Loan and Lease Financings

3 Months Ended

Mar. 31, 2021

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 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 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 days 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. This portfolio sector also includes PPP loans, which are fully guaranteed by the SBA. Total PPP loan originations during the three months ended March 31, 2021 and the full year of 2020 amounted to $232.44 million and $597.45 million, respectively. As of March 31, 2021, PPP loan balances were $443.84 million which is net of an unearned discount of $13.62 million. Previously, solar loans and leases had been included in this portfolio segment but after a reevaluation of credit risk characteristics and outstanding balance levels, it was determined that they should be removed and placed into a separate and unique segment.

Solar – loans are for the purpose of financing 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, pledge of permits and licenses, and guarantee of the sponsor. Financing is provided to qualified borrowers throughout the continental United States with an emphasis on the region east of the Rocky Mountains. Previously, this portfolio segment was included in the commercial and agricultural portfolio segment.

Auto and light truck – loans are secured by vehicles and borrowers are nationwide. The portfolio consists of multiple industries: auto rental, auto leasing and specialty vehicle which includes bus, funeral car and step van. 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 amortizations 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 lease stream. Risks in both these segments include economic risks and collateral risks, principally used vehicle values. The bus segment is secured primarily by motor coaches and some shuttle busses. Risks include lack of well-established mechanisms for disposition of collateral, such as auctions that are key to disposition of autos. Loans in the portfolio generally carry personal guarantees and are presently stressed due to the continued shut down of various sports and entertainment.

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 or businesses. 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 United States 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, crane rental entities, forestry, and mining operations. Generally, loans include personal or business 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 development or construction loans. Many commercial real estate loans carry personal guarantees. Additional risks in the commercial real estate portfolio stem from 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 March 31, 2021.


	Term Loans and Leases by Origination Year
(Dollars in thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and agricultural
Grades 1-6	$	255,244	$	384,680	$	88,262	$	103,661	$	50,785	$	35,240	$	268,480	$	—	$	1,186,352
Grades 7-12	5,790		840		3,775		4,353		2,848		3,190		31,560		—		52,356
Total commercial and agricultural	261,034		385,520		92,037		108,014		53,633		38,430		300,040		—		1,238,708
Solar
Grades 1-6	28,077		116,125		83,874		19,336		36,740		3,999		—		—		288,151
Grades 7-12	—		1,188		6,040		745		—		—		—		—		7,973
Total solar	28,077		117,313		89,914		20,081		36,740		3,999		—		—		296,124
Auto and light truck
Grades 1-6	92,970		209,596		119,507		44,072		19,813		3,384		—		—		489,342
Grades 7-12	—		17,831		24,883		11,062		7,589		1,969		—		—		63,334
Total auto and light truck	92,970		227,427		144,390		55,134		27,402		5,353		—		—		552,676
Medium and heavy duty truck
Grades 1-6	16,870		86,222		81,785		40,273		26,270		15,702		—		—		267,122
Grades 7-12	—		—		898		—		—		616		—		—		1,514
Total medium and heavy duty truck	16,870		86,222		82,683		40,273		26,270		16,318		—		—		268,636
Aircraft
Grades 1-6	91,745		383,028		143,854		80,623		85,767		63,229		7,640		—		855,886
Grades 7-12	—		10,717		2,502		470		583		3,612		—		—		17,884
Total aircraft	91,745		393,745		146,356		81,093		86,350		66,841		7,640		—		873,770
Construction equipment
Grades 1-6	59,070		295,555		167,247		85,951		32,604		14,310		18,105		41		672,883
Grades 7-12	572		11,847		8,038		7,379		44		159		1,705		3,117		32,861
Total construction equipment	59,642		307,402		175,285		93,330		32,648		14,469		19,810		3,158		705,744
Commercial real estate
Grades 1-6	37,606		192,699		195,889		169,354		170,139		175,081		503		—		941,271
Grades 7-12	3,525		7,895		7,526		4,504		6,679		3,983		—		—		34,112
Total commercial real estate	41,131		200,594		203,415		173,858		176,818		179,064		503		—		975,383
Residential real estate and home equity
Performing	19,235		130,509		56,110		16,840		17,801		112,867		126,248		4,837		484,447
Nonperforming	—		—		—		21		—		1,341		247		100		1,709
Total residential real estate and home equity	19,235		130,509		56,110		16,861		17,801		114,208		126,495		4,937		486,156
Consumer
Performing	15,816		38,546		29,303		15,557		5,605		1,987		18,761		—		125,575
Nonperforming	—		—		39		76		32		8		158		—		313
Total consumer	$	15,816	$	38,546	$	29,342	$	15,633	$	5,637	$	1,995	$	18,919	$	—	$	125,888

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, 2020.


	Term Loans and Leases by Origination Year
(Dollars in thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and agricultural
Grades 1-6	$	525,816	$	103,120	$	114,251	$	56,007	$	22,023	$	19,790	$	291,990	$	—	$	1,132,997
Grades 7-12	6,788		1,699		4,726		3,507		1,200		2,134		33,067		—		53,121
Total commercial and agricultural	532,604		104,819		118,977		59,514		23,223		21,924		325,057		—		1,186,118
Solar
Grades 1-6	141,089		90,435		20,160		36,909		4,011		—		—		—		292,604
Grades 7-12	—		—		—		—		—		—		—		—		—
Total solar	141,089		90,435		20,160		36,909		4,011		—		—		—		292,604
Auto and light truck
Grades 1-6	248,932		141,841		52,749		24,101		4,210		608		—		—		472,441
Grades 7-12	19,113		27,136		12,796		8,612		2,250		21		—		—		69,928
Total auto and light truck	268,045		168,977		65,545		32,713		6,460		629		—		—		542,369
Medium and heavy duty truck
Grades 1-6	92,698		88,314		44,205		31,773		15,644		4,840		—		—		277,474
Grades 7-12	—		978		—		—		632		88		—		—		1,698
Total medium and heavy duty truck	92,698		89,292		44,205		31,773		16,276		4,928		—		—		279,172
Aircraft
Grades 1-6	429,283		153,358		93,042		95,457		43,972		20,966		6,370		—		842,448
Grades 7-12	11,519		2,561		479		596		2,187		1,670		—		—		19,012
Total aircraft	440,802		155,919		93,521		96,053		46,159		22,636		6,370		—		861,460
Construction equipment
Grades 1-6	311,174		180,550		96,320		42,713		12,624		5,722		17,502		737		667,342
Grades 7-12	17,518		13,743		10,642		398		237		85		2,988		1,935		47,546
Total construction equipment	328,692		194,293		106,962		43,111		12,861		5,807		20,490		2,672		714,888
Commercial real estate
Grades 1-6	190,725		204,477		173,847		175,009		69,022		122,762		373		—		936,215
Grades 7-12	9,518		7,990		5,173		6,684		1,762		2,522		—		—		33,649
Total commercial real estate	200,243		212,467		179,020		181,693		70,784		125,284		373		—		969,864
Residential real estate and home equity
Performing	133,829		65,690		18,194		22,929		41,847		86,106		135,255		5,703		509,553
Nonperforming	—		—		21		14		—		1,435		247		109		1,826
Total residential real estate and home equity	133,829		65,690		18,215		22,943		41,847		87,541		135,502		5,812		511,379
Consumer
Performing	43,824		34,409		18,904		7,005		2,259		793		23,869		—		131,063
Nonperforming	2		99		78		36		8		2		159		—		384
Total consumer	$	43,826	$	34,508	$	18,982	$	7,041	$	2,267	$	795	$	24,028	$	—	$	131,447

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
March 31, 2021
Commercial and agricultural	$	1,233,324	$	9	$	149	$	—	$	1,233,482	$	5,226	$	1,238,708
Solar	296,124		—		—		—		296,124		—		296,124
Auto and light truck	514,136		350		195		—		514,681		37,995		552,676
Medium and heavy duty truck	268,009		11		—		—		268,020		616		268,636
Aircraft	869,618		—		3,384		—		873,002		768		873,770
Construction equipment	693,952		1,085		—		—		695,037		10,707		705,744
Commercial real estate	974,137		—		—		—		974,137		1,246		975,383
Residential real estate and home equity	483,718		672		57		59		484,506		1,650		486,156
Consumer	125,014		292		269		8		125,583		305		125,888
Total	$	5,458,032	$	2,419	$	4,054	$	67	$	5,464,572	$	58,513	$	5,523,085

December 31, 2020
Commercial and agricultural	$	1,180,151	$	34	$	—	$	—	$	1,180,185	$	5,933	$	1,186,118
Solar	292,604		—		—		—		292,604		—		292,604
Auto and light truck	504,659		560		205		—		505,424		36,945		542,369
Medium and heavy duty truck	278,452		—		—		—		278,452		720		279,172
Aircraft	860,632		—		—		—		860,632		828		861,460
Construction equipment	701,124		1,093		298		—		702,515		12,373		714,888
Commercial real estate	968,370		—		—		—		968,370		1,494		969,864
Residential real estate and home equity	508,532		782		239		108		509,661		1,718		511,379
Consumer	130,458		504		101		7		131,070		377		131,447
Total	$	5,424,982	$	2,973	$	843	$	115	$	5,428,913	$	60,388	$	5,489,301

Accrued interest receivable on loans and leases at March 31, 2021 and December 31, 2020 was $16.39 million and $16.39 million, respectively.

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by portfolio segment for the three months ended March 31, 2020.


	Three Months Ended March 31, 2020
(Dollars in thousands)		Average Recorded Investment		Interest Income
Commercial and agricultural		$	7,807	$	102
Solar		—		—
Auto and light truck		743		—
Medium and heavy duty truck		1,025		—
Aircraft		1,781		—
Construction equipment		7,778		4
Commercial real estate		1,372		—
Residential real estate and home equity		336		4
Consumer		—		—
Total		$	20,842	$	110

There were no loan and lease modifications classified as troubled debt restructurings (TDR) during the three months ended March 31, 2021 and 2020. 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, 2021 and 2020 that resulted in an interest rate below market rate.

There were no TDRs which had payment defaults within the twelve months following modification during the three months ended March 31, 2021 and one TDR which had a payment default within the twelve months following modification during the three months ended March 31, 2020. 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, 2021 and December 31, 2020.


(Dollars in thousands)	March 31, 2021		December 31, 2020
Performing TDRs	$	327	$	330
Nonperforming TDRs	9,359		11,156
Total TDRs	$	9,686	$	11,486