Loan and Lease Financings

12 Months Ended

Dec. 31, 2020

Total loans and leases outstanding were recorded net of unearned income and deferred loan fees and costs at December 31, 2020 and 2019, and totaled $5.49 billion and $5.09 billion, respectively. At December 31, 2020 and 2019, net deferred loan and lease (fees) costs were $(3.73) million and $5.06 million, respectively. At December 31, 2020, there were $6.37 million in deferred loan fees related to Paycheck Protection Program (PPP) loans. Accrued interest receivable on loans and leases at December 31, 2020 and 2019 was $16.39 million and $14.81 million, respectively.

In the ordinary course of business, the Company has extended loans to certain directors, executive officers, and principal shareholders of equity securities of 1st Source and to their affiliates. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Company and did not involve more than the normal risk of collectability, or present other unfavorable features. The loans are consistent with sound banking practices and within applicable regulatory and lending limitations. The aggregate dollar amounts of these loans were $26.51 million and $17.08 million at December 31, 2020 and 2019, respectively. During 2020, $11.91 million of new loans and other additions were made and $2.48 million of repayments and other reductions occurred.

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 our 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 our 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 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 solar loans which are not local market credits, and PPP loans, which are fully guaranteed by the SBA. Total PPP loan originations during 2020 amounted to $597.45 million. As of December 31, 2020, PPP loan balances were $351.56 million which is net of an unearned discount of $6.37 million.

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 busses and motor coaches. 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 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	$	666,905	$	193,555	$	134,411	$	92,916	$	26,034	$	19,790	$	291,990	$	—	$	1,425,601
Grades 7-12	6,788		1,699		4,726		3,507		1,200		2,134		33,067		—		53,121
Total commercial and agricultural	673,693		195,254		139,137		96,423		27,234		21,924		325,057		—		1,478,722
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
December 31, 2020
Commercial and agricultural	$	1,472,755	$	34	$	—	$	—	$	1,472,789	$	5,933	$	1,478,722
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
December 31, 2019
Commercial and agricultural	$	1,131,704	$	118	$	—	$	—	$	1,131,822	$	969	$	1,132,791
Auto and light truck	586,212		1,268		77		—		587,557		1,250		588,807
Medium and heavy duty truck	293,736		14		—		—		293,750		1,074		294,824
Aircraft	772,846		7,026		3,293		—		783,165		875		784,040
Construction equipment	702,671		819		609		—		704,099		1,352		705,451
Commercial real estate	906,468		58		—		—		906,526		1,651		908,177
Residential real estate and home equity	528,844		561		152		257		529,814		2,189		532,003
Consumer	138,132		632		187		54		139,005		429		139,434
Total	$	5,060,613	$	10,496	$	4,318	$	311	$	5,075,738	$	9,789	$	5,085,527

Interest income for the years ended December 31, 2020, 2019, and 2018, would have increased by approximately $3.49 million, $0.69 million, and $2.18 million, respectively, if the nonaccrual loans and leases had earned interest at their full contract rate.

The following table shows impaired loans and leases, segregated by portfolio segment, and the corresponding allowance for impaired loans and leases.


(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance






















December 31, 2019
With no related allowance recorded:
Commercial and agricultural	$	218	$	218	$	—
Auto and light truck	853		853		—
Medium and heavy duty truck	1,074		1,074		—
Aircraft	875		875		—
Construction equipment	615		615		—
Commercial real estate	1,487		1,487		—
Residential real estate and home equity	—		—		—
Consumer	—		—		—
Total with no related allowance recorded	5,122		5,122		—
With an allowance recorded:
Commercial and agricultural	10,366		10,366		3,003
Auto and light truck	278		278		30
Medium and heavy duty truck	—		—		—
Aircraft	—		—		—
Construction equipment	736		736		75
Commercial real estate	—		—		—
Residential real estate and home equity	337		339		117
Consumer	—		—		—
Total with an allowance recorded	11,717		11,719		3,225
Total impaired loans	$	16,839	$	16,841	$	3,225

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by portfolio segment, for the years ending December 31, 2019 and 2018.


	2019			2018
(Dollars in thousands)		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Commercial and agricultural		$	5,983	$	242	$	2,812	$	—
Auto and light truck		2,721		—		9,352		—
Medium and heavy duty truck		244		—		247		—
Aircraft		2,409		8		9,987		20
Construction equipment		1,664		—		1,663		—
Commercial real estate		1,715		—		2,303		—
Residential real estate and home equity		340		19		347		15
Consumer loans		—		—		—		—
Total		$	15,076	$	269	$	26,711	$	35

The following table shows the number of loans and leases classified as troubled debt restructuring (TDR) during 2020, 2019 and 2018, by portfolio segment, as well as the recorded investment as of December 31. The classification between nonperforming and performing is shown at the time of modification. Modification programs focused on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. The modifications did not result in the contractual forgiveness of principal or interest. The TDRs during 2020 were the result of issues that predated the COVID-19 pandemic. There were two modifications during 2020, one modification during 2019, and no modifications during 2018 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modifications was immaterial.


	2020			2019			2018
(Dollars in thousands)	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Performing TDRs:
Commercial and agricultural	—	$	—	1	$	9,901	—	$	—
Auto and light truck	—	—		—	—		—	—
Medium and heavy duty truck	—	—		—	—		—	—
Aircraft	—	—		—	—		—	—
Construction equipment	—	—		—	—		—	—
Commercial real estate	—	—		—	—		—	—
Residential real estate and home equity	—	—		—	—		—	—
Consumer	—	—		—	—		—	—
Total performing TDR modifications	—	—		1	9,901		—	—
Nonperforming TDRs:
Commercial and agricultural	—	—		1	465		—	—
Auto and light truck	—	—		—	—		1	285
Medium and heavy duty truck	—	—		—	—		—	—
Aircraft	1	828		—	—		—	—
Construction equipment	1	9,905		—	—		—	—
Commercial real estate	—	—		—	—		—	—
Residential real estate and home equity	—	—		—	—		—	—
Consumer	—	—		—	—		—	—
Total nonperforming TDR modifications	2	10,733		1	465		1	285
Total TDR modifications	2	$	10,733	2	$	10,366	1	$	285

There was one nonperforming commercial and agricultural TDR with a recorded investment of $0.41 million which had a payment default within the twelve months following modification for the year ended December 31, 2020, one nonperforming auto and light truck TDR with a recorded investment of $0.00 million which had a payment default within the twelve months following modification for the year ended December 31, 2019, and no TDRs which had a payment default within the twelve months following modification during the year ended December 31, 2018.

The classification between nonperforming and performing is shown at the time of modification. 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.


Year Ended December 31 (Dollars in thousands)	2020		2019
Performing TDRs	$	330	$	10,238
Nonperforming TDRs	11,156		486
Total TDRs	$	11,486	$	10,724