasonable and supportable forecasts and also include an 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, 2025, totaled $161.85 million and was 2.30% of loans and leases, compared to $155.54 million or 2.27% of loans and leases at December 31, 2024 and $147.55 million or 2.26% of loans and leases at December 31, 2023. 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, 2025.
Charge-offs for loan and lease losses were $8.30 million for 2025, compared to $13.73 million for 2024 and $6.65 million for 2023. Primarily reflective of loan and lease growth and accretive forecast adjustments, we added $10.51 million to the provision for credit losses on loans and leases for 2025, compared to a provision of $13.66 million for 2024 and a provision of $5.87 million for 2023.
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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)
Amounts of loans and leases outstanding at end of period
Average amount of net loans and leases outstanding during period
Amount of unfunded loan commitments at end of period (1)
Balance of allowance for loan and lease losses at beginning of period
Charge-offs:
Commercial and agricultural
Renewable energy
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total charge-offs
Recoveries:
Commercial and agricultural
Renewable energy
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total recoveries
Net charge-offs (recoveries)
Provision for credit losses - loans and leases
Balance of allowance for loan and lease losses at end of period
Balance of liability for unfunded loan commitments at beginning of period
Provision (recovery of provision) for credit losses - unfunded loan commitments
Balance of liability for unfunded loan commitments at end of period
Asset Quality Ratios:
Net charge-offs (recoveries) to average net loans and leases outstanding
Allowance for loan and lease losses to net loans and leases outstanding end of period
Liability for unfunded loan commitments to unfunded loan commitments end of period
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) Represents noncancelable commitments
The following table shows net charge-offs (recoveries) as a percentage of average loans and leases by portfolio type:
Commercial and agricultural
Renewable energy
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total net charge-offs (recoveries) to average portfolio loans and leases
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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.
(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
Renewable energy
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total
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, and consumer loans that are both well secured and in the process of collection.
Nonperforming assets amounted to $77.38 million at December 31, 2025, compared to $31.33 million at December 31, 2024, and $24.24 million at December 31, 2023. During 2025, interest income on nonaccrual loans and leases would have increased by approximately $5.83 million compared to $2.06 million in 2024 if these loans and leases had earned interest at their full contractual rate.
Nonperforming assets at December 31, 2025 increased from December 31, 2024, mainly due to increases in nonaccrual loans and leases in the auto rental segment of our auto and light truck portfolio, partially offset by lower nonaccrual loans and leases in our construction portfolio. Repossessions consisted mainly of units in the construction equipment and consumer portfolios. There is no other real estate owned as of year end.
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Nonperforming assets at December 31 (Dollars in thousands)
Loans past due over 90 days
Nonaccrual loans and leases:
Commercial and agricultural
Renewable energy
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total nonaccrual loans and leases
Total nonperforming loans and leases
Other real estate
Repossessions:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Consumer
Total repossessions
Operating leases
Total nonperforming assets
Nonperforming loans and leases to loans and leases, net of unearned discount
Nonperforming assets to loans and leases and operating leases, net of unearned discount
Coverage ratio of allowance for loan and lease losses to nonperforming loans and leases
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, 2025 and 2024, we had $11.10 million and $20.60 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, 2025, potential problem loans consisted of five relationships; two relationships in the commercial and agricultural portfolio, two relationships in the auto and light truck portfolio, and one relationship in the commercial real estate 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 2025 decreased 4.98% from 2024, following a 6.34% decrease from year-end 2023 to year-end 2024. The amortized cost of securities available-for-sale at December 31, 2025 was 17.32% of total assets, compared to 18.48% of total assets at December 31, 2024.
The following table shows the amortized cost of investment securities available-for-sale as of December 31.
(Dollars in thousands)
U.S. Treasury and Federal agencies securities
U.S. States and political subdivisions securities
Mortgage-backed securities — Federal agencies
Corporate debt securities
Total debt securities available-for-sale
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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, 2025, 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
1 – 5 years
5 – 10 years
Over 10 years
Total U.S. Treasury and Federal agencies securities
U.S. States and political subdivisions securities
Under 1 year
1 – 5 years
5 – 10 years
Over 10 years
Total U.S. States and political subdivisions securities
Corporate debt securities
Under 1 year
1 – 5 years
5 – 10 years
Over 10 years
Total Corporate debt securities
Mortgage-backed securities — Federal agencies
Total investment securities available-for-sale
At December 31, 2025, 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, 2025, the vintage (years originated) of the underlying loans comprising our securities are: 12% in the year 2025; 8% in the year 2024; 18% in the years 2022 and 2023; 48% in the years 2020 and 2021; 5% in the years 2018 and 2019; 9% in the years 2017 and prior.
DEPOSITS
The following table shows the average daily amounts of deposits and rates paid on such deposits.
(Dollars in thousands)
Amount
Rate
Amount
Rate
Amount
Rate
Noninterest bearing demand
Interest bearing demand
Savings
Time
Total deposits
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
4 – 6 Months
7 – 12 Months
Over 12 Months
Total
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
Federal Home Loan Bank Advances
Federal Reserve Advances
Other
Short-Term Borrowings
Total Borrowings
Balance at December 31, 2025
Maximum amount outstanding at any month-end
Average amount outstanding
Weighted average interest rate during the year
Weighted average interest rate for outstanding amounts at
December 31, 2025
Balance at December 31, 2024
Maximum amount outstanding at any month-end
Average amount outstanding
Weighted average interest rate during the year
Weighted average interest rate for outstanding amounts at
December 31, 2024
During January 2024, 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 2025, we repaid the borrowing in full.
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 2025, average core deposits equaled 72.62% of average total assets, compared to 71.39% in 2024 and 73.77% in 2023. The effective rate of core deposits in 2025 was 1.80%, compared to 1.97% in 2024 and 1.45% in 2023.
Average noninterest bearing core deposits decreased 0.44% in 2025 compared to a decrease of 8.22% in 2024. These represented 24.56% of total core deposits in 2025, compared to 25.79% in 2024, and 28.24% in 2023.
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 2025, our reliance on purchased funds decreased to 10.54% of average total assets from 12.69% in 2024.
Shareholders’ Equity — Average shareholders’ equity equated 13.39% of average total assets in 2025, compared to 12.10% in 2024. Shareholders’ equity was 14.08% of total assets at year-end 2025, compared to 12.44% at year-end 2024. 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 $34.78 million and $87.23 million at December 31, 2025 and 2024, 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.
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 $1.44 billion.
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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 againstunforeseen 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, 2025, 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, 2025.
(Dollars in thousands)
Available
Internal Sources
Unencumbered securities
External Sources
FHLB advances (1)
FRB borrowings
Fed funds purchased (2)
Brokered deposits (3)
Listing services deposits (3)
Total liquidity
% of Total deposits net brokered and listing services certificates of deposit
(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) Availability contingent on correspondent bank approvals at time of borrowing
(3) Availability contingent on internal borrowing guidelines
External sources as listed in the table above are managed to approved guidelines by our Board of Directors. Total net available liquidity was $3.63 billion at December 31, 2025, which accounted for approximately 52% of total deposits net of brokered and listing services certificates of deposits.
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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, 2025
December 31, 2024
Basis Point Interest Rate Change
12 Months
24 Months
12 Months
24 Months
Down 100
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, 2025 and 2024, 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.
