Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2011

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to             

 

Commission file number 0-6233

 

GRAPHIC

(Exact name of registrant as specified in its charter)

 

INDIANA

 

35-1068133

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification
No.)

 

 

 

100 North Michigan Street

 

 

South Bend, IN

 

46614

(Address of principle executive
offices)

 

(Zip Code)

 

(574) 235-2000

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes x No

 

Number of shares of common stock outstanding as of July 15, 2011 — 24,213,142 shares

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

Consolidated statements of financial condition — June 30, 2011 and December 31, 2010

 

3

 

Consolidated statements of income — three and six months ended June 30, 2011 and 2010

 

4

 

Consolidated statements of shareholders’ equity — six months ended June 30, 2011 and 2010

 

5

 

Consolidated statements of cash flows — six months ended June 30, 2011 and 2010

 

6

 

Notes to the Consolidated Financial Statements

 

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

39

Item 4.

Controls and Procedures

 

39

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

39

Item 1A.

Risk Factors

 

39

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

Item 3.

Defaults Upon Senior Securities

 

40

Item 4.

(Removed and reserved)

 

40

Item 5.

Other Information

 

40

Item 6.

Exhibits

 

40

 

 

 

 

SIGNATURES

 

41

 

 

 

CERTIFICATIONS

 

 

 

 

 

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32.1

 

 

Exhibit 32.2

 

 

 

2



Table of Contents

 

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited - Dollars in thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

59,249

 

$

62,313

 

Federal funds sold and interest bearing deposits with other banks

 

100

 

34,559

 

Investment securities available-for-sale (amortized cost of $878,401 and $952,101 at June 30, 2011 and December 31, 2010, respectively)

 

902,742

 

969,018

 

Other investments

 

18,974

 

21,343

 

Trading account securities

 

143

 

138

 

Mortgages held for sale

 

7,805

 

32,599

 

Loans and leases - net of unearned discount

 

 

 

 

 

Commercial and agricultural loans

 

551,820

 

530,228

 

Auto, light truck and environmental equipment

 

473,925

 

396,500

 

Medium and heavy duty truck

 

155,423

 

162,824

 

Aircraft financing

 

607,567

 

614,357

 

Construction equipment financing

 

274,968

 

285,634

 

Commercial real estate

 

568,226

 

594,729

 

Residential real estate

 

390,389

 

390,951

 

Consumer loans

 

95,839

 

95,400

 

Total loans and leases

 

3,118,157

 

3,070,623

 

Reserve for loan and lease losses

 

(85,010

)

(86,874

)

Net loans and leases

 

3,033,147

 

2,983,749

 

Equipment owned under operating leases, net

 

77,102

 

78,138

 

Net premises and equipment

 

36,885

 

33,881

 

Goodwill and intangible assets

 

88,325

 

88,955

 

Accrued income and other assets

 

130,479

 

140,588

 

Total assets

 

$

4,354,951

 

$

4,445,281

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest bearing

 

$

516,189

 

$

524,564

 

Interest bearing

 

3,007,127

 

3,098,181

 

Total deposits

 

3,523,316

 

3,622,745

 

Short-term borrowings:

 

 

 

 

 

Federal funds purchased and securities sold under agreements to repurchase

 

108,799

 

136,028

 

Other short-term borrowings

 

21,324

 

19,961

 

Total short-term borrowings

 

130,123

 

155,989

 

Long-term debt and mandatorily redeemable securities

 

36,785

 

24,816

 

Subordinated notes

 

89,692

 

89,692

 

Accrued expenses and other liabilities

 

69,441

 

65,656

 

Total liabilities

 

3,849,357

 

3,958,898

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock; no par value

 

 

 

 

 

Authorized 10,000,000 shares; none issued or outstanding

 

 

 

Common stock; no par value

 

 

 

 

 

Authorized 40,000,000 shares; issued 25,643,506 at June 30, 2011 and December 31, 2010

 

346,535

 

350,282

 

Retained earnings

 

175,374

 

157,875

 

Cost of common stock in treasury (1,431,804 shares at June 30, 2011 and 1,470,696 shares at December 31, 2010)

 

(31,437

)

(32,284

)

Accumulated other comprehensive income

 

15,122

 

10,510

 

Total shareholders’ equity

 

505,594

 

486,383

 

Total liabilities and shareholders’ equity

 

$

4,354,951

 

$

4,445,281

 

 

The accompanying notes are a part of the consolidated financial statements.

 

3



Table of Contents

 

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited - Dollars in thousands, except per share amounts)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

41,710

 

$

43,099

 

$

83,009

 

$

85,369

 

Investment securities, taxable

 

4,912

 

5,279

 

9,394

 

10,680

 

Investment securities, tax-exempt

 

1,004

 

1,422

 

2,190

 

2,889

 

Other

 

247

 

250

 

490

 

524

 

Total interest income

 

47,873

 

50,050

 

95,083

 

99,462

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

8,162

 

11,573

 

16,517

 

23,978

 

Short-term borrowings

 

74

 

206

 

163

 

394

 

Subordinated notes

 

1,648

 

1,647

 

3,295

 

3,294

 

Long-term debt and mandatorily redeemable securities

 

405

 

375

 

664

 

645

 

Total interest expense

 

10,289

 

13,801

 

20,639

 

28,311

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

37,584

 

36,249

 

74,444

 

71,151

 

Provision for loan and lease losses

 

67

 

5,798

 

2,265

 

10,186

 

Net interest income after provision for loan and lease losses

 

37,517

 

30,451

 

72,179

 

60,965

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Trust fees

 

4,411

 

4,062

 

8,403

 

7,807

 

Service charges on deposit accounts

 

4,638

 

5,275

 

8,874

 

9,895

 

Mortgage banking income

 

835

 

425

 

1,279

 

1,202

 

Insurance commissions

 

1,062

 

1,061

 

2,204

 

2,526

 

Equipment rental income

 

6,009

 

6,672

 

12,047

 

13,417

 

Other income

 

3,327

 

3,012

 

6,298

 

5,701

 

Investment securities and other investment gains

 

1,142

 

95

 

1,272

 

976

 

Total noninterest income

 

21,424

 

20,602

 

40,377

 

41,524

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

19,135

 

18,848

 

37,773

 

37,658

 

Net occupancy expense

 

2,051

 

1,939

 

4,371

 

4,426

 

Furniture and equipment expense

 

3,561

 

3,196

 

6,910

 

5,996

 

Depreciation - leased equipment

 

4,795

 

5,304

 

9,600

 

10,668

 

Professional fees

 

1,080

 

1,418

 

2,176

 

2,932

 

Supplies and communication

 

1,316

 

1,338

 

2,710

 

2,707

 

FDIC and other insurance

 

958

 

1,667

 

2,634

 

3,341

 

Business development and marketing expense

 

864

 

880

 

1,486

 

1,447

 

Loan and lease collection and repossession expense

 

1,500

 

3,267

 

2,824

 

4,373

 

Other expense

 

683

 

1,792

 

3,935

 

3,211

 

Total noninterest expense

 

35,943

 

39,649

 

74,419

 

76,759

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

22,998

 

11,404

 

38,137

 

25,730

 

Income tax expense

 

8,133

 

3,609

 

12,664

 

8,256

 

 

 

 

 

 

 

 

 

 

 

Net income

 

14,865

 

7,795

 

25,473

 

17,474

 

Preferred stock dividends and discount accretion

 

 

(1,717

)

 

(3,428

)

Net income available to common shareholders

 

$

14,865

 

$

6,078

 

$

25,473

 

$

14,046

 

 

 

 

 

 

 

 

 

 

 

Per common share

 

 

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.61

 

$

0.25

 

$

1.04

 

$

0.57

 

Diluted net income per common share

 

$

0.61

 

$

0.25

 

$

1.04

 

$

0.57

 

Dividends

 

$

0.16

 

$

0.15

 

$

0.32

 

$

0.30

 

Basic weighted average common shares outstanding

 

24,254,334

 

24,284,519

 

24,262,803

 

24,247,586

 

Diluted weighted average common shares outstanding

 

24,263,596

 

24,292,491

 

24,271,527

 

24,254,098

 

 

The accompanying notes are a part of the consolidated financial statements.

 

4



Table of Contents

 

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited - Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Cost of

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common

 

Other

 

 

 

 

 

Preferred

 

Common

 

Retained

 

Stock

 

Comprehensive

 

 

 

Total

 

Stock

 

Stock

 

Earnings

 

in Treasury

 

Income (Loss), Net

 

Balance at January 1, 2010

 

$

570,320

 

$

104,930

 

$

350,269

 

$

142,407

 

$

(32,380

)

$

5,094

 

Comprehensive Income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

17,474

 

 

 

17,474

 

 

 

Change in unrealized appreciation of available-for-sale securities, net of tax

 

9,411

 

 

 

 

 

9,411

 

Reclassification adjustment for gains included in net income, net of tax

 

(174

)

 

 

 

 

(174

)

Total Comprehensive Income

 

26,711

 

 

 

 

 

 

Issuance of 188,470 common shares under stock based compensation awards, including related tax effects

 

2,884

 

 

 

628

 

2,256

 

 

Cost of 21,471 shares of common stock acquired for treasury

 

(362

)

 

 

 

(362

)

 

Preferred stock discount accretion

 

 

653

 

 

(653

)

 

 

Preferred stock dividend (paid and/or accrued)

 

(2,775

)

 

 

(2,775

)

 

 

Common stock dividend ($0.30 per share)

 

(7,282

)

 

 

(7,282

)

 

 

Stock based compensation

 

6

 

 

6

 

 

 

 

Balance at June 30, 2010

 

$

589,502

 

$

105,583

 

$

350,275

 

$

149,799

 

$

(30,486

)

$

14,331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2011

 

$

486,383

 

$

 

$

350,282

 

$

157,875

 

$

(32,284

)

$

10,510

 

Comprehensive Income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

25,473

 

 

 

25,473

 

 

 

Change in unrealized appreciation of available-for-sale securities, net of tax

 

5,457

 

 

 

 

 

5,457

 

Reclassification adjustment for gains included in net income, net of tax

 

(845

)

 

 

 

 

(845

)

Total Comprehensive Income

 

30,085

 

 

 

 

 

 

Issuance of 148,291 common shares under stock based compensation awards, including related tax effects

 

2,818

 

 

 

(168

)

2,986

 

 

Cost of 109,399 shares of common stock acquired for treasury

 

(2,139

)

 

 

 

(2,139

)

 

Repurchase of common stock warrant

 

(3,750

)

 

(3,750

)

 

 

 

Common stock dividend ($0.32 per share)

 

(7,806

)

 

 

(7,806

)

 

 

Stock based compensation

 

3

 

 

3

 

 

 

 

Balance at June 30, 2011

 

$

505,594

 

$

 

$

346,535

 

$

175,374

 

$

(31,437

)

$

15,122

 

 

The accompanying notes are a part of the consolidated financial statements.

 

5



Table of Contents

 

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited - Dollars in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2011

 

2010

 

Operating activities:

 

 

 

 

 

Net income

 

$

25,473

 

$

17,474

 

Adjustments to reconcile net income to net cash provided (used) by operating activities:

 

 

 

 

 

Provision for loan and lease losses

 

2,265

 

10,186

 

Depreciation of premises and equipment

 

1,780

 

2,156

 

Depreciation of equipment owned and leased to others

 

9,600

 

10,668

 

Amortization of investment security premiums and accretion of discounts, net

 

965

 

795

 

Amortization of mortgage servicing rights

 

1,458

 

1,461

 

Mortgage servicing asset impairment

 

16

 

970

 

Deferred income taxes

 

(755

)

8,637

 

Investment securities and other investment gains

 

(1,272

)

(976

)

Originations/purchases of loans held for sale, net of principal collected

 

(40,963

)

(138,692

)

Proceeds from the sales of loans held for sale

 

66,258

 

107,651

 

Net gain on sale of loans held for sale

 

(500

)

(1,394

)

Change in trading account securities

 

(5

)

12

 

Change in interest receivable

 

918

 

1,255

 

Change in interest payable

 

2,462

 

3,238

 

Change in other assets

 

8,347

 

(3,482

)

Change in other liabilities

 

(734

)

(6,355

)

Other

 

2,620

 

387

 

Net change in operating activities

 

77,933

 

13,991

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Proceeds from sales of investment securities

 

126,805

 

71,917

 

Proceeds from maturities of investment securities

 

107,843

 

215,792

 

Purchases of investment securities

 

(160,641

)

(303,604

)

Net change in other investments

 

2,370

 

2,056

 

Loans sold or participated to others

 

11,010

 

9,886

 

Net change in loans and leases

 

(62,674

)

(58,893

)

Net change in equipment owned under operating leases

 

(8,564

)

(4,952

)

Purchases of premises and equipment

 

(5,589

)

(1,041

)

Net change in investing activities

 

10,560

 

(68,839

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Net change in demand deposits, NOW accounts and savings accounts

 

(108,064

)

44,177

 

Net change in certificates of deposit

 

8,635

 

(87,055

)

Net change in short-term borrowings

 

(25,866

)

(8,336

)

Proceeds from issuance of long-term debt

 

10,554

 

10,346

 

Payments on long-term debt

 

(256

)

(289

)

Net proceeds from issuance of treasury stock

 

2,818

 

2,884

 

Acquisition of treasury stock

 

(2,139

)

(362

)

Repurchase of common stock warrant

 

(3,750

)

 

Cash dividends paid on preferred stock

 

 

(2,775

)

Cash dividends paid on common stock

 

(7,948

)

(7,408

)

Net change in financing activities

 

(126,016

)

(48,818

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(37,523

)

(103,666

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

96,872

 

210,102

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

59,349

 

$

106,436

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

Loans transferred to other real estate and repossessed assets

 

$

6,721

 

$

10,939

 

Common stock matching contribution to KSOP plan

 

2,420

 

2,545

 

 

The accompanying notes are a part of the consolidated financial statements.

 

6



Table of Contents

 

1ST SOURCE CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.       Basis of Presentation

 

The accompanying unaudited consolidated financial statements reflect all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, the results of operations, changes in shareholders’ equity, and cash flows for the periods presented.  These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been omitted.  The Notes to the Consolidated Financial Statements appearing in 1st Source Corporation’s Annual Report on Form 10-K (2010 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements.  The balance sheet at December 31, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  Certain amounts in the prior period consolidated financial statements have been reclassified to conform with the current year presentation.

 

Cash Flow — For purposes of the consolidated statements of cash flow, we consider cash and due from banks, federal funds sold and interest bearing deposits with other banks with original maturities of three months or less as cash and cash equivalents.

 

Note 2.       Recent Accounting Pronouncements

 

Comprehensive Income:  In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05 “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income.”  ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011.  We are assessing the impact of ASU 2011-05 on our comprehensive income presentation.

 

Fair Value Measurements:  In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  Consequently, the amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs (International Financial Reporting Standards).  ASU 2011-04 is effective prospectively during interim and annual periods beginning on or after December 15, 2011.  Early application by public entities is not permitted.  We are assessing the impact of ASU 2011-04 on our fair value disclosures.

 

Transfers and Servicing:  In April 2011, the FASB issued ASU No. 2011-03 “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreement.”  ASU 2011-03 removes from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee.  ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011.  The guidance should

 

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be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date.  Early adoption is not permitted.  We are assessing the impact of ASU 2011-03 on our financial condition, results of operations, and disclosures.

 

Receivables:  In April 2011, the FASB issued ASU No. 2011-02 “Receivables (Topic 310) — A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.”  ASU 2011-02 clarifies whether loan modifications constitute troubled debt restructuring.  In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties.  ASU 2011-02 is effective for the first interim and annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  We are assessing the impact of ASU 2011-02 on our financial condition, results of operations, and disclosures.

 

Business Combinations:  In December 2010, the FASB issued ASU No. 2010-29 “Business Combinations (Topic 805) - Disclosure of Supplementary Pro Forma Information for Business Combinations.”  If a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  ASU 2010-29 also expands the supplementary pro forma disclosures.  ASU 2010-29 was effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  ASU 2010-29 will only affect us if there are future business combinations.

 

Intangibles - Goodwill and Other:  In December 2010, the FASB issued ASU No. 2010-28 “Intangibles - Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.”  ASU 2010-28 affects all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative.  ASU 2010-28 was effective for fiscal years and interim periods within those years, beginning after December 15, 2010.  ASU 2010-28 did not have an impact on our financial condition, results of operations, or disclosures.

 

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Note 3.       Investment Securities

 

Investment securities available-for-sale were as follows:

 

 

 

Amortized

 

Gross

 

Gross

 

 

 

(Dollars in thousands)

 

Cost

 

Unrealized Gains

 

Unrealized Losses

 

Fair Value

 

June 30, 2011

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

376,304

 

$

6,998

 

$

(127

)

$

383,175

 

U.S. States and political subdivisions securities

 

112,900

 

5,310

 

(786

)

117,424

 

Mortgage-backed securities — Federal agencies

 

339,583

 

9,898

 

(225

)

349,256

 

Corporate debt securities

 

40,563

 

181

 

(70

)

40,674

 

Foreign government and other securities

 

6,705

 

44

 

(54

)

6,695

 

Total debt securities

 

876,055

 

22,431

 

(1,262

)

897,224

 

Marketable equity securities

 

2,346

 

3,176

 

(4

)

5,518

 

Total investment securities available-for-sale

 

$

878,401

 

$

25,607

 

$

(1,266

)

$

902,742

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

442,612

 

$

5,546

 

$

(849

)

$

447,309

 

U.S. States and political subdivisions securities

 

147,679

 

4,381

 

(1,753

)

150,307

 

Mortgage-backed securities — Federal agencies

 

309,046

 

7,854

 

(232

)

316,668

 

Corporate debt securities

 

45,778

 

182

 

(345

)

45,615

 

Foreign government and other securities

 

5,732

 

18

 

(34

)

5,716

 

Total debt securities

 

950,847

 

17,981

 

(3,213

)

965,615

 

Marketable equity securities

 

1,254

 

2,152

 

(3

)

3,403

 

Total investment securities available-for-sale

 

$

952,101

 

$

20,133

 

$

(3,216

)

$

969,018

 

 

At June 30, 2011 and December 31, 2010, the residential mortgage-backed securities we held consisted primarily of GNMA, FNMA and FHLMC pass-through certificates which are guaranteed by those respective agencies of the United States government (or Government Sponsored Enterprise, GSEs).

 

The contractual maturities of debt securities available-for-sale at June 30, 2011 are shown below.  Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars in thousands)

 

Amortized Cost

 

Fair Value

 

Due in one year or less

 

$

45,160

 

$

45,550

 

Due after one year through five years

 

337,681

 

344,378

 

Due after five years through ten years

 

146,453

 

151,643

 

Due after ten years

 

7,178

 

6,397

 

Mortgage-backed securities

 

339,583

 

349,256

 

Total debt securities available-for-sale

 

$

876,055

 

$

897,224

 

 

The following table shows the gross realized gains and losses on sale of securities from the securities available-for-sale portfolio, including marketable equity securities.  Realized gains and losses on the sales of all securities are computed using the specific identification cost basis.  The gross gains and losses in the first six months of 2011 primarily reflect the sale of municipal, Farmer Mac, FHLB and FFCB debt securities.  The sale of municipal securities was to reduce credit risk exposure in certain states.  The action to sell agency securities was to improve future yield.  There was no impact to other than temporary impairment (OTTI) as a result of the 2011 sales.  The gross gains and losses in the first six months of 2010 reflect the disposition of FNMA and FHLMC debt securities.  There were no OTTI write-downs in 2011 or 2010.

 

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Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(Dollars in thousands)

 

2011

 

2010

 

2011

 

2010

 

Gross realized gains

 

$

1,153

 

$

 

$

1,598

 

$

292

 

Gross realized losses

 

 

 

(238

)

(12

)

Net realized gains (losses)

 

$

1,153

 

$

 

$

1,360

 

$

280

 

 

There were net gains of $5 thousand for the six months ended June 30, 2011 and net losses of $11 thousand recorded for the six months ended June 30, 2010 on $0.14 million in trading securities outstanding at June 30, 2011 and at December 31, 2010.

 

The following tables summarize our gross unrealized losses and fair value by investment category and age:

 

 

 

Less than 12 Months

 

12 months or Longer

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(Dollars in thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

39,869

 

$

(127

)

$

 

$

 

$

39,869

 

$

(127

)

U.S. States and political subdivisions securities

 

1,582

 

(34

)

6,426

 

(752

)

8,008

 

(786

)

Mortgage-backed securities - Federal agencies

 

50,235

 

(201

)

4,215

 

(24

)

54,450

 

(225

)

Corporate debt securities

 

17,090

 

(70

)

 

 

17,090

 

(70

)

Foreign government and other securities

 

940

 

(54

)

 

 

940

 

(54

)

Total debt securities

 

109,716

 

(486

)

10,641

 

(776

)

120,357

 

(1,262

)

Marketable equity securities

 

1

 

 

4

 

(4

)

5

 

(4

)

Total investment securities available-for-sale

 

$

109,717

 

$

(486

)

$

10,645

 

$

(780

)

$

120,362

 

$

(1,266

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

158,497

 

$

(849

)

$

 

$

 

$

158,497

 

$

(849

)

U.S. States and political subdivisions securities

 

9,226

 

(246

)

9,055

 

(1,507

)

18,281

 

(1,753

)

Mortgage-backed securities - Federal agencies

 

23,351

 

(213

)

4,887

 

(19

)

28,238

 

(232

)

Corporate debt securities

 

26,407

 

(345

)

 

 

26,407

 

(345

)

Foreign government and other securities

 

3,015

 

(34

)

 

 

3,015

 

(34

)

Total debt securities

 

220,496

 

(1,687

)

13,942

 

(1,526

)

234,438

 

(3,213

)

Marketable equity securities

 

 

 

5

 

(3

)

5

 

(3

)

Total investment securities available-for-sale

 

$

220,496

 

$

(1,687

)

$

13,947

 

$

(1,529

)

$

234,443

 

$

(3,216

)

 

The initial indication of OTTI for both debt and equity securities is a decline in fair value below amortized cost.  Quarterly, the impaired securities are analyzed on a qualitative and quantitative basis in determining OTTI.  Declines in the fair value of available-for-sale debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses.  The amount of impairment related to other factors is recognized in other comprehensive income.  In estimating OTTI impairment losses, we consider among other things, (i) the length of time and the extent to which fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether it is more likely than not that we will not have to sell any such securities before a recovery of cost.

 

At June 30, 2011, we do not have the intent to sell any of the available-for-sale securities in the table above and believe that it is more likely than not that we will not have to sell any such securities before an anticipated recovery of cost.  The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased and market illiquidity on auction rate securities which are reflected in U.S. States and Political subdivisions securities.  The fair value is expected to recover on all debt securities as they approach their maturity date or repricing date or if market yields for such investments decline.  We do not believe any of the securities are impaired due to reasons of credit quality.  Accordingly, as of June 30, 2011, we believe the impairments detailed in the table above are temporary and no impairment loss has been

 

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realized in our consolidated statements of income.

 

At June 30, 2011 and December 31, 2010, investment securities with carrying values of $255.75 million and $299.88 million, respectively, were pledged as collateral to secure government deposits, security repurchase agreements, and for other purposes.

 

Note 4.       Loan and Lease Financings

 

We evaluate 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).  We use 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 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 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 adequacy of the reserve 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).

 

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The table below presents the credit quality grades of the recorded investment in loans and leases, segregated by class.

 

 

 

Credit Quality Grades

 

(Dollars in thousands)

 

1-6

 

7-12

 

Total

 

June 30, 2011

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

504,680

 

$

47,140

 

$

551,820

 

Auto, light truck and environmental equipment

 

468,911

 

5,014

 

473,925

 

Medium and heavy duty truck

 

140,418

 

15,005

 

155,423

 

Aircraft financing

 

560,855

 

46,712

 

607,567

 

Construction equipment financing

 

249,834

 

25,134

 

274,968

 

Commercial real estate

 

508,983

 

59,243

 

568,226

 

Total

 

$

2,433,681

 

$

198,248

 

$

2,631,929

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

483,603

 

$

46,625

 

$

530,228

 

Auto, light truck and environmental equipment

 

389,774

 

6,726

 

396,500

 

Medium and heavy duty truck

 

143,431

 

19,393

 

162,824

 

Aircraft financing

 

555,106

 

59,251

 

614,357

 

Construction equipment financing

 

246,644

 

38,990

 

285,634

 

Commercial real estate

 

532,581

 

62,148

 

594,729

 

Total

 

$

2,351,139

 

$

233,133

 

$

2,584,272

 

 

The table below presents the recorded investment in residential real estate and consumer loans by performing or non-performing status.  Non-performing loans are those loans which are on nonaccrual status or are 90 days or more past due.

 

(Dollars in thousands) 

 

Performing

 

Nonperforming

 

Total

 

June 30, 2011

 

 

 

 

 

 

 

Residential real estate

 

$

385,901

 

$

4,488

 

$

390,389

 

Consumer

 

95,427

 

412

 

95,839

 

Total

 

$

481,328

 

$

4,900

 

$

486,228

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

Residential real estate

 

$

385,729

 

$

5,222

 

$

390,951

 

Consumer

 

94,973

 

427

 

95,400

 

Total

 

$

480,702

 

$

5,649

 

$

486,351

 

 

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Table of Contents

 

The table below presents the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.

 

 

 

 

 

 

 

 

 

90 Days

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

or More

 

 

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Past Due

 

Total

 

 

 

Total Financing

 

(Dollars in thousands) 

 

Current

 

Past Due

 

Past Due

 

and Accruing

 

Accruing Loans

 

Nonaccrual

 

Receivables

 

June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

545,602

 

$

792

 

$

160

 

$

 

$

546,554

 

$

5,266

 

$

551,820

 

Auto, light truck and environmental equipment

 

470,680

 

468

 

240

 

 

471,388

 

2,537

 

473,925

 

Medium and heavy duty truck

 

151,076

 

138

 

3

 

 

151,217

 

4,206

 

155,423

 

Aircraft financing

 

586,772

 

3,640

 

124

 

 

590,536

 

17,031

 

607,567

 

Construction equipment financing

 

267,846

 

1,364

 

1,482

 

 

270,692

 

4,276

 

274,968

 

Commercial real estate

 

538,707

 

1,682

 

796

 

 

541,185

 

27,041

 

568,226

 

Residential real estate

 

382,960

 

2,222

 

719

 

272

 

386,173

 

4,216

 

390,389

 

Consumer

 

94,220

 

935

 

272

 

65

 

95,492

 

347

 

95,839

 

Total

 

$

3,037,863

 

$

11,241

 

$

3,796

 

$

337

 

$

3,053,237

 

$

64,920

 

$

3,118,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

521,363

 

$

760

 

$

22

 

$

 

$

522,145

 

$

8,083

 

$

530,228

 

Auto, light truck and environmental equipment

 

391,925

 

528

 

715

 

 

393,168

 

3,332

 

396,500

 

Medium and heavy duty truck

 

157,723

 

33

 

 

 

157,756

 

5,068

 

162,824

 

Aircraft financing

 

580,174

 

16,097

 

188

 

 

596,459

 

17,898

 

614,357

 

Construction equipment financing

 

275,204

 

1,254

 

601

 

 

277,059

 

8,575

 

285,634

 

Commercial real estate

 

567,254

 

759

 

94

 

 

568,107

 

26,622

 

594,729

 

Residential real estate

 

381,368

 

3,781

 

580

 

264

 

385,993

 

4,958

 

390,951

 

Consumer

 

93,290

 

1,152

 

531

 

98

 

95,071

 

329

 

95,400

 

Total

 

$

2,968,301

 

$

24,364

 

$

2,731

 

$

362

 

$

2,995,758

 

$

74,865

 

$

3,070,623

 

 

A loan or lease is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan or lease agreement.  The table below presents impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.

 

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Table of Contents

 

 

 

 

 

Unpaid

 

 

 

 

 

Recorded

 

Principal

 

Related

 

(Dollars in thousands) 

 

Investment

 

Balance

 

Allowance

 

June 30, 2011

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

2,771

 

$

2,771

 

$

 

Auto, light truck and environmental equipment

 

1,387

 

1,387

 

 

Medium and heavy duty truck

 

3,244

 

3,244

 

 

Aircraft financing

 

13,938

 

13,938

 

 

Construction equipment financing

 

3,670

 

3,670

 

 

Commercial real estate

 

22,080

 

22,084

 

 

Total with no related allowance recorded

 

47,090

 

47,094

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

7,477

 

7,477

 

3,051

 

Auto, light truck and environmental equipment

 

446

 

446

 

105

 

Medium and heavy duty truck

 

989

 

989

 

172

 

Aircraft financing

 

3,008

 

3,008

 

817

 

Construction equipment financing

 

562

 

562

 

20

 

Commercial real estate

 

6,717

 

6,716

 

639

 

Total with an allowance recorded

 

19,199

 

19,198

 

4,804

 

Total impaired loans

 

$

66,289

 

$

66,292

 

$

4,804

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

4,930

 

$

4,930

 

$

 

Auto, light truck and environmental equipment

 

1,596

 

1,597

 

 

Medium and heavy duty truck

 

1,748

 

1,748

 

 

Aircraft financing

 

4,509

 

4,509

 

 

Construction equipment financing

 

5,534

 

5,535

 

 

Commercial real estate

 

21,071

 

21,071

 

 

Total with no related allowance recorded

 

39,388

 

39,390

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

8,282

 

8,281

 

4,190

 

Auto, light truck and environmental equipment

 

1,136

 

1,136

 

377

 

Medium and heavy duty truck

 

3,347

 

3,347

 

1,049

 

Aircraft financing

 

13,913

 

13,913

 

2,050

 

Construction equipment financing

 

3,374

 

3,379

 

648

 

Commercial real estate

 

8,625

 

8,630

 

893

 

Total with an allowance recorded

 

38,677

 

38,686

 

9,207

 

Total impaired loans

 

$

78,065

 

$

78,076

 

$

9,207

 

 

Average recorded investment and interest income recognized on impaired loans and leases, segregated by class, is shown in the table below.

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

(Dollars in thousands) 

 

Average
Recorded
Investment

 

Interest
Income

 

Interest
Income

 

Average
Recorded
Investment

 

Interest
Income

 

Interest
Income

 

Commercial and agricultural loans

 

$

11,342

 

$

114

 

$

181

 

$

12,156

 

$

230

 

$

206

 

Auto, light truck and environmental equipment

 

1,774

 

 

 

2,005

 

1

 

 

Medium and heavy duty truck

 

4,350

 

1

 

2

 

4,580

 

3

 

3

 

Aircraft financing

 

17,070

 

6

 

103

 

16,673

 

15

 

103

 

Construction equipment financing

 

6,289

 

8

 

81

 

7,300

 

16

 

169

 

Commercial real estate

 

30,448

 

49

 

20

 

30,156

 

114

 

44

 

Total

 

$

71,273

 

$

178

 

$

387

 

$

72,870

 

$

379

 

$

525

 

 

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Table of Contents

 

As of June 30, 2011 and December 31, 2010, we had $6.61 million and $7.31 million, respectively of performing loans classified as troubled debt restructuring.

 

Note 5.       Reserve for Loan and Lease Losses

 

The reserve for loan and lease loss methodology has been consistently applied for several years, with enhancements instituted periodically.  Reserve ratios are reviewed quarterly and revised periodically to reflect recent loss history and to incorporate current risks and trends which may not be recognized in historical data.  As we update our historical charge-off analysis, we review the look-back periods for each business loan portfolio.  Furthermore, we perform a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency in order to review portfolio trends and other factors, including specific industry risks and economic conditions, which may have an impact on the reserves and reserve ratios applied to various portfolios.  We adjust the calculated historical based ratio as a result of our analysis of environmental factors, principally economic risk and concentration risk.  Key economic factors affecting our portfolios are growth in gross domestic product, unemployment rates, housing market trends, commodity prices, inflation, national and international economic volatility, global debt and capital markets and political stability or lack thereof.  Concentration risk is impacted primarily by geographic concentration in Northern Indiana and Southwestern Lower Michigan in our business banking and commercial real estate portfolios and by collateral concentration in our specialty finance portfolios and exposure to foreign markets by geographic risk.

 

The reserve for loan and lease losses is maintained at a level believed to be adequate by management to absorb probable losses inherent in the loan and lease portfolio.  The determination of the reserve requires significant judgment reflecting management’s best estimate of probable loan and lease losses related to specifically identified loans and leases as well as probable losses in the remainder of the various loan and lease portfolios.  For purposes of determining the reserve, we have segmented our loans and leases into classes based on the associated risks within these segments.  We have determined that eight classes exist within our loan and lease portfolio.  The methodology for assessing the appropriateness of the reserve consists of several key elements, which include: specific reserves for impaired loans, percentage allocations for special attention loans and leases (classified loans and leases and internal watch list credits) without specific reserves, formula reserves (calculated by applying loss factors based upon a review of historical loss experience and qualitative factors) for each business lending division portfolio, and reserves for pooled homogeneous loans and leases.  Management’s evaluation is based upon a continuing review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic and geopolitical events, all of which are subject to judgment and will change.

 

15



Table of Contents

 

Changes in the reserve for loan and lease losses, segregated by class, for the three months ended June 30, 2011 and 2010 are shown below.

 

 

 

 

 

Auto, light truck

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

Commercial and

 

and environmental

 

Medium and

 

Aircraft

 

equipment

 

Commercial

 

Residential

 

Consumer

 

 

 

(Dollars in thousands) 

 

agricultural loans

 

equipment

 

heavy duty truck

 

financing

 

financing

 

real estate

 

real estate

 

loans

 

Total

 

June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for loan and lease losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

16,305

 

$

7,924

 

$

5,065

 

$

30,903

 

$

6,798

 

$

15,535

 

$

2,542

 

$

1,088

 

$

86,160

 

Charge-offs

 

535

 

257

 

 

530

 

268

 

1,234

 

120

 

257

 

3,201

 

Recoveries

 

1,492

 

25

 

 

90

 

63

 

181

 

31

 

102

 

1,984

 

Net charge-offs (recoveries)

 

(957

)

232

 

 

440

 

205

 

1,053

 

89

 

155

 

1,217

 

Provision (recovery of provision)

 

(448

)

1,349

 

(481

)

(1,902

)

209

 

918

 

204

 

218

 

67

 

Balance, end of period

 

$

16,814

 

$

9,041

 

$

4,584

 

$

28,561

 

$

6,802

 

$

15,400

 

$

2,657

 

$

1,151

 

$

85,010

 

Ending balance: individually evaluated for impairment

 

$

3,051

 

$

105

 

$

172