Loan and Lease Financings

12 Months Ended

Dec. 31, 2023

Total loans and leases outstanding were recorded net of unearned income and deferred loan fees and costs at December 31, 2023 and 2022, and totaled $6.52 billion and $6.01 billion, respectively. At December 31, 2023 and 2022, net deferred loan and lease costs were $1.65 million and $2.00 million, respectively. Accrued interest receivable on loans and leases at December 31, 2023 and 2022 was $25.35 million and $18.75 million, respectively.

In the ordinary course of business, the Company has extended loans to certain directors, executive officers, and principal shareholders of equity securities of 1st Source and to their affiliates. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Company and did not involve more than the normal risk of collectability, or present other unfavorable features. The loans are consistent with sound banking practices and within applicable regulatory and lending limitations. The aggregate dollar amounts of these loans were $7.74 million and $12.53 million at December 31, 2023 and 2022, respectively. During 2023, $8.51 million of new loans and other additions were made and $13.30 million of repayments and other reductions occurred.

The Company evaluates loans and leases, except residential real estate and home equity loans and consumer loans, for credit quality at least annually but more frequently if certain circumstances occur (such as material new information which becomes available and indicates a potential change in credit risk). The Company uses two methods to assess credit risk: loan or lease credit quality grades and credit risk classifications. The purpose of the loan or lease credit quality grade is to document the degree of risk associated with individual credits as well as inform management of the degree of risk in the portfolio taken as a whole. Credit risk classifications are used to categorize loans by degree of risk and to designate individual or committee approval authorities for higher risk credits at the time of origination. Credit risk classifications include categories for: Acceptable, Marginal, Special Attention, Special Risk, Restricted by Policy, Regulated and Prohibited by Law.

All loans and leases, except residential real estate and home equity loans and consumer loans, are assigned credit quality grades on a scale from 1 to 12 with grade 1 representing superior credit quality. The criteria used to assign grades to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Company’s safety and soundness. Loans or leases graded 7 or weaker are considered “special attention” credits and, as such, relationships in excess of $250,000 are reviewed quarterly as part of management’s evaluation of the appropriateness of the allowance for loan and lease losses. Grade 7 credits are defined as “watch” and contain greater than average credit risk and are monitored to limit the Company’s exposure to increased risk; grade 8 credits are “special mention” and, following regulatory guidelines, are defined as having potential weaknesses that deserve management’s close attention. Credits that exhibit well-defined weaknesses and a distinct possibility of loss are considered ‘‘classified’’ and are graded 9 through 12 corresponding to the regulatory definitions of “substandard” (grades 9 and 10) and the more severe ‘‘doubtful’’ (grade 11) and ‘‘loss’’ (grade 12). For residential real estate and home equity and consumer loans, credit quality is based on the aging status of the loan and by payment activity. Nonperforming loans are those loans which are on nonaccrual status or are 90 or more past due.

Below is a summary of the Company’s loan and lease portfolio segments and a discussion of the risk characteristics relevant to each portfolio segment.

Commercial and agricultural – loans are to entities within the Company’s local market communities. Loans are for business or agri-business purposes and include working capital lines of credit secured by accounts receivable and inventory that are generally renewable annually and term loans secured by equipment with amortizations based on the expected life of the underlying collateral, generally three to seven years. These loans are typically further supported by personal guarantees. Commercial exposure is to a wide range of industries and services. Risks in this sector are also varied and are most impacted by general economic conditions. Risk mitigants include appropriate underwriting and monitoring and, when appropriate, government guarantees, including SBA and FSA.

Renewable energy – loans are for the purpose of financing primarily solar related projects and may include construction draw notes, operating loans, letters of credit and may entail a tax equity structure. Collateral in a multi-state area includes tangible assets of the borrower, assignment of intangible assets including power purchase agreements, and pledges of permits and licenses. Financing is provided to qualified borrowers throughout the continental United States with an emphasis on the region east of the Rocky Mountains.

Auto and light truck – loans are secured by vehicles and borrowers are nationwide. The portfolio consists of multiple industries: auto rental, auto leasing and a small specialty vehicle segment which the Company is largely exiting. Borrowers in the auto rental segment are primarily independent auto rental entities with on-airport and off-airport locations, and some insurance replacement business. Loan terms are relatively short, generally eighteen months, but up to four years. Auto leasing customers lease to businesses and the Company takes assignment of the lease stream and places its lien on the vehicles. Terms are generally longer than the auto rental sector, three to seven years and match the underlying leases. Risks include economic risks and collateral risks, principally used vehicle values.

Medium and heavy duty truck – loans and full-service truck leases are secured by heavy-duty trucks, commonly Class 8 trucks, and are generally personally guaranteed. In addition to economic risks, collateral risk is significant. Financing is generally at full cost, plus additional expenditures to get the vehicle operational, such as taxes, insurance and fees. It takes three to four years of debt amortization to reach an equity position in the collateral.

Aircraft – loans are to domestic and foreign borrowers with the domestic segment further divided into two pools: 1) personal and business use, and 2) dealers and operators. The Company’s focus for the foreign sector is Latin America, principally Mexico and Brazil. Loans are primarily secured by new and used business jets and helicopters, with appropriate advances, amortizations of ten to fifteen years, and are generally guaranteed by individuals. The most significant risk in the Aircraft portfolio is collateral risk - volatility in underlying values and maintenance concerns. The portfolio is subject to national and global economic risks.

Construction equipment – loans are to borrowers throughout the country secured by specific equipment. The borrowers include highway and road builders, asphalt producers and pavers, suppliers of aggregate products, site developers, frac sand operations, general construction equipment dealers and operators, and crane rental entities. Generally, loans include personal guarantees. The construction equipment industry is heavily dependent on the U.S. economy and the global economy. Market growth is reliant on investments from public and private sectors into urbanization and infrastructure projects.

Commercial real estate – loans are generally to entities within the local market communities served by the Company with advances generally within regulatory guidelines. Historically, the Company’s exposure to commercial real estate had been primarily to the less risky owner-occupied segment although growth in recent years has been in the non-owner-occupied segment which now accounts for slightly less than half of the portfolio. The non-owner-occupied segment includes hotels, apartment complexes and warehousing facilities. There is limited exposure to construction loans although at present, construction exposures are comparably higher than previous periods. Many commercial real estate loans carry personal guarantees. Additional risks in the commercial real estate portfolio include interest rate risk, geographical concentration in northern Indiana and southwest Michigan, and general economic conditions.

Residential real estate and home equity – loans predominantly include one-to-four family mortgages to borrowers in the Company’s local market communities and are appropriately underwritten and secured by residential real estate.

Consumer – loans are to individuals in the Company’s local markets and auto loans are generally secured by personal vehicles and appropriately underwritten.

The following table shows the amortized cost of loans and leases, segregated by portfolio segment, credit quality rating and year of origination as of December 31, 2023.



	Term Loans and Leases by Origination Year
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and agricultural
Grades 1-6	$	155,656	$	124,717	$	68,473	$	39,708	$	18,658	$	15,856	$	299,495	$	—	$	722,563
Grades 7-12	7,502		2,657		4,886		501		293		418		27,403		—		43,660
Total commercial and agricultural	163,158		127,374		73,359		40,209		18,951		16,274		326,898		—		766,223
Current period gross charge-offs	668		499		15		17		4		—		3,102		—		4,305
Renewable energy
Grades 1-6	177,364		23,679		86,836		29,138		56,935		25,756		—		—		399,708
Grades 7-12	—		—		—		—		—		—		—		—		—
Total renewable energy	177,364		23,679		86,836		29,138		56,935		25,756		—		—		399,708
Current period gross charge-offs	—		—		—		—		—		—		—		—		—
Auto and light truck
Grades 1-6	603,406		248,701		64,182		24,986		13,573		5,287		—		—		960,135
Grades 7-12	908		1,848		474		2,490		632		425		—		—		6,777
Total auto and light truck	604,314		250,549		64,656		27,476		14,205		5,712		—		—		966,912
Current period gross charge-offs	126		360		128		33		19		63		—		—		729
Medium and heavy duty truck
Grades 1-6	96,254		114,490		44,069		24,645		15,264		4,202		—		—		298,924
Grades 7-12	3,565		7,010		1,675		—		773		—		—		—		13,023
Total medium and heavy duty truck	99,819		121,500		45,744		24,645		16,037		4,202		—		—		311,947
Current period gross charge-offs	—		—		—		—		—		—		—		—		—
Aircraft
Grades 1-6	269,635		355,175		197,579		140,744		37,244		36,936		6,420		—		1,043,733
Grades 7-12	10,120		9,475		3,704		4,543		—		6,597		—		—		34,439
Total aircraft	279,755		364,650		201,283		145,287		37,244		43,533		6,420		—		1,078,172
Current period gross charge-offs	—		—		—		—		—		—		—		—		—
Construction equipment
Grades 1-6	459,884		333,008		131,838		64,998		29,543		7,803		26,044		2,346		1,055,464
Grades 7-12	6,915		20,826		1,037		510		—		—		—		—		29,288
Total construction equipment	466,799		353,834		132,875		65,508		29,543		7,803		26,044		2,346		1,084,752
Current period gross charge-offs	—		44		10		—		—		—		—		—		54
Commercial real estate
Grades 1-6	336,287		251,055		148,597		105,282		86,452		187,306		275		—		1,115,254
Grades 7-12	678		5,313		2,576		651		4,372		1,017		—		—		14,607
Total commercial real estate	336,965		256,368		151,173		105,933		90,824		188,323		275		—		1,129,861
Current period gross charge-offs	—		39		30		—		179		—		—		—		248
Residential real estate and home equity
Performing	87,767		110,058		89,458		88,232		30,681		72,211		152,037		5,575		636,019
Nonperforming	—		107		74		—		414		756		536		67		1,954
Total residential real estate and home equity	87,767		110,165		89,532		88,232		31,095		72,967		152,573		5,642		637,973
Current period gross charge-offs	—		—		—		—		—		54		39		8		101
Consumer
Performing	53,023		47,789		19,739		6,286		2,539		1,021		12,063		—		142,460
Nonperforming	63		246		123		31		28		6		—		—		497
Total consumer	53,086		48,035		19,862		6,317		2,567		1,027		12,063		—		142,957
Current period gross charge-offs	541		455		138		28		17		3		29		—		1,211

The following table shows the amortized cost of loans and leases, segregated by portfolio segment, credit quality rating and year of origination as of December 31, 2022.



	Term Loans and Leases by Origination Year
(Dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and agricultural
Grades 1-6	$	159,317	$	107,232	$	71,365	$	35,874	$	17,192	$	13,860	$	370,553	$	—	$	775,393
Grades 7-12	4,491		5,934		60		2,094		1,644		1,040		21,375		—		36,638
Total commercial and agricultural	163,808		113,166		71,425		37,968		18,836		14,900		391,928		—		812,031
Renewable energy
Grades 1-6	109,393		113,276		35,660		72,652		18,518		20,654		—		—		370,153
Grades 7-12	—		—		1,091		5,678		701		3,540		—		—		11,010
Total renewable energy	109,393		113,276		36,751		78,330		19,219		24,194		—		—		381,163
Auto and light truck
Grades 1-6	521,399		155,508		62,063		32,975		10,946		3,476		—		—		786,367
Grades 7-12	5,972		3,366		5,836		2,836		1,792		1,948		—		—		21,750
Total auto and light truck	527,371		158,874		67,899		35,811		12,738		5,424		—		—		808,117
Medium and heavy duty truck
Grades 1-6	158,296		66,533		43,711		31,980		10,053		3,274		—		—		313,847
Grades 7-12	—		—		—		—		—		15		—		—		15
Total medium and heavy duty truck	158,296		66,533		43,711		31,980		10,053		3,289		—		—		313,862
Aircraft
Grades 1-6	438,481		273,726		213,661		57,379		31,085		35,012		3,687		—		1,053,031
Grades 7-12	12,962		4,253		6,190		—		—		1,286		—		—		24,691
Total aircraft	451,443		277,979		219,851		57,379		31,085		36,298		3,687		—		1,077,722
Construction equipment
Grades 1-6	475,854		213,349		106,409		59,204		17,834		4,593		23,310		2,754		903,307
Grades 7-12	20,709		7,757		2,483		1,878		313		32		583		1,441		35,196
Total construction equipment	496,563		221,106		108,892		61,082		18,147		4,625		23,893		4,195		938,503
Commercial real estate
Grades 1-6	271,526		164,173		121,685		97,470		102,271		168,391		251		—		925,767
Grades 7-12	1,532		1,716		7,824		5,789		47		1,070		—		—		17,978
Total commercial real estate	273,058		165,889		129,509		103,259		102,318		169,461		251		—		943,745
Residential real estate and home equity
Performing	115,154		100,690		97,205		34,498		6,864		81,653		142,724		4,115		582,903
Nonperforming	—		131		693		—		—		725		180		105		1,834
Total residential real estate and home equity	115,154		100,821		97,898		34,498		6,864		82,378		142,904		4,220		584,737
Consumer
Performing	74,258		34,619		12,924		7,375		2,977		692		18,098		—		150,943
Nonperforming	148		65		49		53		12		12		—		—		339
Total consumer	$	74,406	$	34,684	$	12,973	$	7,428	$	2,989	$	704	$	18,098	$	—	$	151,282

The following table shows the amortized cost of loans and leases, segregated by portfolio segment, with delinquency aging and nonaccrual status.


(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Accruing		Total Accruing Loans		Nonaccrual		Total Financing Receivables
December 31, 2023
Commercial and agricultural	$	752,947	$	9	$	—	$	—	$	752,956	$	13,267	$	766,223
Renewable energy	399,708		—		—		—		399,708		—		399,708
Auto and light truck	962,226		20		—		—		962,246		4,666		966,912
Medium and heavy duty truck	311,915		32		—		—		311,947		—		311,947
Aircraft	1,069,830		8,113		229		—		1,078,172		—		1,078,172
Construction equipment	1,078,912		2,044		3,620		—		1,084,576		176		1,084,752
Commercial real estate	1,126,806		—		85		—		1,126,891		2,970		1,129,861
Residential real estate and home equity	634,345		1,623		51		142		636,161		1,812		637,973
Consumer	141,489		864		107		7		142,467		490		142,957
Total	$	6,478,178	$	12,705	$	4,092	$	149	$	6,495,124	$	23,381	$	6,518,505
December 31, 2022
Commercial and agricultural	$	810,223	$	944	$	—	$	—	$	811,167	$	864	$	812,031
Renewable energy	381,163		—		—		—		381,163		—		381,163
Auto and light truck	793,610		353		1		—		793,964		14,153		808,117
Medium and heavy duty truck	313,845		—		2		—		313,847		15		313,862
Aircraft	1,075,865		223		1,063		—		1,077,151		571		1,077,722
Construction equipment	932,603		431		—		—		933,034		5,469		938,503
Commercial real estate	940,516		—		—		—		940,516		3,229		943,745
Residential real estate and home equity	582,053		562		288		49		582,952		1,785		584,737
Consumer	150,328		416		199		5		150,948		334		151,282
Total	$	5,980,206	$	2,929	$	1,553	$	54	$	5,984,742	$	26,420	$	6,011,162

Interest income for the years ended December 31, 2023, 2022, and 2021, would have increased by approximately $1.47 million, $2.68 million, and $2.62 million, respectively, if the nonaccrual loans and leases had earned interest at their full contract rate.

Loan Modification Disclosures Pursuant to ASU 2022-02

The following table shows the amortized cost of loans and leases at December 31, 2023 that were both experiencing financial difficulty and modified during the twelve months ended December 31, 2023, segregated by portfolio segment and type of modification. The percentage of the amortized cost of loans and leases that were modified to borrowers in financial distress as compared to the amortized cost of each segment of financial receivable is also presented below.


(Dollars in thousands)	Payment Delay		Term Extension		Interest Rate Reduction		Combination Payment Delay and Term Extension		% of Total Segment Financing Receivables
Commercial and agricultural	$	3,016	$	—	$	—	$	1,537	0.59	%


Medium and heavy duty truck	—		—		—		11,050		3.54

Construction equipment	—		1,496		—		—		0.14
Commercial real estate	288		—		426		—		0.06


Total	$	3,304	$	1,496	$	426	$	12,587	0.27	%

There were $2.27 million of commitments to lend additional amounts to the borrowers included in the previous table.

The Company closely monitors the performance of loans and leases that have been modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of such loans and leases that have been modified during the twelve months ended December 31, 2023.


(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due
Commercial and agricultural	$	1,706	$	—	$	—	$	2,847	$	2,847


Medium and heavy duty truck	11,050		—		—		—		—

Construction equipment	1,496		—		—		—		—
Commercial real estate	426		288		—		—		288


Total	$	14,678	$	288	$	—	$	2,847	$	3,135

The following table shows the financial effect of loan and lease modifications presented above to borrowers experiencing financial difficulty for the twelve months ended December 31, 2023.


	Weighted- Average Interest Rate Reduction		Weighted- Average Term Extension (in months)	Weighted- Average Payment Delay (in months)	Combination Weighted-Average Payment Delay and Term Extension (in months)
Commercial and agricultural	—	%	3	6	30


Medium and heavy duty truck	—	%	0	0	6

Construction equipment	—	%	5	0	0
Commercial real estate	3.00	%	0	3	0


Total	3.00	%	4	6	10

There was one modified loan that had a payment default during the twelve months ended December 31, 2023 and was modified in the twelve months prior to that default to a borrower experiencing financial difficulty.

Upon the Company’s determination that a modified loan or lease has subsequently been deemed uncollectible, the loan or lease is written off. Therefore, the amortized cost of the loan is reduced by the uncollectible amount and the allowance for loan and lease losses is adjusted by the same amount.

Troubled Debt Restructuring (TDR) Disclosures Prior to the Adoption of ASU 2022-02

There were no loan and lease modifications classified as a TDR during the twelve months ended December 31, 2022 and one nonperforming construction equipment TDR with a recorded investment of $5.73 million during the twelve months ended December 31, 2021. The classification between nonperforming and performing is determined at the time of modification. Modification programs focus on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. Modifications do not result in the contractual forgiveness of principal or interest. There were no modifications during 2022 and one modification during 2021 that resulted in an interest rate reduction below market rate.

There was one nonperforming construction equipment TDR with a recorded investment of $3.07 million which had a payment default within the twelve months following modification for the year ended December 31, 2022 and no TDRs which had payment defaults within the twelve months following modification for the year ended December 31, 2021. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.

The following table shows the recorded investment of loans and leases classified as troubled debt restructurings as of December 31, 2022.


Year Ended December 31 (Dollars in thousands)	2022
Performing TDRs	$	—
Nonperforming TDRs	3,640
Total TDRs	$	3,640