Loan and Lease Financings

9 Months Ended

Sep. 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 September 30, 2022, PPP loan balances were $6.35 million which is net of unearned fees of $0.13 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 September 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	$	119,558	$	126,915	$	86,893	$	39,376	$	19,329	$	18,808	$	397,057	$	—	$	807,936
Grades 7-12	3,094		2,897		124		2,358		2,509		1,399		15,445		—		27,826
Total commercial and agricultural	122,652		129,812		87,017		41,734		21,838		20,207		412,502		—		835,762
Solar
Grades 1-6	69,556		115,921		37,240		72,710		18,631		33,467		—		—		347,525
Grades 7-12	—		—		1,103		5,732		705		3,570		—		—		11,110
Total solar	69,556		115,921		38,343		78,442		19,336		37,037		—		—		358,635
Auto and light truck
Grades 1-6	394,772		186,699		74,388		41,687		12,935		4,713		—		—		715,194
Grades 7-12	6,569		5,228		7,419		3,416		2,511		2,987		—		—		28,130
Total auto and light truck	401,341		191,927		81,807		45,103		15,446		7,700		—		—		743,324
Medium and heavy duty truck
Grades 1-6	114,007		72,478		50,579		38,281		12,679		4,986		—		—		293,010
Grades 7-12	—		—		—		—		—		58		—		—		58
Total medium and heavy duty truck	114,007		72,478		50,579		38,281		12,679		5,044		—		—		293,068
Aircraft
Grades 1-6	317,174		292,885		239,238		60,565		33,028		47,775		4,530		—		995,195
Grades 7-12	592		—		578		—		—		1,630		—		—		2,800
Total aircraft	317,766		292,885		239,816		60,565		33,028		49,405		4,530		—		997,995
Construction equipment
Grades 1-6	359,702		234,401		120,431		68,480		24,452		7,729		22,426		2,975		840,596
Grades 7-12	22,162		9,618		2,466		2,081		234		55		—		1,480		38,096
Total construction equipment	381,864		244,019		122,897		70,561		24,686		7,784		22,426		4,455		878,692
Commercial real estate
Grades 1-6	208,585		170,211		128,762		115,556		108,539		189,259		296		—		921,208
Grades 7-12	280		838		7,614		6,138		48		1,297		—		—		16,215
Total commercial real estate	208,865		171,049		136,376		121,694		108,587		190,556		296		—		937,423
Residential real estate and home equity
Performing	89,237		101,190		101,388		35,269		7,274		85,733		142,535		3,779		566,405
Nonperforming	—		186		926		—		—		669		188		228		2,197
Total residential real estate and home equity	89,237		101,376		102,314		35,269		7,274		86,402		142,723		4,007		568,602
Consumer
Performing	59,856		39,184		15,115		9,045		3,854		1,032		20,323		—		148,409
Nonperforming	—		69		30		40		15		14		—		—		168
Total consumer	$	59,856	$	39,253	$	15,145	$	9,085	$	3,869	$	1,046	$	20,323	$	—	$	148,577

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
September 30, 2022
Commercial and agricultural	$	834,918	$	360	$	41	$	—	$	835,319	$	443	$	835,762
Solar	358,635		—		—		—		358,635		—		358,635
Auto and light truck	725,421		234		—		—		725,655		17,669		743,324
Medium and heavy duty truck	293,010		—		—		—		293,010		58		293,068
Aircraft	995,787		—		1,630		—		997,417		578		997,995
Construction equipment	872,660		1,568		217		—		874,445		4,247		878,692
Commercial real estate	934,804		—		—		—		934,804		2,619		937,423
Residential real estate and home equity	565,712		508		185		166		566,571		2,031		568,602
Consumer	147,874		446		89		—		148,409		168		148,577
Total	$	5,728,821	$	3,116	$	2,162	$	166	$	5,734,265	$	27,813	$	5,762,078

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 September 30, 2022 and December 31, 2021 was $15.19 million and $12.94 million, respectively.

There were no loan and lease modifications classified as a troubled debt restructuring (TDR) during the three and nine months ended September 30, 2022. There was one nonperforming loan and lease modification classified as a troubled debt restructuring (TDR) during the three and nine months ended September 30, 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 nine months ended September 30, 2022 and one modification during the three and nine months ended September 30, 2021 that resulted in an interest rate below market rate.

There were no TDRs 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. There were no TDRs which had payment defaults within the twelve months following modification during the three and nine months ended September 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 September 30, 2022 and December 31, 2021.


(Dollars in thousands)	September 30, 2022		December 31, 2021
Performing TDRs	$	—	$	319
Nonperforming TDRs	4,042		6,742
Total TDRs	$	4,042	$	7,061