1st Source (SRCE) 10-K2019 FY Annual report

1st Source Corporation, an Indiana corporation incorporated in 1971, is a bank holding company headquartered in South Bend, Indiana that provides, through its subsidiaries (collectively referred to as “1st Source”, “we”, and “our”), a broad array of financial products and services. 1st Source Bank (“Bank”), its banking subsidiary, offers commercial and consumer banking services, trust and wealth advisory services, and insurance to individual and business clients through most of our 80 banking center locations in 17 counties in Indiana and Michigan and Sarasota County in Florida. 1st Source Bank’s Specialty Finance Group, with 15 locations nationwide, offers specialized financing services for construction equipment, new and used private and cargo aircraft, and various vehicle types (cars, trucks, vans) for fleet purposes. While our lending portfolio is concentrated in certain equipment types, we serve a diverse client base. We are not dependent upon any single industry or client. At December 31, 2019, we had consolidated total assets of $6.62 billion, total loans and leases of $5.09 billion, total deposits of $5.36 billion, and total shareholders’ equity of $828.28 million.

Our principal executive office is located at 100 North Michigan Street, South Bend, Indiana 46601 and our telephone number is (574) 235-2000. Access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports is available, free of charge, at www.1stsource.com soon after the material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

1st Source Bank is a wholly owned subsidiary of 1st Source Corporation that offers a broad range of consumer and commercial banking services through its lending operations, retail branches, and fee based businesses.

The group also generates equipment rental income through the leasing of construction equipment, various types of trucks, vans, automobiles, motor coaches, shuttle buses and other equipment through operating leases to clients.

In addition to loan and lease financings during 2019, the group had average total deposit account balances of approximately $196 million.

The Specialty Finance Group also consists of separate wholly owned subsidiaries of 1st Source Bank which include: Michigan Transportation Finance Corporation, 1st Source Specialty Finance, Inc., SFG Aircraft, Inc., 1st Source Intermediate Holding, LLC, SFG Commercial Aircraft Leasing, Inc., and SFG Equipment Leasing Corporation I.

1st Source Insurance, Inc. is a wholly owned subsidiary of 1st Source Bank that provides insurance products and services to individuals and businesses covering corporate and personal property, casualty insurance, and individual and group health and life insurance. 1st Source Insurance, Inc. has ten offices.

1st Source Corporation Investment Advisors, Inc. (Investment Advisors) is a wholly owned subsidiary of 1st Source Bank that provides investment advisory services for trust and investment clients of 1st Source Bank. Investment Advisors is registered as an investment advisor with the SEC under the Investment Advisors Act of 1940. Investment Advisors serves strictly in an advisory capacity and as such, does not hold any client securities.

1st Source Bank is the managing general partner in the following subsidiaries that have interests in tax-advantaged investments with third parties: 1st Source Solar 2, LLC, 1st Source Solar 3, LLC, 1st Source Solar 4, LLC, 1st Source Solar 5, LLC and 1st Source Solar 6, LLC.

We have other subsidiaries that are not significant to the consolidated entity.

Our unconsolidated subsidiary includes 1st Source Master Trust. This subsidiary was created for the purpose of issuing $57.00 million of trust preferred securities and lending the proceeds to 1st Source. We guarantee, on a limited basis, payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities.

The activities in which we and the Bank engage are highly competitive. Our businesses and the geographic markets we serve require us to compete with other banks, some of which are affiliated with large bank holding companies headquartered outside of our principal market. We generally compete on the basis of client service and responsiveness to client needs, available loan and deposit products, the rates of interest charged on loans and leases, the rates of interest paid for funds, other credit and service charges, the quality of services rendered, the convenience of banking facilities, and in the case of loans and leases to large commercial borrowers, relative lending limits.

In addition to competing with other banks within our primary service areas, the Bank also competes with other financial service companies, such as credit unions, industrial loan associations, securities firms, insurance companies, small loan companies, finance companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit organizations, and other enterprises.

Additional competition for depositors’ funds comes from United States Government securities, private issuers of debt obligations, and suppliers of other investment alternatives for depositors. Many of our non-bank competitors are not subject to the same extensive Federal and State regulations that govern bank holding companies and banks. Such non-bank competitors may, as a result, have certain advantages over us in providing some services.

We compete against these financial institutions by being convenient to do business with, and by taking the time to listen and understand our clients’ needs. We deliver personalized, one-on-one banking through knowledgeable local members of the community always keeping the clients’ best interest in mind while offering a full array of products and highly personalized services. We rely on our history and our reputation in northern Indiana dating back to 1863.

At December 31, 2019, we had approximately 1,175 employees on a full-time equivalent basis. We provide a wide range of employee benefits and consider employee relations to be good.

1st Source endeavors to be a good steward of the environment. We have an approach that protects and conserves our natural resources through methods such as:

We are conscious of our paper usage, recognizing that we depend on printed materials for important day-to-day office work, client communications, and acquiring new clients. Increasingly, consumers demand more environmentally sustainable options and prefer online statements and correspondence rather that printed materials. The majority of the paper used in our facilities is recycled through our secure shred program and in 2019 we recycled 186,000 pounds of paper. In recent years, we have also transitioned away from the traditional proxy model and have utilized the notice and access or “e-proxy” model for supplying shareholder materials for our Annual Meeting. This has resulted in a reduction in the amount of paper consumed by us each year during this process.

Additionally, we are utilizing various sustainable practices in some of our facilities such as LED lights, daylight harvesting sensors, programmable thermostats, 95% or higher efficiency furnace systems, drip irrigation, 90% recycled mats, and sustainable landscaping and irrigation systems. In an effort to reduce our carbon footprint, we have utilized solar panels in two of our banking centers for supplemental sustainable power. These banking centers have supplemented approximately 20% of their total electrical usage with renewable solar power.

To help reduce emissions associated with travel, we have tools that help clients choose the banking center and ATMs closest to them. In addition, mobile deposit features are available to our clients, enabling them to deposit checks into their accounts using their mobile devices.

Many of these approaches can create long-term value for our clients and shareholders through increased revenues, reduced costs and improved convenience.

We are a registered bank holding company under the Bank Holding Company Act of 1956, as amended (BHCA), and, as such, we are subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (Federal Reserve). We are required to file annual reports with the Federal Reserve and to provide the Federal Reserve such additional information as it may require.

The Bank, as an Indiana state bank and member of the Federal Reserve System, is supervised by the Indiana Department of Financial Institutions (DFI) and the Federal Reserve. As such, 1st Source Bank is regularly examined by and subject to regulations promulgated by the DFI and the Federal Reserve. Because the Federal Deposit Insurance Corporation (FDIC) provides deposit insurance to the Bank, we are also subject to supervision and regulation by the FDIC (even though the FDIC is not our primary Federal regulator).

The BHCA also restricts non-bank activities to those which, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks. As discussed below, the Gramm-Leach-Bliley Act (GLBA), which was enacted in 1999, established a distinct type of bank holding company known as a “financial holding company” that has powers that are not otherwise available to bank holding companies.

In July 2013, the Federal Reserve and other federal banking agencies approved final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for all U.S. banks and for bank holding companies with greater than $500 million in assets. Under these final rules, minimum requirements will increase for both the quantity and quality of capital held by 1st Source and the Bank. The rules include a new common equity Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0%, and a minimum leverage ratio of 4.0%. The final rules also require a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement, which was phased in over a three-year period beginning in 2016 and is now fully phased in, effectively raised the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5%.

The final rules also increase the required capital for certain categories of assets, including higher-risk construction real estate loans and certain exposures related to securitizations. The final rules do not, however, adopt the changes in the proposed rule to the risk weights assigned to certain mortgage loan assets. The final rules instead adopt the risk weights for residential mortgages under the existing general risk-based capital rules, which assign a risk weight of either 50% (for most first-lien exposures) or 100% for other residential mortgage exposures. Similarly, the final rules do not adopt the proposed rule’s elimination of Tier 1 treatment of trust preferred securities for banking organizations with less than $15 billion in assets as of December 31, 2010. Instead, the final rules permit these banking organizations to retain non-qualifying Tier 1 capital trust preferred securities issued prior to May 19, 2010, subject generally to a limit of 25% of Tier 1 capital.

These new minimum capital ratios became effective for us on January 1, 2015 and became fully phased in on January 1, 2019. As of December 31, 2019, we were in compliance with all applicable regulatory capital requirements.

In September 2019, the FRB and other federal banking agencies adopted a final rule, effective January 1, 2020, creating a community bank leverage ratio (“CBLR”) for institutions with total consolidated assets of less than $10 billion and that meet other qualifying criteria. The CBLR provides for a simple measure of capital adequacy for qualifying institutions. Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies’ capital rules and to have met the well-capitalized ratio requirements. Management is still reviewing the CBLR framework and has not yet determined whether 1st Source and the Bank will elect to use the CBLR framework.

The Bank is also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders, or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and subject to credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions with non affiliates, and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. The Bank is also subject to certain lending limits and restrictions on overdrafts to such persons.

Among other things, the SOA creates the Public Company Accounting Oversight Board as an independent body subject to SEC supervision with responsibility for setting auditing, quality control, and ethical standards for auditors of public companies. The SOA also requires public companies to make faster and more-extensive financial disclosures, requires the chief executive officer and the chief financial officer of public companies to provide signed certifications as to the accuracy and completeness of financial information filed with the SEC, and provides enhanced criminal and civil penalties for violations of the Federal securities laws.

The SOA also addresses functions and responsibilities of audit committees of public companies. The statute, by mandating certain stock exchange listing rules, makes the audit committee directly responsible for the appointment, compensation, and oversight of the work of the company’s outside auditor, and requires the auditor to report directly to the audit committee. The SOA authorizes each audit committee to engage independent counsel and other advisors, and requires a public company to provide the appropriate funding, as determined by its audit committee, to pay the company’s auditors and any advisors that its audit committee retains. The SOA also requires public companies to prepare an internal control report and assessment by management, along with an attestation to this report prepared by the company’s independent registered public accounting firm, in their annual reports to stockholders.

The Dodd-Frank Act also establishes the Consumer Financial Protection Bureau (CFPB) as an independent entity within the Federal Reserve and transferred to the CFPB primary responsibility for administering substantially all of the consumer compliance protection laws formerly administered by other federal agencies. The Dodd-Frank Act also authorizes the CFPB to promulgate consumer protection regulations that will apply to all entities, including banks, that offer consumer financial services or products. It also includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards, and pre-payment penalties.

The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, including some that may affect our business in substantial and unpredictable ways. We have incurred higher operating costs in complying with the Dodd -Frank Act, and we expect that these higher costs will continue for the foreseeable future. Our management continues to monitor the ongoing implementation of the Dodd-Frank Act and as new regulations are issued, will assess their effect on our business, financial condition, and results of operations.

The Regulatory Relief Act, among other things, expands the definition of qualified mortgages a financial institution may hold and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “community bank leverage ratio” of between 8% and 10%. Any qualifying depository institution or its holding company that exceeds this community bank leverage ratio will be considered to have met generally applicable leverage and risk-based capital requirements. Further, any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” for purposes of the prompt corrective action rules. In addition, the Regulatory Relief Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the proprietary trading prohibitions in the Volcker Rule, mortgage disclosures, and risk weights for certain high-risk commercial real estate loans.

It is difficult at this time to predict when or how any new standards under the Regulatory Relief Act will ultimately be applied to the Bank or 1st Source or what specific impact the Regulatory Relief Act and the yet-to-be-written implementing rules and regulations will have on the Bank or 1st Source.

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.

We maintain an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to our management. The loan and lease review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.

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 minimize these risks through our underwriting standards. We obtain financial information and perform credit risk analysis on our customers. Credit criteria may include, but are not limited to, assessments of income, cash flows, collateral, and net worth; asset ownership; bank and trade credit references; credit bureau reports; and operational history.

Commercial real estate or equipment loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and generate positive cash flows. Our management examines current and projected cash flows of the borrower to determine the ability of the borrower to repay their obligations as agreed. Underwriting standards are designed to promote relationship banking rather than transactional banking. 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. Our credit policy sets different maximum exposure limits both by business sector and our current and historical relationship and previous experience with each customer.

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.

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. Finance receivables for this Group generally provide for monthly payments and may include prepayment penalty provisions.

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 businesses provide financing.

Our aircraft portfolio has foreign exposure, particularly in Mexico and Brazil. We establish exposure limits for each country through a centralized oversight process, and in consideration of relevant economic, political, social and legal risks. We monitor exposures closely and adjust our country limits in response to changing conditions. 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.

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.

We have a significant number of loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The transitional impact away from LIBOR may adversely affect revenues, expenses and the value of those financial instruments. Such transition may also result in litigation with counterparties impacted by the transition as well as increased regulatory scrutiny and other adverse consequences. Any replacement benchmark ultimately adopted as a substitute for LIBOR may behave differently than LIBOR in a manner detrimental to our financial performance. We are actively monitoring market developments and implementing a transition plan. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.

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.

Our headquarters building is located in downtown South Bend, Indiana. The building is part of a larger complex, including a 300-room hotel and a 500-car parking garage. In September 2019, we extended the lease on this property through September 2027. As of December 31, 2019, 1st Source leases approximately 71% of the office space in this complex.

At December 31, 2019, we owned or leased property and/or buildings where 1st Source Bank’s 80 banking centers were located. Our facilities are located in Allen, Elkhart, Fulton, Huntington, Kosciusko, LaPorte, Marshall, Porter, Pulaski, St. Joseph, Starke, Tippecanoe, Wells, and Whitley Counties in the State of Indiana, Berrien, Cass, and Kalamazoo Counties in the State of Michigan, and Sarasota County in the state of Florida. Additionally, we utilize an operations center for business operations. The Bank leases additional property and/or buildings to and from third parties under lease agreements negotiated at arms-length.

1st Source and our subsidiaries are involved in various other legal proceedings incidental to the conduct of our businesses. Our management does not expect that the outcome of any such proceedings will have a material adverse effect on our consolidated financial position or results of operations.

Part II

Our common stock is traded on the NASDAQ Global Select Market under the symbol “SRCE.” As of February 14, 2020, there were 1,544 holders of record of 1st Source common stock.

The following table shows selected financial data and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes presented elsewhere herein.

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing our results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis you are encouraged to review the consolidated financial statements and statistical data presented in this document.

This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements. Words such as “believe,” “contemplate,” “seek,” “estimate,” “plan,” “project,” “anticipate,” “possible,” “assume,” “expect,” “intend,” “targeted,” “continue,” “remain,” “will,” “should,” “indicate,” “would,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date.

All written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation, and do not undertake, to update, revise, or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made. We have expressed our expectations, beliefs, and projections in good faith and we believe they have a reasonable basis. However, we make no assurances that our expectations, beliefs, or projections will be achieved or accomplished. The results or outcomes indicated by our forward-looking statements may not be realized due to a variety of factors, including, without limitation, the following:

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 reserve for loan and lease 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 Committee of the Board of Directors. Following is a discussion of the areas we view as our most critical accounting policies.

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.”

Net income available to common shareholders in 2019 was $91.96 million, up from $82.41 million in 2018 and up from $68.05 million in 2017. Diluted net income per common share was $3.57 in 2019, $3.16 in 2018, and $2.60 in 2017. Return on average total assets was 1.41% in 2019 compared to 1.34% in 2018, and 1.21% in 2017. Return on average common shareholders’ equity was 11.50% in 2019 versus 11.09% in 2018, and 9.69% in 2017.

Net income in 2019, as compared to 2018, was positively impacted by a $9.96 million or 4.66% increase in net interest income, a $4.08 million or 4.20% increase in noninterest income, and a $3.63 million or 18.65% decrease in provision for loan and lease losses which was offset by a $5.53 million or 24.44% increase in income tax expense and a $2.54 million or 1.36% increase in noninterest expense. Net income in 2018 was positively impacted by a $28.28 million or 15.23% increase in net interest income and a $10.70 million or 32.11% decrease in income tax expense, which was offset by a $10.48 million or 116.73% increase in provision for loan and lease losses and a $12.47 million or 7.17% increase in noninterest expense over 2017.

Dividends paid on common stock in 2019 amounted to $1.10 per share, compared to $0.96 per share in 2018, and $0.76 per share in 2017. The level of earnings reinvested and dividend payouts are determined by the Board of Directors based on management’s assessment of future growth opportunities and the level of capital necessary to support them.

Net interest margin (the ratio of net interest income to average earning assets) is significantly affected by movements in interest rates and changes in the mix of earning assets and the liabilities that fund those assets. Net interest margin on a fully taxable- equivalent basis was 3.68% in 2019, compared to 3.73% in 2018 and 3.57% in 2017. Net interest income was $223.87 million for 2019, compared to $213.91 million for 2018 and $185.63 million for 2017. Tax-equivalent net interest income totaled $224.55 million for 2019, up $9.84 million from the $214.71 million reported in 2018. Tax-equivalent net interest income for 2018 was up $27.28 million from the $187.43 reported for 2017.

During 2019, average earning assets increased $342.91 million or 5.95% while average interest-bearing liabilities increased $152.29 million or 3.55% over the comparable period in 2018. The yield on average earning assets increased 17 basis points to 4.65% for 2019 from 4.48% for 2018 primarily due to higher rates on loans and leases. Total cost of average interest-bearing liabilities increased 32 basis points to 1.33% during 2019 from 1.01% in 2018 as a result of the rising interest rate environment during 2018 and competitive pressure on deposit rates. The result to the fully taxable-equivalent net interest margin was a decrease of five basis points.

The largest contributor to the increase in the yield on average earning assets in 2019 was the 23 basis point improvement in the loan and lease portfolio yield primarily due to market conditions as a result of 2018 Federal interest rate increases. Average net loans and leases increased $244.91 million or 5.15% in 2019 from 2018 while the yield increased to 5.16%.

During 2019, the tax-equivalent yield on investment securities available-for-sale decreased five basis points to 2.23% while the average balance grew $62.85 million. Average mortgages held for sale increased $7.41 million during 2019 while the yield decreased 63 basis points. Average 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 increased $27.75 million during 2019 while the yield decreased 53 basis points. The decrease in yield for mortgages held for sale and other investments was primarily a result of higher outstanding balances at lower rates.

Average interest-bearing deposits increased $211.10 million or 5.42% during 2019 while the effective rate paid on those deposits increased 34 basis points. The increase in the average cost of interest-bearing deposits was primarily the result of higher rates, competitive pressure on rates and a slight shift in the deposit mix. Average noninterest-bearing demand deposits increased $101.98 million or 9.53% during 2019.

Average short-term borrowings decreased $59.13 million during 2019 while the effective rate paid decreased 13 basis points. The decrease in short-term borrowings was primarily the result of decreased borrowings with the Federal Home Loan Bank. Average long-term debt and mandatorily redeemable securities balances increased $0.32 million during 2019 as the effective rate increased 81 basis points primarily due to higher rates on mandatorily redeemable securities.

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 (35% for periods prior to 2018). Nonaccrual loans and leases are included in the average loan and lease balance outstanding.

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.

The change in interest due to both rate and volume 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.

Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) decreased $0.38 million or 1.80% in 2019 from 2018 compared to a slight increase in 2018 over 2017. 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, 2019 and 2018 was $4.48 billion and $3.94 billion, respectively. Stock market recoveries during the fourth quarter of 2019 helped improve the market value of trust assets under management at December 31, 2019, however the decrease in trust and wealth advisory fees during 2019 was due to a lower average market value of trust assets under management during 2019 compared to 2018. At December 31, 2019, these trust assets were comprised of $3.02 billion of personal and agency trusts and estate administration assets, $926.61 million of employee benefit plan assets, $426.91 million of individual retirement accounts, and $105.35 million of custody assets.

Service charges on deposit accounts increased by $0.56 million or 5.32% in 2019 from 2018 compared to a decrease of $0.14 million or 1.27% in 2018 from 2017. The increase in service charges on deposit accounts in 2019 was primarily due to a higher volume of nonsufficient fund transactions. The decrease in service charges on deposit accounts in 2018 primarily reflects a one-time adjustment to business account fees.

Debit card income improved $0.84 million or 6.28% in 2019 from 2018 compared to an increase of $1.56 million or 13.21% in 2018 from 2017. The increase in 2019 and 2018 was mainly the result of an increased volume of debit card transactions.

Mortgage banking income increased $0.85 million or 22.22% in 2019 over 2018, compared to a $0.95 million or 19.85% decrease in 2018 from 2017. We had no MSR impairment in 2019, 2018 or 2017. During 2019, 2018 and 2017, we determined that no permanent write-down was necessary for previously recorded impairment on MSRs. During 2019, mortgage banking income increased primarily due to improved gains on a higher volume of loans sold as a result of more loans originated for the secondary market. During 2018, mortgage banking income decreased due to reduced gains on loan sales and a lower volume of loans originated for the secondary market.

Insurance commissions grew $0.26 million or 3.98% in 2019 compared to 2018 and improved $0.61 million or 10.41% in 2018 compared to 2017. The increase in insurance commissions during 2019 and 2018 was mainly due to an increase in the book of business and higher contingent commissions received resulting from increased sales and lower client claims.

Equipment rental income generated from operating leases decreased by $1.05 million or 3.31% during 2019 from 2018 compared to an increase of $1.41 million or 4.65% during 2018 from 2017. The average equipment rental portfolio decreased 3.48% in 2019 over 2018 as a result of reduced leasing volume primarily in the construction and medium and heavy duty truck portfolios offset by a slight increase in the specialty vehicle portfolio and increased 1.41% in 2018 over 2017 as the result of growth in specialty vehicles and solar financing during 2018. In 2019, the decrease in rental income was offset by a similar decrease in depreciation on equipment owned under operating leases. In 2018, the increase in equipment rental income was offset by a similar increase in depreciation on equipment owned under operating leases.

There were no sales of investment securities available-for-sale for the year ended 2019. Sales of investment securities available-for-sale resulted in net losses of $0.35 million for the year ended 2018 and gains of $4.34 million for the year ended 2017. During 2018, losses on the sale of investment securities available-for-sale were primarily the result of repositioning the investment portfolio during the first quarter in response to tax reform.

Other income increased $2.66 million or 25.64% in 2019 from 2018 compared to an increase of $0.44 million or 4.43% in 2018 from 2017. The improvement in 2019 was mainly a result of nonrecurring rental income on a repossessed asset of $0.96 million, higher claim proceeds from bank owned life insurance, and an increase in customer swap fees. The increase was also helped by personal property tax reimbursements on leased equipment from lessees of $0.73 million that were reported gross as required by the new leasing standard effective January 1, 2019. These personal property tax reimbursements were offset by a similar increase in other expense resulting from the payment of personal property taxes to the taxing jurisdictions. The improvement in 2018 was mainly a result of increased net partnership investment gains, higher loan servicing fees, a rise in brokerage fees and commissions, and higher claim proceeds from bank owned life insurance offset by lower customer swap fees and reduced fees on standby letters of credit.

Total salaries and employee benefits increased $3.24 million or 3.45% in 2019 from 2018, following a $6.95 million or 7.99% increase in 2018 from 2017.

Employee salaries increased $1.00 million or 1.29% in 2019 from 2018 compared to an increase of $6.30 million or 8.91% in 2018 from 2017. The increase in 2019 was mainly a result of higher base salaries due to normal merit increases and a slight increase in full-time equivalent employees offset by a decrease in incentive compensation due to fewer vestings of share-based compensation arrangements. The increase in 2018 was mainly a result of higher base salaries and incentive compensation. Higher base salary expense was primarily due to normal merit increases and a slight increase in full-time equivalent employees.

Employee benefits increased $2.25 million or 13.38% in 2019 from 2018, compared to a $0.65 million or 3.98% increase in 2018 from 2017. During 2019, group insurance costs increased as a result of overall higher health insurance claims experience, administrative expenses and stop loss premiums and higher company contributions to employee retirement accounts. In 2018, group insurance costs increased as a result of overall higher health insurance claims experience.

Occupancy expense increased $0.49 million or 4.85% in 2019 from 2018, compared to a decrease of $0.58 million or 5.49% in 2018 from 2017. The higher expense in 2019 was primarily the result of the Company leasing office space in its former headquarters building which sold during the first quarter of 2019 offset by reduced snow removal costs and lower utility expenses compared to 2018. The lower expense in 2018 was primarily attributed to a true-up of operating rent expense on a lease.

Furniture and equipment expense, including depreciation, grew by $1.38 million or 5.90% in 2019 from 2018 compared to an increase of $2.66 million or 12.83% in 2018 from 2017. The higher expense in 2019 was primarily due to increased software maintenance costs. The higher expense in 2018 was primarily due to increased software maintenance costs and higher computer processing charges.

Depreciation on equipment owned under operating leases decreased $1.12 million or 4.27% in 2019 from 2018, following a $1.03 million or 4.10% increase in 2018 from 2017. In 2019 and 2018, depreciation on equipment owned under operating leases correlated with the change in equipment rental income.

Professional fees declined $0.73 million or 9.48% in 2019 from 2018, compared to a $0.87 million or 12.78% increase in 2018 from 2017. The lower expense in 2019 was primarily due to reduced utilization of consulting services as 2018 projects were completed. The higher expense in 2018 compared to 2017 was primarily due to increased utilization of consulting services related to a customer relationship management project, information technology projects as well as a regulatory compliance project.

Supplies and communications expense increased $0.13 million or 2.12% in 2019 from 2018, and increased $0.97 million or 18.02% in 2018 from 2017. During 2019, higher printing costs were offset by lower telephone service expenses. The increase in 2018 resulted primarily from higher data communication line charges as bandwidth was improved and a one-time reduction in postage costs in 2017.

FDIC and other insurance expense decreased $1.13 million or 38.59% in 2019 from 2018 and increased $0.39 million or 15.21% in 2018 from 2017. The decrease in 2019 was mainly due to $0.88 million in FDIC insurance premium credits received. The increase in 2018 was mainly due to higher assessments for FDIC premiums in conjunction with overall asset growth and a rise in other insurance costs.

Business development and marketing expenses grew $0.19 million or 3.13% in 2019 from 2018 and decreased $1.37 million or 18.26% in 2018 from 2017. The higher expense in 2019 was mainly the result of additional marketing promotions. The lower expense in 2018 was mainly the result of reduced charitable contributions offset by additional business development efforts.

Loan and lease collection and repossession expenses increased $0.03 million or 0.80% in 2019 from 2018 compared to an increase of $0.65 million or 23.90% in 2018 from 2017. Loan and lease collection and repossession expense was higher in 2019 primarily due to increased valuation adjustments on repossessed assets and fewer gains on the sale of repossessed assets offset by less legal fees on collection and repossession activity. The increase in 2018 was mainly due to increased valuation adjustments on repossessed assets offset by higher gains on the sale of repossessed assets.

Other expenses were higher by $0.06 million or 0.86% in 2019 as compared to 2018 and increased $0.90 million or 16.22% in 2018 as compared to 2017. The increase in 2019 was primarily the result of higher credit report and appraisal fees on greater loan volume, an increase in the interest rate swap valuation provision and higher professional membership dues and subscriptions offset by a $1.31 million gain on the sale of a fixed asset. Additionally, other expense during 2019 included personal property taxes on leased equipment of $0.73 million that are reported gross as required by the new leasing standard effective January 1, 2019. These personal property taxes on leased equipment were offset by a similar increase in other income from the reimbursement of personal property taxes by lessees. The increase in 2018 was mainly the result of one-time trust losses and reduced gains on the sale of leased equipment offset by a decrease in the provision for unfunded loan commitments and lower intangible asset amortization as items fully amortize and impairment writedowns on branches in 2017 not present in 2018.

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.

At December 31, 2019, 10.5% of total loans and leases were concentrated with non-owner occupied commercial real estate.

Loans and leases, net of unearned discount, at December 31, 2019, were $5.09 billion and were 76.79% of total assets, compared to $4.84 billion and 76.83% of total assets at December 31, 2018. Average loans and leases, net of unearned discount, increased $244.91 million or 5.15% and increased $421.88 million or 9.74% in 2019 and 2018, respectively.

Commercial and agricultural lending, excluding those loans secured by real estate, increased $59.59 million or 5.55% in 2019 over 2018. Commercial and agricultural lending outstandings were $1.13 billion and $1.07 billion at December 31, 2019 and December 31, 2018, respectively. During 2019, we experienced somewhat lower growth in this sector driven, in part, by our decision to exit our participation in several syndicated credit facilities due to interest rate spreads being lower than our targets. These reductions were offset by increases within our solar loan and lease portfolio, which grew by $67.60 million or 70.42% to $163.60 million as that business line has continued to have positive momentum.

Auto and light truck loans increased $28.82 million or 5.15% in 2019 over 2018. At December 31, 2019, auto and light truck loans had outstandings of $588.81 million and $559.99 million at December 31, 2018. This increase was primarily attributable to growth in the commercial lessor, auto rental and the step van segments offset by decreases in the bus financing portfolio due to prudent underwriting considerations.

Medium and heavy duty truck loans and leases increased $11.28 million or 3.98% in 2019. Medium and heavy duty truck financing at December 31, 2019 and 2018 had outstandings of $294.82 million and $283.54 million, respectively. The increase at December 31, 2019 from December 31, 2018 can be mainly attributed to customers continued replacement of aging equipment and increased organic growth with existing client relationships.

Aircraft financing at year-end 2019 decreased $19.07 million or 2.37% from year-end 2018. Aircraft financing at December 31, 2019 and 2018 had outstandings of $784.04 million and $803.11 million, respectively. The reduction during 2019 was due to lower foreign outstandings of $40.20 million offset by increased domestic outstandings of $21.13 million. In 2019, originations were affected by economic and political uncertainties coupled with increased competition for fewer deals. While we experienced growth domestically, our foreign outstandings decreased due largely to significantly lower in-country lending rates that were competitive against our pricing. Also, several of our watch accounts were voluntarily liquidated by borrowers which added to the reduction in foreign outstandings. Our foreign loan and lease outstandings, all denominated in U.S. dollars were $184.24 million and $224.44 million as of December 31, 2019 and 2018, respectively. Loan and lease outstandings to borrowers in Brazil and Mexico were $58.29 million and $111.91 million as of December 31, 2019, respectively, compared to $83.90 million and $127.16 million as of December 31, 2018, respectively. Outstanding balances to other borrowers in other countries were insignificant.

Construction equipment financing increased $60.21 million or 9.33% in 2019 compared to 2018. Construction equipment financing at December 31, 2019 had outstandings of $705.45 million, compared to outstandings of $645.24 million at December 31, 2018. The growth in this category was primarily due to new client relationships and continued replacement of aged equipment.

Commercial loans secured by real estate, of which approximately 55% is owner occupied, increased $98.29 million or 12.14% in 2019 over 2018. Commercial loans secured by real estate outstanding at December 31, 2019 were $908.18 million and $809.89 million at December 31, 2018. The increase in 2019 was driven by general improvements in the business economy within our markets related to our owner occupied financing. Our non-owner occupied real estate portfolio also experienced growth due to funding several projects to existing clients that had been in our pipeline.

Residential real estate and home equity loans were $532.00 million at December 31, 2019 and $523.86 million at December 31, 2018. Residential real estate and home equity loans increased $8.15 million in 2019 from 2018. Residential mortgage and home equity outstandings were higher in 2019 due to a favorable rate environment during the year as well as internal staffing increases which allowed us to capture a greater market share within our footprint. Additionally, a stronger economy with low unemployment resulted in improved customer confidence. Median home values rose during 2019 which led to slightly larger average loan amounts. Refinance activity also improved and new construction loans increased by 5% over 2018.

Consumer loans increased $2.80 million or 2.05% in 2019 over 2018. Consumer loans outstanding at December 31, 2019, were $139.43 million and $136.64 million at December 31, 2018. The increase during 2019 was primarily due to higher demand for auto and personal loans as a result of the stabilized economy with low unemployment, reduced interest rates and increased consumer confidence.

The following table shows the maturities of loans and leases in the categories of commercial and agricultural, auto and light truck, medium and heavy duty truck, aircraft and construction equipment outstanding as of December 31, 2019.

The following table shows amounts due after one year are also classified according to the sensitivity to changes in interest rates.

During 2019, approximately 56% of the Bank’s residential mortgage originations were sold into the secondary market. Mortgage loans held for sale were $20.28 million at December 31, 2019 and were $11.29 million at December 31, 2018.

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. Our exposure risk for repurchases started to reduce in 2016 as a result of the enhancements made by FNMA in 2013 to the selling representations and warranties framework as warranties on loans sold prior to implementation of such changes lapse.

Our liability for repurchases, included in Accrued Expenses and Other Liabilities on the Statements of Financial Condition, was $0.29 million as of December 31, 2019 and 2018. Our expense (recovery) for repurchase losses, included in Loan and Lease Collection and Repossession expense on the Statements of Income, was $0.01 million in 2019 compared to $(0.10) million in 2018 and $(0.03) million in 2017. 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.

The reserve for loan and lease loss methodology has been consistently applied for several years, with enhancements instituted periodically. Reserve ratios are reviewed quarterly and revised periodically to reflect recent loss history and to incorporate current risks and trends which may not be recognized in historical data. As we update our historical charge-off analysis, we review the look-back periods for each business loan portfolio.

During 2019, the medium-term portion of the look-back period was eleven years given that 2009 through 2019 losses were considerably impacted by the severe recession. Although the recession began in December 2007, its financial consequences were not recognized in the loan portfolios until 2009. We gave the greatest weight to this recent eleven-year period in our calculation. Furthermore, we perform a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency in order to review portfolio trends and other factors, including specific industry risks and economic conditions, which may have an impact on the reserves and reserve ratios applied to various portfolios. We adjust the calculated historical based ratio as a result of our analysis of environmental factors, principally economic risk, collateral risk and concentration risk. Key economic factors affecting our portfolios are growth in gross domestic product, unemployment rates, housing market trends, commodity prices, inflation and global economic and political issues. The economy has been strong and is forecast to remain robust as we begin 2020, but there is considerable downside risk. The political stalemates in the U.S. Congress, impeachment concerns and intensified strife in the Middle East, cause increased uncertainty. Collateral values are significant to our underwriting in our specialty finance portfolios and volatility or declining values pose a threat. 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.

The world economy has slowed and challenges persist. Current concerns include ongoing tariff wars, heightened concerns in the Middle East, corruption scandals and political uncertainty in Latin American countries, the improving economic conditions in Brazil tempered by pressure from broader regional instability, stagnation in Mexico with prospects for modest improvement in 2020, the continued slowdown in China, the geopolitical tensions with Russia, and the persistent threats of terrorist attacks. We include a factor in our loss ratios for global risk, as we are increasingly aware of the threat that global concerns may affect our customers. While we are unable to determine with any precision the impact of global economic and political issues on 1st Source Bank’s loan portfolios, we feel the risks are real and significant. We believe there is a risk of negative consequences for our borrowers that would affect their ability to repay their financial obligations. Therefore, we continue to include a factor for global risk in our analysis for 2019.

There are several industries represented in the commercial and agricultural portfolio. The outlook for the business banking portfolio is guardedly optimistic, generally a continuation of 2019 trends. Consumer and small business confidence remains strong and unemployment is slightly lower than the national average in many of the markets we serve. Our recent foray into solar financing looks promising in terms of performance of existing projects financed, loan growth opportunities and overall credit quality. An area of concern remains with our agricultural portfolio, which has exposure of approximately $157 million. Farm incomes declined sharply from 2015 through 2019 and no improvement is anticipated in 2020, as commodity prices, particularly corn and soybeans, remain low. Our customers have had favorable growing conditions which have resulted in strong crop yields. We will continue to have a few borrowers who will be unable to repay their lines of credit in full, resulting in carry-over debt. For the commercial and agricultural portfolio as a whole, we have experienced strong credit quality trends with low delinquencies and minimal charge-offs. We have reviewed the calculated loss ratios and assessed the environmental factors and concentration issues affecting these portfolios and we made a slight upward adjustment to the ratio primarily due to the slowing manufacturing sector. We believe the adjustment to our reserve ratio is appropriate and the ratio is adequate.

The core businesses in our auto and light truck portfolio performed well in 2019. The losses in the portfolio were principally attributable to specialty vehicles which is a relatively new venture and where we had aggressive growth. We sustained small losses on a handful of accounts, the vast majority of which were identified as special mention accounts in 2018. We reviewed our processes, assessed our underwriting and have implemented improvements. We also reviewed the reserve ratio for this segment of the portfolio, increasing it for the pass loans as we continue to have greater movement from pass to special mention for our specialty vehicle credits and decreasing it for the special attention pool as the size of the individual losses is declining as a result of our enhanced monitoring of collateral types and condition. The auto rental portion of the portfolio continues to be threatened by ongoing consolidation in the rental car industry which remains a threat to portfolio growth. On the other hand, collateral values have been relatively stable throughout the latter half of 2019 and are significantly stronger than this time a year ago. We believe the reserve ratio for the auto and light truck portfolio remains appropriate.

We experienced ongoing stability in the medium and heavy duty truck portfolio. We recognized sizable losses during 2009 and the first half of 2010; however, since then we have had only two charge-offs, one small account in 2018 and a mid-sized credit in 2019. Our credit quality is strongest when industry conditions are favorable. Reasonably stable gas prices, low unemployment, and growth in GDP and the construction sector, which leads to higher demand for trucking bode well for the industry as does the strong growth in online sales which drive freight volumes. Industry concerns include a persistent driver shortage which is exacerbated in today’s tight labor market. Furthermore, truck chassis sales are expected to experience a cyclical decline in 2020 resulting in greater competition for new loan transactions, potentially placing additional pressure on interest rates in this portfolio. Nevertheless, the underlying industry fundamentals are expected to remain relatively stable and the industry is poised to have a good year again in 2020. We believe our reserve ratio for this portfolio remains appropriate without adjustment.

Another area of concern continues to be our aircraft portfolio, which was among the sectors affected most by the sluggish economy. In this portfolio we have collateral concentration and $184 million of foreign exposure, primarily in Mexico and Brazil. Mexico’s economic growth is expected to increase moderately but continues to be threatened by drug trafficking and related violence, the solution to which may entail additional public expenditures, further increasing already high and growing government debt. Brazil’s economic recovery has continued to progress; however, improved interest rates in Brazil have made domestic borrowing more attractive for some of our customers. The U.S. economic growth has bolstered the business aviation industry, with stabilized to somewhat improving private jet markets. New business jet markets experienced growth in 2019 and the short to medium term outlook is favorable. We reassessed our ratios, which were established based on the high and volatile loss histories, and believe they remain appropriate particularly given the downside economic risks.

Our construction equipment portfolio is characterized by increasing outstanding loan balances and continued strong credit quality in 2019; however we did experience an uptick in our special attention credits during the most recent three quarters. The construction industry, which was hard hit during the recession, is benefiting from an improving economy, buoyed by growth in private residential and non-residential construction. Nonetheless, certain sectors are experiencing stress and we continue to monitor for credit weaknesses. Historically, 1st Source has experienced less volatility in this portfolio than the industry as losses have been mitigated by appropriate underwriting and a global market for used construction equipment. A solid U.S. market and potential continued infrastructure spending could have a positive impact for the used equipment markets. The industry’s greatest challenge is hiring and retaining qualified workers. The underlying risk has not changed significantly for this portfolio; our reserve factors are similar to last year.

Similar to the commercial portfolio, our commercial real estate loans are concentrated in our local market with local customers, with approximately fifty-five percent of the Bank’s exposure being owner occupied facilities where we are the primary relationship bank for our customers. Nevertheless, we were not immune to the dramatic declines in real estate values following the great recession, similar to other U.S. markets and we experienced losses in these categories from 2009 through 2011. From 2012 through 2019, we have experienced small recoveries in the portfolio with exception of 2018 when we realized a small loss. We reviewed our reserve factors and believe the ratio remains appropriate and adequate this year-end.

The reserve for loan and lease losses at December 31, 2019, totaled $111.25 million and was 2.19% of loans and leases, compared to $100.47 million or 2.08% of loans and leases at December 31, 2018 and $94.88 million or 2.10% of loans and leases at December 31, 2017. It is our opinion that the reserve for loan and lease losses was appropriate to absorb probable losses inherent in the loan and lease portfolio as of December 31, 2019.

Charge-offs for loan and lease losses were $7.59 million for 2019, compared to $17.11 million for 2018 and $6.53 million for 2017. We had one large loss in the aircraft portfolio in 2019 contributing to charge-offs. The provision for loan and lease losses was $15.83 million for 2019, compared to $19.46 million for 2018 and $8.98 million for 2017 to accommodate net charge-offs and loan and lease growth.

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

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

The reserve for loan and lease losses has been allocated according to the amount deemed necessary to provide for the estimated probable losses that have been incurred within the categories of loans and leases set forth in the table below. The following table shows the amount of such components of the reserve at December 31 and the ratio of such loan and lease categories to total outstanding loan and lease balances.

Nonperforming assets amounted to $19.24 million at December 31, 2019, compared to $35.32 million at December 31, 2018, and $31.30 million at December 31, 2017. During 2019, interest income on nonaccrual loans and leases would have increased by approximately $0.69 million compared to $2.18 million in 2018 if these loans and leases had earned interest at their full contractual rate.

Nonperforming assets at December 31, 2019 decreased from December 31, 2018, mainly due to decreases in nonaccrual loans and leases. Repossessions consisted mainly of aircraft largely represented by one airplane and one helicopter with a combined carrying value of $6.71 million at December 31, 2019. Other real estate increased due to foreclosures outpacing sales of existing properties.

The amortized cost of securities at year-end 2019 increased 2.95% from 2018, following a 10.43% increase from year-end 2017 to year-end 2018. The amortized cost of securities at December 31, 2019 was $1.03 billion or 15.61% of total assets, compared to $1.00 billion or 15.96% of total assets at December 31, 2018.

The following table shows the amortized cost of securities available-for-sale as of December 31.

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, 2019, at the amortized costs and weighted average yields of such securities.

At December 31, 2019, 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, 2019, the vintage (years originated) of the underlying loans comprising our securities are: 28% in the year 2019; 39% in the years 2017 and 2018; 12% in the years 2015 and 2016; 6% in the years 2013 and 2014; and 15% in years 2012 and prior.

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

See Part II, Item 8, Financial Statements and Supplementary Data — Note 10 of the Notes to Consolidated Financial Statements for additional information on deposits.

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 three 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 three years.