Loan and Lease Financings

9 Months Ended

Sep. 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 September 30, 2023 and gross charge-offs for the nine months ended September 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	$	124,559	$	127,855	$	76,034	$	43,890	$	24,025	$	18,156	$	316,644	$	—	$	731,163
Grades 7-12	4,203		2,304		6,341		494		1,162		677		16,707		—		31,888
Total commercial and agricultural	128,762		130,159		82,375		44,384		25,187		18,833		333,351		—		763,051
Current period gross charge-offs	455		411		—		17		4		—		1,946		—		2,833
Solar
Grades 1-6	129,390		24,436		89,699		30,775		57,010		26,392		—		—		357,702
Grades 7-12	—		—		—		1,054		5,513		680		—		—		7,247
Total solar	129,390		24,436		89,699		31,829		62,523		27,072		—		—		364,949
Current period gross charge-offs	—		—		—		—		—		—		—		—		—
Auto and light truck
Grades 1-6	471,833		290,946		75,619		30,020		17,041		6,856		—		—		892,315
Grades 7-12	1,033		2,471		789		3,116		817		943		—		—		9,169
Total auto and light truck	472,866		293,417		76,408		33,136		17,858		7,799		—		—		901,484
Current period gross charge-offs	—		140		75		4		19		63		—		—		301
Medium and heavy duty truck
Grades 1-6	86,301		132,020		50,345		28,630		20,275		5,631		—		—		323,202
Grades 7-12	—		—		—		—		—		—		—		—		—
Total medium and heavy duty truck	86,301		132,020		50,345		28,630		20,275		5,631		—		—		323,202
Current period gross charge-offs	—		—		—		—		—		—		—		—		—
Aircraft
Grades 1-6	166,133		389,870		214,169		179,737		49,474		41,619		5,776		—		1,046,778
Grades 7-12	4,310		9,677		7,161		4,819		—		6,836		—		—		32,803
Total aircraft	170,443		399,547		221,330		184,556		49,474		48,455		5,776		—		1,079,581
Current period gross charge-offs	—		—		—		—		—		—		—		—		—
Construction equipment
Grades 1-6	370,642		372,029		149,279		74,922		36,373		10,066		22,795		2,418		1,038,524
Grades 7-12	4,689		16,805		1,180		568		154		41		—		136		23,573
Total construction equipment	375,331		388,834		150,459		75,490		36,527		10,107		22,795		2,554		1,062,097
Current period gross charge-offs	—		44		1		—		—		—		—		—		45
Commercial real estate
Grades 1-6	252,567		252,121		154,744		109,181		90,192		202,871		292		—		1,061,968
Grades 7-12	144		2,747		856		5,752		4,602		12,130		—		—		26,231
Total commercial real estate	252,711		254,868		155,600		114,933		94,794		215,001		292		—		1,088,199
Current period gross charge-offs	—		39		—		—		179		—		—		—		218
Residential real estate and home equity
Performing	67,545		112,070		92,751		89,539		31,394		75,909		151,550		5,121		625,879
Nonperforming	—		84		74		—		414		632		356		76		1,636
Total residential real estate and home equity	67,545		112,154		92,825		89,539		31,808		76,541		151,906		5,197		627,515
Current period gross charge-offs	—		—		—		—		—		54		1		—		55
Consumer
Performing	43,514		53,780		22,705		7,552		3,441		1,346		10,841		—		143,179
Nonperforming	—		173		120		49		42		7		—		—		391
Total consumer	43,514		53,953		22,825		7,601		3,483		1,353		10,841		—		143,570
Current period gross charge-offs	$	353	$	374	$	90	$	26	$	13	$	3	$	20	$	—	$	879

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
September 30, 2023
Commercial and agricultural	$	756,225	$	572	$	—	$	—	$	756,797	$	6,254	$	763,051
Solar	364,949		—		—		—		364,949		—		364,949
Auto and light truck	895,298		1,115		12		—		896,425		5,059		901,484
Medium and heavy duty truck	323,202		—		—		—		323,202		—		323,202
Aircraft	1,079,135		—		446		—		1,079,581		—		1,079,581
Construction equipment	1,059,212		2,270		—		—		1,061,482		615		1,062,097
Commercial real estate	1,085,383		—		—		—		1,085,383		2,816		1,088,199
Residential real estate and home equity	624,675		811		393		111		625,990		1,525		627,515
Consumer	142,550		562		67		43		143,222		348		143,570
Total	$	6,330,629	$	5,330	$	918	$	154	$	6,337,031	$	16,617	$	6,353,648

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 September 30, 2023 and December 31, 2022 was $22.81 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 September 30, 2023 that were both experiencing financial difficulty and modified during the three months ended September 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 Payment Delay and Term Extension		% of Total Segment Financing Receivables
Commercial and agricultural	$	196	$	—	$	—	$	500	0.09	%








Total	$	196	$	—	$	—	$	500	0.01	%

The following table shows the amortized cost of loans and leases at September 30, 2023 that were both experiencing financial difficulty and modified during the nine months ended September 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 Payment Delay and Term Extension		% of Total Segment Financing Receivables
Commercial and agricultural	$	3,360	$	125	$	—	$	1,312	0.63	%




Construction equipment	—		1,809		—		—		0.17
Commercial real estate	296		—		451		—		0.07


Total	$	3,656	$	1,934	$	451	$	1,312	0.12	%

There were $0.19 million commitments to lend additional amounts to the borrowers included in the previous tables at September 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 September 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	$	696	$	—	$	—	$	—	$	—








Total	$	696	$	—	$	—	$	—	$	—

The following table shows the performance of such loans and leases that have been modified during the nine months ended September 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	$	1,633	$	—	$	—	$	3,164	$	3,164




Construction equipment	1,809		—		—		—		—
Commercial real estate	747		—		—		—		—


Total	$	4,189	$	—	$	—	$	3,164	$	3,164

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


	Weighted- Average Payment Delay (in months)	Combination Weighted-Average Payment Delay and Term Extension (in months)
Commercial and agricultural	6	13








Total	6	13

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


	Weighted- Average Interest Rate Reduction		Weighted- Average Term Extension (in months)	Weighted- Average Payment Delay (in months)	Combination Weighted-Average Payment Delay and Term Extension (in months)
Commercial and agricultural	—	%	3	6	44




Construction equipment	—	%	5	0	0
Commercial real estate	3.00	%	0	3	0


Total	3.00	%	4	6	44

There was one modified loan that had a payment default during the nine months ended September 30, 2023 and was modified in the twelve months prior to that default to a borrower 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 nine months ended September 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 nine months ended September 30, 2022 that resulted in an interest rate below market rate.

There were no TDR which had a payment default within the twelve months following modification during the three months ended September 30, 2022 and one TDR which had a payment default within the twelve months following modification during the nine months ended September 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