| Loans, Leases and Allowance | Loans, Leases and Allowance The following table shows the composition of the loan and lease portfolio at June 30, 2024 and December 31, 2023: June 30, December 31, Commercial mortgage $ 356,250 $ 341,633 Commercial and industrial 127,160 115,428 Construction and development 139,588 157,805 Multi-family 174,251 138,757 Residential mortgage 175,059 162,123 Home equity lines of credit 13,781 10,904 Direct financing leases 148,173 156,598 Consumer 22,782 23,264 1,157,044 1,106,512 Less Allowance for credit losses on loans and leases 15,882 15,663 Deferred loan fees 583 776 $ 1,140,579 $ 1,090,073 The Company rates all loans and leases by credit quality using the following designations: Grade 1 – Exceptional Exceptional loans and leases are top-quality loans to individuals whose financial credentials are well known to the Company. These loans and leases have excellent sources of repayment, are well documented and/or virtually free of risk (i.e., CD secured loans). Grade 2 – Quality Loans and Leases These loans and leases have excellent sources of repayment with no identifiable risk of collection, and they conform in all respects to Company policy and IDFI and FDIC regulations. Documentation exceptions are minimal or are in the process of being corrected and are not of a type that could subsequently expose the Company to risk of loss. Grade 3 – Acceptable Loans This category is for “average” quality loans and leases. These loans and leases have adequate sources of repayment with little identifiable risk of collection and they conform to Company policy and IDFI/FDIC regulations. Grade 4 – Acceptable but Monitored Loans and leases in this category may have a greater than average risk due to financial weakness or uncertainty but do not appear to require classification as special mention or substandard loans. Loans and leases rated “4” need to be monitored on a regular basis to ascertain that the reasons for placing them in this category do not advance or worsen. Grade 5 – Special Mention Loans and leases in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company’s credit position at some future date. Special Mention loans and leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. This special mention rating is designed to identify a specific level of risk and concern about an asset’s quality. Although a special mention loan or lease has a higher probability of default than a pass rated loan or lease, its default is not imminent. Grade 6 – Substandard Loans and leases in this category are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans and leases so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans and leases have a high probability of payment default, or they have other well-defined weaknesses. Such loans and leases have a distinct potential for loss; however, an individual loan’s or lease’s potential for loss does not have to be distinct for the loan or lease to be rated substandard. The following are examples of situations that might cause a loan or lease to be graded a “6”: • Cash flow deficiencies (losses) jeopardize future loan or lease payments. • Sale of non-collateral assets has become a primary source of loan or lease repayment. • The relationship has deteriorated to the point that sale of collateral is now the Company’s primary source of repayment, unless this was the original source of loan or lease repayment. • The borrower is bankrupt or for any other reason future repayment is dependent on court action. Grade 7 – Doubtful A loan or lease classified as doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. A doubtful loan or lease has a high probability of total or substantial loss. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Because of high probability of loss, nonaccrual accounting treatment will be required for doubtful loans and leases. Grade 8 – Loss Loans and leases classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan or lease has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan or lease even though partial recovery may be effected in the future. No material changes have been made to the risk characteristics discussed above contained in the Company's 2023 Form 10-K. The following tables present the credit risk profile of the Company’s loan and lease portfolio based on rating category, payment activity, and origination year as of June 30, 2024 and rating category as of December 31, 2023: 2024 2023 2022 2021 2020 Prior Revolving loans amortized cost basis Total As of June 30, 2024: Commercial mortgage Pass $ 12,335 $ 40,027 $ 87,838 $ 68,164 $ 32,094 $ 93,760 $ 16,470 $ 350,688 Substandard — — — 242 4,785 535 — 5,562 Total Commercial mortgage 12,335 40,027 87,838 68,406 36,879 94,295 16,470 356,250 Current period gross charge-offs — — — — — — — — Commercial and industrial Pass 13,887 35,585 11,847 12,289 3,811 11,060 33,992 122,471 Substandard — — 331 — — 100 4,258 4,689 Total Commercial and industrial 13,887 35,585 12,178 12,289 3,811 11,160 38,250 127,160 Current period gross charge-offs — — — — — — — — Construction and development Pass 11,008 26,792 73,202 20,512 3,044 130 — 134,688 Substandard — — — — — 4,900 — 4,900 Total Construction and development 11,008 26,792 73,202 20,512 3,044 5,030 — 139,588 Current period gross charge-offs — — — — — — — — Multi-family Pass 5,400 3,818 59,342 50,792 6,290 25,277 17,651 168,570 Special Mention — — — 1,513 — — 4,168 5,681 Total Multi-family 5,400 3,818 59,342 52,305 6,290 25,277 21,819 174,251 Current period gross charge-offs — — — — — — — — Residential mortgage Pass 13,481 34,318 30,553 33,693 17,198 41,762 2,293 173,298 Substandard — 62 — 226 — 1,473 — 1,761 Total Residential mortgage 13,481 34,380 30,553 33,919 17,198 43,235 2,293 175,059 Current period gross charge-offs — — — — — 10 — 10 Home equity Pass — — — — — — 13,629 13,629 Substandard — — — — — — 152 152 Total Home equity lines of credit — — — — — — 13,781 13,781 Current period gross charge-offs — — — — — — — — Direct financing leases Pass 24,315 64,749 33,431 17,206 6,444 1,255 — 147,400 Substandard 12 56 502 122 64 — — 756 Doubtful — — — — 17 — — 17 Total Direct financing leases 24,327 64,805 33,933 17,328 6,525 1,255 — 148,173 Current period gross charge-offs — 537 250 70 14 — — 871 Consumer Pass 4,552 7,839 6,589 2,792 564 436 — 22,772 Substandard — — — 10 — — — 10 Total Consumer 4,552 7,839 6,589 2,802 564 436 — 22,782 Current period gross charge-offs 17 56 52 10 — 3 — 138 Total Loans and Leases $ 84,990 $ 213,246 $ 303,635 $ 207,561 $ 74,311 $ 180,688 $ 92,613 $ 1,157,044 Total current period gross charge-offs $ 17 $ 593 $ 302 $ 80 $ 14 $ 13 $ — $ 1,019 2023 2022 2021 2020 2019 Prior Revolving loans amortized cost basis Total As of December 31, 2023: Commercial mortgage Pass $ 31,795 $ 83,567 $ 69,863 $ 33,226 $ 45,746 $ 60,563 $ 11,495 $ 336,255 Special Mention — — — 4,850 — — — 4,850 Substandard — — — — — 528 — 528 Total Commercial mortgage 31,795 83,567 69,863 38,076 45,746 61,091 11,495 341,633 Current period gross charge-offs — — — — — — — — Commercial and industrial Pass 38,721 13,509 13,390 4,348 1,727 9,430 30,287 111,412 Substandard — — — 10 — 138 3,868 4,016 Total Commercial and industrial 38,721 13,509 13,390 4,358 1,727 9,568 34,155 115,428 Current period gross charge-offs — 58 — — — — — 58 Construction and development Pass 36,868 81,715 30,383 2,981 111 847 — 152,905 Substandard — — — — 4,900 — — 4,900 Total Construction and development 36,868 81,715 30,383 2,981 5,011 847 — 157,805 Current period gross charge-offs — — — — — — — — Multi-family Pass 4,443 39,271 37,422 6,383 7,291 18,400 25,547 138,757 Total Multi-family 4,443 39,271 37,422 6,383 7,291 18,400 25,547 138,757 Current period gross charge-offs — — — — — — — — Residential mortgage Pass 31,352 31,447 35,174 17,651 8,812 36,118 216 160,770 Substandard — — — — 92 1,261 — 1,353 Total Residential mortgage 31,352 31,447 35,174 17,651 8,904 37,379 216 162,123 Current period gross charge-offs — — — — — — — — Home equity Pass — — 282 — — — 10,597 10,879 Substandard — — — — — — 25 25 Total Home equity lines of credit — — 282 — — — 10,622 10,904 Current period gross charge-offs — — — — — — — — Direct financing leases Pass 76,018 41,838 24,675 10,264 2,895 462 — 156,152 Substandard 80 184 80 21 — — — 365 Doubtful 79 — — — 2 — — 81 Total Direct financing leases 76,177 42,022 24,755 10,285 2,897 462 — 156,598 Current period gross charge-offs 105 276 459 85 11 1 — 937 Consumer Pass 9,775 8,223 3,713 840 358 279 — 23,188 Substandard 35 17 15 — 9 — — 76 Total Consumer 9,810 8,240 3,728 840 367 279 — 23,264 Current period gross charge-offs 39 69 75 25 7 — — 215 Total Loans and Leases $ 229,166 $ 299,771 $ 214,997 $ 80,574 $ 71,943 $ 128,026 $ 82,035 $ 1,106,512 Total current period gross charge-offs $ 144 $ 403 $ 534 $ 110 $ 18 $ 1 $ — $ 1,210 For the three months ended June 30, 2024 and December 31, 2023, the Company did not have any revolving loans convert to term loans. The following tables present the Company’s loan and lease portfolio aging analysis of the recorded investment in loans and leases as of June 30, 2024 and December 31, 2023: June 30, 2024 Delinquent Loans and Leases Current Total Total Loans 30-59 Days 60-89 Days 90 Days and Total Past Commercial mortgage $ — $ — $ 179 $ 179 $ 356,071 $ 356,250 $ 179 Commercial and industrial 193 348 15 556 126,604 127,160 15 Construction and development — — 4,900 4,900 134,688 139,588 — Multi-family — — — — 174,251 174,251 — Residential mortgage 616 285 1,762 2,663 172,396 175,059 1,665 Home equity 515 214 152 881 12,900 13,781 152 Direct financing leases 164 189 626 979 147,194 148,173 626 Consumer 427 211 10 648 22,134 22,782 10 Totals $ 1,915 $ 1,247 $ 7,644 $ 10,806 $ 1,146,238 $ 1,157,044 $ 2,647 December 31, 2023 Delinquent Loans and Leases Current Total Total Loans 30-59 Days 60-89 Days 90 Days and Total Past Commercial mortgage $ — $ — $ — $ — $ 341,633 $ 341,633 $ — Commercial and industrial 136 — — 136 115,292 115,428 — Construction and development — 75 4,900 4,975 152,830 157,805 — Multi-family — — — — 138,757 138,757 — Residential mortgage 688 306 1,379 2,373 159,750 162,123 1,278 Home equity 463 — 25 488 10,416 10,904 25 Direct financing leases 452 236 296 984 155,614 156,598 296 Consumer 292 148 76 516 22,748 23,264 76 Totals $ 2,031 $ 765 $ 6,676 $ 9,472 $ 1,097,040 $ 1,106,512 $ 1,675 The following table presents information on the Company’s nonaccrual loans and leases at June 30, 2024, and at December 31, 2023: June 30, December 31, Nonaccrual loans and leases Nonaccrual loans and leases without an allowance for credit losses Nonaccrual loans and leases Nonaccrual loans and leases without an allowance for credit losses Commercial and industrial $ 37 $ — $ 1,241 $ 1,202 Construction and development 4,900 — 4,900 — Residential mortgage 97 97 101 101 Direct financing leases 17 17 82 82 Total nonaccrual loans and leases $ 5,051 $ 114 $ 6,324 $ 1,385 During the three months ended June 30, 2024 and December 31, 2023, the Company recognized $1,000 and $42,000 of interest income on nonaccrual loans and leases, respectively. The following tables present the Company's amortized cost basis of collateral dependent loans, and their respective collateral type, which are individually analyzed to determine expected credit losses as of June 30, 2024 and December 31, 2023: June 30, 2024 Commercial Real Estate Multi-family Housing Residential Real Estate Other Total Allowance on Collateral Dependent Loans Commercial mortgage $ 5,297 $ — $ — $ — $ 5,297 $ — Commercial and industrial — — — 4,258 4,258 — Construction and development 4,900 — — — 4,900 1,000 Multi-family — 1,513 — — 1,513 — Residential mortgage — — 147 — 147 — Total $ 10,197 $ 1,513 $ 147 $ 4,258 $ 16,115 $ 1,000 December 31, 2023 Commercial Real Estate Residential Real Estate Other Total Allowance on Collateral Dependent Loans Commercial mortgage $ 5,377 $ — $ — $ 5,377 $ — Commercial and industrial — — 3,868 3,868 — Construction and development 4,900 — — 4,900 1,000 Residential mortgage — 152 — 152 — Total $ 10,277 $ 152 $ 3,868 $ 14,297 $ 1,000 Loan Modification Disclosures under ASU 2022-02 In certain situations, the Company may modify the terms of a loan to a borrower experiencing financial difficulty. These modifications may include payment delays, term extensions, or interest-rate reductions. In some cases, combinations of modifications may be made to the same loan. If a determination is made that a modified loan has been deemed uncollectible, the loan (or portion of the loan) is charged-off, reducing the amortized cost basis of the loan and adjusting the allowance for credit losses. During the three and six months ended June 30, 2024 and 2023, the Company had no new modifications to borrowers experiencing financial difficulty. There were no modified loans and leases that had a payment default during the three or six months ended June 30, 2024 and 2023, and that were modified in the twelve months prior to that default by borrowers experiencing financial difficulty. Other Real Estate Owned Other real estate owned is included in other assets on the Condensed Consolidated Balance Sheets. At June 30, 2024 and December 31, 2023, other real estate owned included $43,200 and $136,000, respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At June 30, 2024 and December 31, 2023, the recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $465,000 and $470,000, respectively. Direct Financing Leases The following lists the components of the net investment in direct financing leases: June 30, December 31, Total minimum lease payments to be received $ 168,387 $ 177,952 Initial direct costs 9,297 9,702 177,684 187,654 Less: Unearned income (29,511) (31,056) Net investment in direct finance leases $ 148,173 $ 156,598 The following table summarizes the future minimum lease payments receivable subsequent to June 30, 2024: Remainder of 2024 $ 33,487 2025 56,419 2026 41,355 2027 24,965 2028 10,912 Thereafter 1,249 $ 168,387 Allowance for Credit Losses on Loans and Leases The allowance for credit losses on loans and leases is established for current expected credit losses on the Company's loan and lease portfolios in accordance with ASC Topic 326. This requires significant judgement to estimate credit losses measured on a collective pool basis when similar risk characteristics exist, and for loans evaluated individually. The Company estimates expected future losses for the loan's entire contractual term, taking into account expected payments when appropriate. The allowance is an estimation based on management's evaluation of expected losses related to the Company's financial assets measured at amortized cost. It considers relevant available information from internal and external sources relating to the historical loss experience, current conditions and reasonable and supportable forecasts for the Company's outstanding loan and lease balances. The Company utilizes a cash flow ("CF") analysis method of estimating expected losses, which relies on key inputs and assumptions. Significant factors affecting the calculation are the segmenting of loans and leases based upon similar risk characteristics, applied loss rates based upon reasonable and supportable forecasts, and contractual term adjustments, including prepayment and curtailment adjustments. To ensure the allowance is maintained at an adequate level, a detailed analysis is performed on a quarterly basis, with an appropriate provision made to adjust the allowance. The Company has elected to exclude accrued interest receivable from the calculation of the allowance for credit losses, as it is the Company's policy to write off accrued interest in a timely manner as it is deemed uncollectible by reversing interest income. The Company categorizes its loan portfolios into eight segments, as discussed above, based on similar risk characteristics. Loans within each segment are collectively evaluated using either a CF methodology or remaining life methodology. When estimating for credit loss, the Company forecasts the first four quarters of the credit loss estimate and reverts to a long-run average of each considered factor. The Company developed its reasonable and supportable forecasts using economic data, such as gross domestic product and unemployment rate. Qualitative adjustments are applied to each collectively segmented pool to appropriately capture differences in current or expected qualitative risk characteristics. When evaluating the estimation for expected credit losses, the Company evaluates these qualitative adjustments for any changes in: • lending policies, procedures, and strategies; • the nature and volume of the loan and lease portfolio; • international, national, regional, and local conditions; • the experience, depth, and ability of lending management; • the volume and severity of past due loans; • the quality of the loan review system; • the underlying collateral; • concentration risk; and • the effect of other external factors. The following tables summarize changes in the allowance for credit losses by segment for the three and six months ended June 30, 2024 and 2023, respectively: Balances, March 31, 2024 Provision for (reversal of) credit losses Charge-offs Recoveries Balances, June 30, 2024 Commercial mortgage $ 4,626 $ 155 $ — $ — $ 4,781 Commercial and industrial 1,390 17 — 14 1,421 Construction and development 3,900 (436) — — 3,464 Multi-family 1,906 191 — — 2,097 Residential mortgage 1,720 36 — 5 1,761 Home equity 113 20 — — 133 Direct financing leases 1,868 477 (514) 89 1,920 Consumer 302 47 (66) 22 305 Total $ 15,825 $ 507 $ (580) $ 130 $ 15,882 Balances, December 31, 2023 Provision for (reversal of) credit losses Charge-offs Recoveries Balances, June 30, 2024 Commercial mortgage $ 4,655 $ 126 $ — $ — $ 4,781 Commercial and industrial 1,281 65 — 75 1,421 Construction and development 3,883 (419) — — 3,464 Multi-family 1,789 308 — — 2,097 Residential mortgage 1,681 81 (10) 9 1,761 Home equity 102 31 — — 133 Direct financing leases 1,955 723 (871) 113 1,920 Consumer 317 78 (138) 48 305 Total $ 15,663 $ 993 $ (1,019) $ 245 $ 15,882 Balances, March 31, 2023 Provision for (reversal of) credit losses Charge-offs Recoveries Balances, June 30, 2023 Commercial mortgage $ 4,728 $ 232 $ — $ 3 $ 4,963 Commercial and industrial 1,538 74 — 11 1,623 Construction and development 3,475 (509) — — 2,966 Multi-family 1,967 14 — — 1,981 Residential mortgage 1,596 15 — 12 1,623 Home equity 112 (10) — — 102 Direct financing leases 1,765 285 (281) 45 1,814 Consumer 314 10 (24) 19 319 Total $ 15,495 $ 111 $ (305) $ 90 $ 15,391 Balances, December 31, 2022 Impact of adopting ASC 326 Balances, January 1, 2023 Post-ASC 326 adoption Provision for (reversal of) credit losses Charge-offs Recoveries Balances, June 30, 2023 Commercial mortgage $ 4,776 $ (395) $ 4,381 $ 569 $ — $ 13 $ 4,963 Commercial and industrial 1,291 360 1,651 (51) — 23 1,623 Construction and development 2,855 784 3,639 (673) — — 2,966 Multi-family 1,955 (99) 1,856 125 — — 1,981 Residential mortgage 76 1,439 1,515 86 — 22 1,623 Home equity 23 89 112 (10) — — 102 Direct financing leases 1,196 422 1,618 353 (366) 209 1,814 Consumer 241 64 305 52 (68) 30 319 Total $ 12,413 $ 2,664 $ 15,077 $ 451 $ (434) $ 297 $ 15,391 During the second quarter of 2024, the allowance for credit losses on loans and leases increased from $15.8 million at March 31, 2023, to $15.9 million at June 30, 2024. The increase was attributable to additional provisions totaling $507,000 during the second quarter of 2024, partially offset by net charge-offs of $450,000. Multiple loan categories experienced loan growth while a few declined slightly, as compared to prior quarter. • Commercial Mortgage – allowance increased due to loan balances increasing $17.8 million. • Commercial & Industrial – allowance increased due to loan balances increasing $3.5 million. • Construction & Development – allowance decreased due to loan balances decreasing $25.5 million. • Multi-Family – allowance increased due to balances increasing $20.5 million. • Residential Mortgage – allowance increased due to balances increasing $4.0 million. • Home Equity – allowance increased due to balances increasing $1.6 million. • Direct Financing Leases – allowance increased while balances decreased $4.3 million, due to a higher calculated reserve percentage. • Consumer – allowance increased slightly, while balances decreased $222,000. Our commercial loan portfolio, consisting of commercial and multi-family real estate loans, commercial and industrial loans, and construction loans, represented 68.9% and 68.1% of our portfolio as of June 30, 2024 and December 31, 2023, respectively. The allowance for credit losses on loans and leases allocated to the commercial loan portfolio represented 74.1% of our total allowance at both June 30, 2024 and December 31, 2023. Economic Outlook Due to the future-focused nature of the calculation for the allowance for credit losses, management must make significant assumptions. Estimating an appropriate allowance requires management to use relevant forward-looking information drawn from reasonable and supportable forecasts. Economic factors are a consequential part of these forecasts, and as such are evaluated periodically for developments that may impact the Company's allowance for credit losses and loan and lease portfolio. As of June 30, 2024, the primary economic factors affecting the Company's loan portfolio continue to be persistent inflation, higher interest rates, geopolitical risk, mild economic growth, and a weakened employment outlook. These key factors will continue to influence the Company's loan and lease portfolio for the near future. In addition, market liquidity continues to impact the economic environment and could potentially further tighten credit conditions. The Company remains committed to three growth market regions: Columbus, Ohio, Dayton/Springfield, Ohio, and Indianapolis, Indiana. These market regions specialize in commercial real estate loans, and their respective forecasts are described below: • Columbus, Ohio – The market region anticipates stable job growth in 2024, with slight increases projected in certain sectors. Construction activity is showing signs of slowing, as speculative projects are not being pre-leased, prompting greater caution in initiating new developments. The majority of new construction projects are built-to-suit, indicating a softening demand as parties exercise prudence amid economic uncertainties. The region's unemployment rate has seen a slight uptick, aligning with the national average. • Dayton/Springfield, Ohio – The economic outlook for this region remains stable. With few new projects entering the market and a lack of ongoing construction, the real estate sector appears to be in a holding pattern. However, there is a noticeable trend towards a decrease in the region's vacancy rate, suggesting potential shifts in demand patterns or better utilization of existing properties. Concerns about recession are diminishing, and the economic outlook for 2024 indicates a slow but steady positive trajectory. The relationship between Wright Patterson Air Force Base (WPAFB) and the local market is deeply interconnected, influencing all aspects of the economy. The future economic prospects of the area are closely tied to WPAFB and the success of the military, federal government, and defense industry. WPAFB is currently unveiling extensive plans to revamp and streamline processes across the Air Force and related sectors. These initiatives have the potential to significantly impact the economic trajectory of the local market. • Indianapolis, Indiana – Based upon optimistic 2024 first half economic results, the market region is expecting continued economic growth in 2024. First half results were fueled primarily by an expanding labor market, retail sales growth, and increasing median household incomes. Future potential economic volatility may have a significant impact on the Company's loan and lease portfolio, specifically the allowance for credit losses. There are a myriad of potential outcomes, and the variances may be significant and unpredictable. As a result, the Company's future estimates may fluctuate for the remainder of 2024. Allowance for Credit Losses on Unfunded Commitments The allowance for credit losses on unfunded commitments is included in other liabilities on the Condensed Consolidated Balance Sheets. The estimate of expected losses on unfunded commitments is calculated based on the loss rate for the loan or lease segment in which the loan or lease commitments would be classified if funded, adjusted for the estimate of funding probability. Additional provisions applied to the allowance are recognized in the provision for credit losses on the Condensed Consolidated Statements of Income. The following tables detail activity in the allowance for credit losses on unfunded commitments during the three and six months ended June 30, 2024 and 2023: Three Months Ended June 30, 2024 2023 Beginning balance $ 1,339 $ 2,204 Reversal of credit losses (236) (103) Ending balance $ 1,103 $ 2,101 Six Months Ended June 30, 2024 2023 Beginning balance $ 1,642 $ — Impact of adopting ASC 326 — 2,374 Reversal of credit losses (539) (273) Ending balance $ 1,103 $ 2,101 |
