Loan and Lease Financings

6 Months Ended

Jun. 30, 2023

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 $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.

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 predominantly consists of loans to borrowers in the auto rental and commercial auto leasing industries. 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.

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 both the U.S. and 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 has been primarily to the less risky owner-occupied segment. The non-owner-occupied segment accounts for less than half of the commercial real estate portfolio and 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, 2023 and gross charge-offs for the six months ended June 30, 2023.


	Term Loans and Leases by Origination Year
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and agricultural
Grades 1-6	$	92,693	$	136,814	$	85,344	$	49,138	$	26,652	$	20,633	$	355,974	$	—	$	767,248
Grades 7-12	3,794		2,647		6,149		125		1,383		964		14,878		—		29,940
Total commercial and agricultural	96,487		139,461		91,493		49,263		28,035		21,597		370,852		—		797,188
Current period gross charge-offs	—		410		—		17		4		—		141		—		572
Solar
Grades 1-6	60,419		62,735		100,991		32,520		71,288		38,212		—		—		366,165
Grades 7-12	—		—		—		1,063		5,559		4,118		—		—		10,740
Total solar	60,419		62,735		100,991		33,583		76,847		42,330		—		—		376,905
Current period gross charge-offs	—		—		—		—		—		—		—		—		—
Auto and light truck
Grades 1-6	339,177		381,682		103,261		38,051		21,822		9,331		—		—		893,324
Grades 7-12	6		1,365		384		3,636		1,008		1,331		—		—		7,730
Total auto and light truck	339,183		383,047		103,645		41,687		22,830		10,662		—		—		901,054
Current period gross charge-offs	—		—		25		5		19		63		—		—		112
Medium and heavy duty truck
Grades 1-6	60,076		140,322		55,507		32,536		23,782		7,411		—		—		319,634
Grades 7-12	—		—		—		—		—		—		—		—		—
Total medium and heavy duty truck	60,076		140,322		55,507		32,536		23,782		7,411		—		—		319,634
Current period gross charge-offs	—		—		—		—		—		—		—		—		—
Aircraft
Grades 1-6	83,575		403,096		237,935		193,455		51,102		50,186		7,423		—		1,026,772
Grades 7-12	2,305		9,861		8,689		5,356		—		7,357		—		—		33,568
Total aircraft	85,880		412,957		246,624		198,811		51,102		57,543		7,423		—		1,060,340
Current period gross charge-offs	—		—		—		—		—		—		—		—		—
Construction equipment
Grades 1-6	239,170		408,000		169,531		85,502		43,478		12,753		18,499		2,659		979,592
Grades 7-12	4,955		19,125		2,696		1,221		1,259		73		136		3,912		33,377
Total construction equipment	244,125		427,125		172,227		86,723		44,737		12,826		18,635		6,571		1,012,969
Current period gross charge-offs	—		44		1		—		—		—		—		—		45
Commercial real estate
Grades 1-6	125,722		250,685		159,142		109,824		92,997		229,221		321		—		967,912
Grades 7-12	37		1,656		1,602		7,920		4,827		1,369		—		—		17,411
Total commercial real estate	125,759		252,341		160,744		117,744		97,824		230,590		321		—		985,323
Current period gross charge-offs	—		39		—		—		179		—		—		—		218
Residential real estate and home equity
Performing	51,492		113,812		95,910		93,079		31,885		79,994		145,455		4,462		616,089
Nonperforming	—		—		—		—		414		690		221		81		1,406
Total residential real estate and home equity	51,492		113,812		95,910		93,079		32,299		80,684		145,676		4,543		617,495
Current period gross charge-offs	—		—		—		—		—		9		1		—		10
Consumer
Performing	29,929		60,766		26,343		8,996		4,571		1,883		11,644		—		144,132
Nonperforming	—		144		34		61		51		13		—		—		303
Total consumer	29,929		60,910		26,377		9,057		4,622		1,896		11,644		—		144,435
Current period gross charge-offs	$	211	$	274	$	81	$	9	$	5	$	—	$	16	$	—	$	596

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


	Term Loans and Leases by Origination Year
(Dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and agricultural
Grades 1-6	$	159,317	$	107,232	$	71,365	$	35,874	$	17,192	$	13,860	$	370,553	$	—	$	775,393
Grades 7-12	4,491		5,934		60		2,094		1,644		1,040		21,375		—		36,638
Total commercial and agricultural	163,808		113,166		71,425		37,968		18,836		14,900		391,928		—		812,031

Solar
Grades 1-6	109,393		113,276		35,660		72,652		18,518		20,654		—		—		370,153
Grades 7-12	—		—		1,091		5,678		701		3,540		—		—		11,010
Total solar	109,393		113,276		36,751		78,330		19,219		24,194		—		—		381,163

Auto and light truck
Grades 1-6	521,399		155,508		62,063		32,975		10,946		3,476		—		—		786,367
Grades 7-12	5,972		3,366		5,836		2,836		1,792		1,948		—		—		21,750
Total auto and light truck	527,371		158,874		67,899		35,811		12,738		5,424		—		—		808,117

Medium and heavy duty truck
Grades 1-6	158,296		66,533		43,711		31,980		10,053		3,274		—		—		313,847
Grades 7-12	—		—		—		—		—		15		—		—		15
Total medium and heavy duty truck	158,296		66,533		43,711		31,980		10,053		3,289		—		—		313,862

Aircraft
Grades 1-6	438,481		273,726		213,661		57,379		31,085		35,012		3,687		—		1,053,031
Grades 7-12	12,962		4,253		6,190		—		—		1,286		—		—		24,691
Total aircraft	451,443		277,979		219,851		57,379		31,085		36,298		3,687		—		1,077,722

Construction equipment
Grades 1-6	475,854		213,349		106,409		59,204		17,834		4,593		23,310		2,754		903,307
Grades 7-12	20,709		7,757		2,483		1,878		313		32		583		1,441		35,196
Total construction equipment	496,563		221,106		108,892		61,082		18,147		4,625		23,893		4,195		938,503

Commercial real estate
Grades 1-6	271,526		164,173		121,685		97,470		102,271		168,391		251		—		925,767
Grades 7-12	1,532		1,716		7,824		5,789		47		1,070		—		—		17,978
Total commercial real estate	273,058		165,889		129,509		103,259		102,318		169,461		251		—		943,745

Residential real estate and home equity
Performing	115,154		100,690		97,205		34,498		6,864		81,653		142,724		4,115		582,903
Nonperforming	—		131		693		—		—		725		180		105		1,834
Total residential real estate and home equity	115,154		100,821		97,898		34,498		6,864		82,378		142,904		4,220		584,737

Consumer
Performing	74,258		34,619		12,924		7,375		2,977		692		18,098		—		150,943
Nonperforming	148		65		49		53		12		12		—		—		339
Total consumer	74,406		34,684		12,973		7,428		2,989		704		18,098		—		151,282

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


(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Accruing		Total Accruing Loans		Nonaccrual		Total Financing Receivables
June 30, 2023
Commercial and agricultural	$	788,349	$	158	$	—	$	—	$	788,507	$	8,681	$	797,188
Solar	376,905		—		—		—		376,905		—		376,905
Auto and light truck	894,576		812		—		—		895,388		5,666		901,054
Medium and heavy duty truck	319,634		—		—		—		319,634		—		319,634
Aircraft	1,059,386		—		688		—		1,060,074		266		1,060,340
Construction equipment	1,011,305		357		—		—		1,011,662		1,307		1,012,969
Commercial real estate	982,344		71		—		—		982,415		2,908		985,323
Residential real estate and home equity	615,430		534		125		52		616,141		1,354		617,495
Consumer	143,365		590		177		4		144,136		299		144,435
Total	$	6,191,294	$	2,522	$	990	$	56	$	6,194,862	$	20,481	$	6,215,343

December 31, 2022
Commercial and agricultural	$	810,223	$	944	$	—	$	—	$	811,167	$	864	$	812,031
Solar	381,163		—		—		—		381,163		—		381,163
Auto and light truck	793,610		353		1		—		793,964		14,153		808,117
Medium and heavy duty truck	313,845		—		2		—		313,847		15		313,862
Aircraft	1,075,865		223		1,063		—		1,077,151		571		1,077,722
Construction equipment	932,603		431		—		—		933,034		5,469		938,503
Commercial real estate	940,516		—		—		—		940,516		3,229		943,745
Residential real estate and home equity	582,053		562		288		49		582,952		1,785		584,737
Consumer	150,328		416		199		5		150,948		334		151,282
Total	$	5,980,206	$	2,929	$	1,553	$	54	$	5,984,742	$	26,420	$	6,011,162

Accrued interest receivable on loans and leases at June 30, 2023 and December 31, 2022 was $20.16 million and $18.75 million, respectively.

Loan Modification Disclosures Pursuant to ASU 2022-02

The following table shows the amortized cost of loans and leases at June 30, 2023 that were both experiencing financial difficulty and modified during the three months ended June 30, 2023, segregated by portfolio segment and type of modification. The percentage of the amortized cost of loans and leases that were modified to borrowers in financial distress as compared to the amortized cost of each segment of financial receivable is also presented below.


(Dollars in thousands)	Payment Delay		Term Extension		Interest Rate Reduction		Combination Term Extension and Interest Rate Reduction		% of Total Segment Financing Receivables
Commercial and agricultural	$	3,985	$	—	$	—	$	—	0.50	%




Construction equipment	—		2,126		—		—		0.21
Commercial real estate	318		—		—		—		0.03


Total	$	4,303	$	2,126	$	—	$	—	0.10	%

The following table shows the amortized cost of loans and leases at June 30, 2023 that were both experiencing financial difficulty and modified during the six months ended June 30, 2023, segregated by portfolio segment and type of modification. The percentage of the amortized cost of loans and leases that were modified to borrowers in financial distress as compared to the amortized cost of each segment of financial receivable is also presented below.


(Dollars in thousands)	Payment Delay		Term Extension		Interest Rate Reduction		Combination Term Extension and Interest Rate Reduction		% of Total Segment Financing Receivables
Commercial and agricultural	$	3,985	$	543	$	—	$	—	0.57	%




Construction equipment	—		6,038		—		—		0.60
Commercial real estate	318		—		479		—		0.08


Total	$	4,303	$	6,581	$	479	$	—	0.18	%

There were no commitments to lend additional amounts to the borrowers included in the previous tables at June 30, 2023.

The Company closely monitors the performance of loans and leases that have been modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of such loans and leases that have been modified during the three months ended June 30, 2023.


(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due
Commercial and agricultural	$	3,985	$	—	$	—	$	—	$	—




Construction equipment	2,126		—		—		—		—
Commercial real estate	—		—		—		318		318


Total	$	6,111	$	—	$	—	$	318	$	318

The following table shows the performance of such loans and leases that have been modified during the six months ended June 30, 2023.


(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due
Commercial and agricultural	$	3,985	$	120	$	423	$	—	$	543




Construction equipment	6,038		—		—		—		—
Commercial real estate	479		—		—		318		318


Total	$	10,502	$	120	$	423	$	318	$	861

The following table shows the financial effect of loan and lease modifications presented above to borrowers experiencing financial difficulty for the three months ended June 30, 2023.


	Weighted- Average Term Extension (in months)	Weighted- Average Payment Delay (in months)
Commercial and agricultural	61	6




Construction equipment	5	0



Total	21	6

The following table shows the financial effect of loan and lease modifications presented above to borrowers experiencing financial difficulty for the six months ended June 30, 2023.


	Weighted- Average Interest Rate Reduction		Weighted- Average Term Extension (in months)	Weighted- Average Payment Delay (in months)
Commercial and agricultural	—	%	33	6




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


Total	3.00	%	11	6

There were no modified loans and leases that had a payment default during the six months ended June 30, 2023 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty.

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

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

There were no loan and lease modifications classified as a TDR during the three and six months ended June 30, 2022. 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 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. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.

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


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