Loan and Lease Financings

6 Months Ended

Jun. 30, 2022

Loan and Lease FinancingsThe 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 $250,000 are reviewed quarterly as part of management’s evaluation of the appropriateness of the allowance for loan and lease losses. Grade 7 credits are defined as “watch” and contain greater than average credit risk and are monitored to limit the 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. As of June 30, 2022, PPP loan balances were $9.13 million which is net of unearned fees of $0.21 million.

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, and pledges of permits and licenses. Financing is provided to qualified borrowers throughout the continental United States with an emphasis on the region east of the Rocky Mountains.

Auto and light truck – loans are secured by vehicles and borrowers are nationwide. The portfolio consists of multiple industries: auto rental, auto leasing and 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 leases. Risks in both these segments include economic risks and collateral risks, principally used vehicle values. The bus segment is secured primarily by shuttle buses and motor coaches, the step van segment is secured by step vans and the funeral car segment is secured by hearses and limousines. 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.

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

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

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

Commercial real estate – loans are generally to entities within the local market communities served by the Company with advances generally within regulatory guidelines. Historically, the Company’s exposure to commercial real estate had been primarily to the less risky owner-occupied segment although growth in recent years has been in the non-owner-occupied segment which now accounts for slightly less than half of the portfolio. The non-owner-occupied segment includes hotels, apartment complexes and warehousing facilities. There is limited exposure to construction loans. 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 June 30, 2022.


	Term Loans and Leases by Origination Year
(Dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and agricultural
Grades 1-6	$	72,156	$	147,849	$	98,378	$	42,888	$	38,899	$	24,112	$	393,543	$	—	$	817,825
Grades 7-12	1,540		2,099		145		3,032		2,245		1,127		14,605		—		24,793
Total commercial and agricultural	73,696		149,948		98,523		45,920		41,144		25,239		408,148		—		842,618
Solar
Grades 1-6	35,647		138,283		38,889		73,558		18,780		34,039		—		—		339,196
Grades 7-12	—		—		1,112		5,776		712		3,676		—		—		11,276
Total solar	35,647		138,283		40,001		79,334		19,492		37,715		—		—		350,472
Auto and light truck
Grades 1-6	276,473		237,030		91,065		51,976		16,246		6,426		—		—		679,216
Grades 7-12	3,071		7,085		8,611		3,866		2,933		3,938		—		—		29,504
Total auto and light truck	279,544		244,115		99,676		55,842		19,179		10,364		—		—		708,720
Medium and heavy duty truck
Grades 1-6	76,322		78,628		56,118		44,023		15,835		7,285		—		—		278,211
Grades 7-12	—		—		—		—		—		123		—		—		123
Total medium and heavy duty truck	76,322		78,628		56,118		44,023		15,835		7,408		—		—		278,334
Aircraft
Grades 1-6	211,125		311,833		261,744		67,040		39,515		55,885		4,870		—		952,012
Grades 7-12	1,338		—		608		—		3,984		1,934		—		—		7,864
Total aircraft	212,463		311,833		262,352		67,040		43,499		57,819		4,870		—		959,876
Construction equipment
Grades 1-6	223,116		259,093		142,207		78,532		29,861		10,118		19,831		3,189		765,947
Grades 7-12	22,015		8,034		1,974		3,080		743		16		—		1,925		37,787
Total construction equipment	245,131		267,127		144,181		81,612		30,604		10,134		19,831		5,114		803,734
Commercial real estate
Grades 1-6	135,414		171,977		137,630		131,727		125,010		211,768		350		—		913,876
Grades 7-12	1,435		—		7,744		6,495		48		1,460		—		—		17,182
Total commercial real estate	136,849		171,977		145,374		138,222		125,058		213,228		350		—		931,058
Residential real estate and home equity
Performing	57,047		102,401		104,916		36,048		7,508		90,950		131,762		3,956		534,588
Nonperforming	—		—		—		—		14		653		151		183		1,001
Total residential real estate and home equity	57,047		102,401		104,916		36,048		7,522		91,603		131,913		4,139		535,589
Consumer
Performing	39,856		46,515		17,695		11,267		5,011		1,464		18,853		—		140,661
Nonperforming	—		9		65		37		26		17		—		—		154
Total consumer	$	39,856	$	46,524	$	17,760	$	11,304	$	5,037	$	1,481	$	18,853	$	—	$	140,815

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, 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	$	233,512	$	123,947	$	60,744	$	55,231	$	32,545	$	20,184	$	364,460	$	—	$	890,623
Grades 7-12	4,682		194		3,667		2,373		2,004		484		14,685		—		28,089
Total commercial and agricultural	238,194		124,141		64,411		57,604		34,549		20,668		379,145		—		918,712
Solar
Grades 1-6	159,244		42,073		81,593		18,979		34,889		3,780		—		—		340,558
Grades 7-12	—		1,138		5,882		724		—		—		—		—		7,744
Total solar	159,244		43,211		87,475		19,703		34,889		3,780		—		—		348,302
Auto and light truck
Grades 1-6	331,105		122,709		72,580		24,965		11,814		901		—		—		564,074
Grades 7-12	10,828		11,752		7,467		3,859		4,876		919		—		—		39,701
Total auto and light truck	341,933		134,461		80,047		28,824		16,690		1,820		—		—		603,775
Medium and heavy duty truck
Grades 1-6	92,252		68,354		57,967		23,210		12,419		5,265		—		—		259,467
Grades 7-12	—		—		—		—		—		273		—		—		273
Total medium and heavy duty truck	92,252		68,354		57,967		23,210		12,419		5,538		—		—		259,740
Aircraft
Grades 1-6	384,895		290,897		85,916		45,848		47,025		29,435		4,844		—		888,860
Grades 7-12	1,141		649		—		4,670		454		2,627		—		—		9,541
Total aircraft	386,036		291,546		85,916		50,518		47,479		32,062		4,844		—		898,401
Construction equipment
Grades 1-6	314,044		201,032		109,029		47,693		13,501		5,031		18,937		4,594		713,861
Grades 7-12	26,650		8,709		1,983		797		80		—		—		2,193		40,412
Total construction equipment	340,694		209,741		111,012		48,490		13,581		5,031		18,937		6,787		754,273
Commercial real estate
Grades 1-6	230,701		150,144		146,374		141,838		126,642		112,243		391		—		908,333
Grades 7-12	218		5,921		7,159		491		6,208		1,011		—		—		21,008
Total commercial real estate	230,919		156,065		153,533		142,329		132,850		113,254		391		—		929,341
Residential real estate and home equity
Performing	105,345		114,682		41,185		9,706		11,720		89,646		122,281		4,555		499,120
Nonperforming	—		—		—		13		421		655		293		88		1,470
Total residential real estate and home equity	105,345		114,682		41,185		9,719		12,141		90,301		122,574		4,643		500,590
Consumer
Performing	58,866		24,307		17,031		8,284		2,263		697		21,378		—		132,826
Nonperforming	37		107		43		30		33		4		—		—		254
Total consumer	$	58,903	$	24,414	$	17,074	$	8,314	$	2,296	$	701	$	21,378	$	—	$	133,080

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
June 30, 2022
Commercial and agricultural	$	840,915	$	802	$	—	$	—	$	841,717	$	901	$	842,618
Solar	350,472		—		—		—		350,472		—		350,472
Auto and light truck	687,206		81		—		—		687,287		21,433		708,720
Medium and heavy duty truck	278,211		—		—		—		278,211		123		278,334
Aircraft	957,333		—		1,934		—		959,267		609		959,876
Construction equipment	797,117		111		—		—		797,228		6,506		803,734
Commercial real estate	928,246		—		—		—		928,246		2,812		931,058
Residential real estate and home equity	533,813		494		281		46		534,634		955		535,589
Consumer	140,167		424		69		4		140,664		151		140,815
Total	$	5,513,480	$	1,912	$	2,284	$	50	$	5,517,726	$	33,490	$	5,551,216

December 31, 2021
Commercial and agricultural	$	916,659	$	—	$	—	$	—	$	916,659	$	2,053	$	918,712
Solar	348,302		—		—		—		348,302		—		348,302
Auto and light truck	579,605		—		—		—		579,605		24,170		603,775
Medium and heavy duty truck	259,467		—		—		—		259,467		273		259,740
Aircraft	894,092		1,130		2,530		—		897,752		649		898,401
Construction equipment	745,870		1,313		—		—		747,183		7,090		754,273
Commercial real estate	926,345		—		—		—		926,345		2,996		929,341
Residential real estate and home equity	498,854		212		54		245		499,365		1,225		500,590
Consumer	132,464		332		30		4		132,830		250		133,080
Total	$	5,301,658	$	2,987	$	2,614	$	249	$	5,307,508	$	38,706	$	5,346,214

Accrued interest receivable on loans and leases at June 30, 2022 and December 31, 2021 was $13.08 million and $12.94 million, respectively.

There were no loan and lease modifications classified as a troubled debt restructuring (TDR) during the three and six months ended June 30, 2022 and 2021. The classification between nonperforming and performing is determined at the time of modification. Modification programs focus on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. Modifications do not result in the contractual forgiveness of principal or interest. There were no modifications during the three and six months ended June 30, 2022 and 2021 that resulted in an interest rate below market rate.

There was one TDR which had a payment default within the twelve months following modification during the three and six months ended June 30, 2022 and no TDRs which had payment defaults within the twelve months following modification during the three and six months ended June 30, 2021. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.

The following table shows the recorded investment of loans and leases classified as troubled debt restructurings as of June 30, 2022 and December 31, 2021.


(Dollars in thousands)	June 30, 2022		December 31, 2021
Performing TDRs	$	—	$	319
Nonperforming TDRs	5,204		6,742
Total TDRs	$	5,204	$	7,061