Loan and Lease Financings

The loan and lease portfolio includes direct financing leases, which are included in commercial and agricultural, auto and light truck, medium and heavy duty truck, aircraft, and construction equipment on the Consolidated Statements of Financial Condition.

The following table shows the the components of the investment in direct finance leases at March 31, 2019 and December 31, 2018.



(Dollars in thousands)	March 31, 2019			December 31, 2018
Direct finance leases:
Minimum lease payments	$	249,069		$	257,398
Estimated unguaranteed residual values	41			41
Less: Unearned income	(45,420		)	(46,709		)
Net investment in lease financing	$	203,690		$	210,730

To mitigate this risk of loss, the Company seeks to diversify both the type of equipment leased and the industries in which the lessees participate. In addition, a portion of our leases are terminal rental adjustment clause or “TRAC” leases where the lessee effectively guarantees the full residual value through a rental adjustment at the end of term or those where partial value is guaranteed (“split-TRAC”), which has a limited residual risk. Under a split-TRAC structure, the limited residual risk would be satisfied first by the net sale proceeds of the leased asset. The lessee’s at-risk portion, or top risk, is satisfied last and is subject to repayment as additional rent, if the TRAC amount is not satisfied by the net sale proceeds.

The following table shows direct financing minimum lease payments receivable for the next five years 2019 through 2023 and thereafter.



(Dollars in thousands)
2019	$	39,791
2020	46,697
2021	39,067
2022	36,643
2023	31,450
Thereafter	55,421
Total	$	249,069

Interest income recognized from direct financing lease payments for the three months ended March 31, 2019 and 2018 was $2.78 million and $2.57 million, respectively.

The Company evaluates loans and leases 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 $100,000 are reviewed quarterly as part of management’s evaluation of the appropriateness of the reserve 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 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).

The following table shows the credit quality grades of the recorded investment in loans and leases, segregated by class.



	Credit Quality Grades
(Dollars in thousands)	1-6		7-12		Total
March 31, 2019
Commercial and agricultural	$	1,117,440	$	28,591	$	1,146,031
Auto and light truck	534,407		19,671		554,078
Medium and heavy duty truck	284,208		1,423		285,631
Aircraft	802,373		28,064		830,437
Construction equipment	623,140		17,895		641,035
Commercial real estate	799,662		18,797		818,459
Total	$	4,161,230	$	114,441	$	4,275,671

December 31, 2018
Commercial and agricultural	$	1,043,019	$	30,186	$	1,073,205
Auto and light truck	528,174		31,813		559,987
Medium and heavy duty truck	281,834		1,710		283,544
Aircraft	768,442		34,669		803,111
Construction equipment	625,579		19,660		645,239
Commercial real estate	787,376		22,510		809,886
Total	$	4,034,424	$	140,548	$	4,174,972

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. The following table shows the recorded investment in residential real estate and home equity and consumer loans by performing or nonperforming status. Nonperforming loans are those loans which are on nonaccrual status or are 90 days or more past due.



(Dollars in thousands)	Performing		Nonperforming		Total
March 31, 2019
Residential real estate and home equity	$	512,927	$	1,792	$	514,719
Consumer	135,578		219		135,797
Total	$	648,505	$	2,011	$	650,516

December 31, 2018
Residential real estate and home equity	$	521,846	$	2,009	$	523,855
Consumer	136,423		214		136,637
Total	$	658,269	$	2,223	$	660,492

The following table shows the recorded investment of loans and leases, segregated by class, 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
March 31, 2019
Commercial and agricultural	$	1,142,979	$	84	$	—	$	—	$	1,143,063	$	2,968	$	1,146,031
Auto and light truck	548,752		1,024		148		—		549,924		4,154		554,078
Medium and heavy duty truck	285,539		23		—		—		285,562		69		285,631
Aircraft	818,494		9,106		1,585		—		829,185		1,252		830,437
Construction equipment	639,039		580		—		—		639,619		1,416		641,035
Commercial real estate	816,251		277		—		—		816,528		1,931		818,459
Residential real estate and home equity	511,627		819		481		151		513,078		1,641		514,719
Consumer	134,808		629		141		28		135,606		191		135,797
Total	$	4,897,489	$	12,542	$	2,355	$	179	$	4,912,565	$	13,622	$	4,926,187

December 31, 2018
Commercial and agricultural	$	1,070,530	$	22	$	—	$	—	$	1,070,552	$	2,653	$	1,073,205
Auto and light truck	544,022		3,154		1,437		—		548,613		11,374		559,987
Medium and heavy duty truck	283,284		154		—		—		283,438		106		283,544
Aircraft	790,233		4,149		1,168		—		795,550		7,561		803,111
Construction equipment	641,270		1,643		—		—		642,913		2,326		645,239
Commercial real estate	807,793		109		—		—		807,902		1,984		809,886
Residential real estate and home equity	520,124		1,267		455		295		522,141		1,714		523,855
Consumer	135,591		682		150		73		136,496		141		136,637
Total	$	4,792,847	$	11,180	$	3,210	$	368	$	4,807,605	$	27,859	$	4,835,464

The following table shows impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.



(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Reserve
March 31, 2019
With no related reserve recorded:
Commercial and agricultural	$	2,269	$	2,269	$	—
Auto and light truck	590		590		—
Medium and heavy duty truck	—		—		—
Aircraft	1,251		1,251		—
Construction equipment	471		471		—
Commercial real estate	1,117		1,117		—
Residential real estate and home equity	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	5,698		5,698		—
With a reserve recorded:
Commercial and agricultural	504		504		42
Auto and light truck	3,365		3,365		488
Medium and heavy duty truck	—		—		—
Aircraft	—		—		—
Construction equipment	922		922		149
Commercial real estate	727		727		20
Residential real estate and home equity	342		344		124
Consumer	—		—		—
Total with a reserve recorded	5,860		5,862		823
Total impaired loans	$	11,558	$	11,560	$	823

December 31, 2018
With no related reserve recorded:
Commercial and agricultural	$	2,471	$	2,471	$	—
Auto and light truck	7,504		7,504		—
Medium and heavy duty truck	106		106		—
Aircraft	556		556		—
Construction equipment	905		905		—
Commercial real estate	1,131		1,131		—
Residential real estate and home equity	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	12,673		12,673		—
With a reserve recorded:
Commercial and agricultural	—		—		—
Auto and light truck	3,840		3,840		372
Medium and heavy duty truck	—		—		—
Aircraft	7,004		7,004		1,255
Construction equipment	1,340		1,340		279
Commercial real estate	759		759		51
Residential real estate and home equity	344		346		126
Consumer	—		—		—
Total with a reserve recorded	13,287		13,289		2,083
Total impaired loans	$	25,960	$	25,962	$	2,083

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by class.



	Three Months Ended March 31,
	2019				2018
(Dollars in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Commercial and agricultural	$	2,821	$	—	$	2,843	$	—
Auto and light truck	5,003		—		7,827		—
Medium and heavy duty truck	54		—		347		—
Aircraft	5,445		—		3,069		—
Construction equipment	1,929		—		1,330		—
Commercial real estate	1,859		—		3,696		—
Residential real estate and home equity	343		5		350		4
Consumer	—		—		—		—
Total	$	17,454	$	5	$	19,462	$	4

There were no loan and lease modifications classified as a troubled debt restructuring (TDR) during the three months ended March 31, 2019 and 2018. 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 the three months ended March 31, 2019 and 2018 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modification was immaterial.

There were no TDRs which had payment defaults within the twelve months following modification during the three months ended March 31, 2019 and 2018. 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 March 31, 2019 and December 31, 2018.



(Dollars in thousands)	March 31, 2019		December 31, 2018
Performing TDRs	$	342	$	344
Nonperforming TDRs	229		316
Total TDRs	$	571	$	660