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 September 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 principal 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 October 14, 2011 – 24,213,116 shares

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

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

3

 

Consolidated statements of income — three and nine months ended September 30, 2011 and 2010

4

 

Consolidated statements of shareholders’ equity — nine months ended September 30, 2011 and 2010

5

 

Consolidated statements of cash flows — nine months ended September 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

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.

Controls and Procedures

41

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3.

Defaults Upon Senior Securities

42

Item 4.

(Removed and reserved)

42

Item 5.

Other Information

42

Item 6.

Exhibits

43

 

 

 

SIGNATURES

44

 

 

 

CERTIFICATIONS

 

 

 

 

 

Exhibit 31.1

45

 

Exhibit 31.2

46

 

Exhibit 32.1

47

 

Exhibit 32.2

48

 

2


 


Table of Contents

 

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited - Dollars in thousands)

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

57,986

 

$

62,313

 

Federal funds sold and interest bearing deposits with other banks

 

25,064

 

34,559

 

Investment securities available-for-sale (amortized cost of $820,336 and $952,101 at September 30, 2011 and December 31, 2010, respectively)

 

850,507

 

969,018

 

Other investments

 

18,974

 

21,343

 

Trading account securities

 

119

 

138

 

Mortgages held for sale

 

13,219

 

32,599

 

Loans and leases - net of unearned discount

 

 

 

 

 

Commercial and agricultural loans

 

557,392

 

530,228

 

Auto, light truck and environmental equipment

 

442,127

 

396,500

 

Medium and heavy duty truck

 

152,703

 

162,824

 

Aircraft financing

 

613,706

 

614,357

 

Construction equipment financing

 

260,241

 

285,634

 

Commercial real estate

 

556,287

 

594,729

 

Residential real estate

 

404,063

 

390,951

 

Consumer loans

 

96,775

 

95,400

 

Total loans and leases

 

3,083,294

 

3,070,623

 

Reserve for loan and lease losses

 

(84,210

)

(86,874

)

Net loans and leases

 

2,999,084

 

2,983,749

 

Equipment owned under operating leases, net

 

75,096

 

78,138

 

Net premises and equipment

 

40,958

 

33,881

 

Goodwill and intangible assets

 

88,000

 

88,955

 

Accrued income and other assets

 

136,934

 

140,588

 

Total assets

 

$

4,305,941

 

$

4,445,281

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest bearing

 

$

560,932

 

$

524,564

 

Interest bearing

 

2,886,653

 

3,098,181

 

Total deposits

 

3,447,585

 

3,622,745

 

Short-term borrowings:

 

 

 

 

 

Federal funds purchased and securities sold under agreements to repurchase

 

124,779

 

136,028

 

Other short-term borrowings

 

16,159

 

19,961

 

Total short-term borrowings

 

140,938

 

155,989

 

Long-term debt and mandatorily redeemable securities

 

37,064

 

24,816

 

Subordinated notes

 

89,692

 

89,692

 

Accrued expenses and other liabilities

 

73,783

 

65,656

 

Total liabilities

 

3,789,062

 

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 September 30, 2011 and December 31, 2010

 

346,535

 

350,282

 

Retained earnings

 

183,007

 

157,875

 

Cost of common stock in treasury (1,430,490 shares at September 30, 2011 and 1,470,696 shares at December 31, 2010)

 

(31,408

)

(32,284

)

Accumulated other comprehensive income

 

18,745

 

10,510

 

Total shareholders’ equity

 

516,879

 

486,383

 

Total liabilities and shareholders’ equity

 

$

4,305,941

 

$

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

40,741

 

$

43,722

 

$

123,750

 

$

129,091

 

Investment securities, taxable

 

4,694

 

4,931

 

14,088

 

15,611

 

Investment securities, tax-exempt

 

934

 

1,369

 

3,124

 

4,258

 

Other

 

217

 

219

 

707

 

743

 

Total interest income

 

46,586

 

50,241

 

141,669

 

149,703

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

7,756

 

10,790

 

24,273

 

34,768

 

Short-term borrowings

 

77

 

219

 

240

 

613

 

Subordinated notes

 

1,647

 

1,648

 

4,942

 

4,942

 

Long-term debt and mandatorily redeemable securities

 

480

 

400

 

1,144

 

1,045

 

Total interest expense

 

9,960

 

13,057

 

30,599

 

41,368

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

36,626

 

37,184

 

111,070

 

108,335

 

Provision for loan and lease losses

 

1,260

 

5,578

 

3,525

 

15,764

 

Net interest income after provision for loan and lease losses

 

35,366

 

31,606

 

107,545

 

92,571

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Trust fees

 

3,902

 

3,870

 

12,305

 

11,677

 

Service charges on deposit accounts

 

4,748

 

4,918

 

13,622

 

14,813

 

Mortgage banking income

 

1,056

 

2,549

 

2,335

 

3,751

 

Insurance commissions

 

1,212

 

1,180

 

3,416

 

3,706

 

Equipment rental income

 

5,814

 

6,495

 

17,861

 

19,912

 

Other income

 

3,084

 

2,656

 

9,382

 

8,357

 

Investment securities and other investment gains

 

414

 

1,083

 

1,686

 

2,059

 

Total noninterest income

 

20,230

 

22,751

 

60,607

 

64,275

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

19,476

 

18,980

 

57,249

 

56,638

 

Net occupancy expense

 

2,237

 

2,200

 

6,608

 

6,626

 

Furniture and equipment expense

 

3,519

 

3,227

 

10,429

 

9,223

 

Depreciation - leased equipment

 

4,650

 

5,173

 

14,250

 

15,841

 

Professional fees

 

1,326

 

1,563

 

3,502

 

4,495

 

Supplies and communication

 

1,312

 

1,387

 

4,022

 

4,094

 

FDIC and other insurance

 

874

 

1,420

 

3,508

 

4,761

 

Business development and marketing expense

 

968

 

845

 

2,454

 

2,292

 

Loan and lease collection and repossession expense

 

1,387

 

1,449

 

4,211

 

5,822

 

Other expense

 

1,399

 

1,566

 

5,334

 

4,777

 

Total noninterest expense

 

37,148

 

37,810

 

111,567

 

114,569

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

18,448

 

16,547

 

56,585

 

42,277

 

Income tax expense

 

6,908

 

5,344

 

19,572

 

13,600

 

 

 

 

 

 

 

 

 

 

 

Net income

 

11,540

 

11,203

 

37,013

 

28,677

 

Preferred stock dividends and discount accretion

 

 

(1,721

)

 

(5,149

)

Net income available to common shareholders

 

$

11,540

 

$

9,482

 

$

37,013

 

$

23,528

 

 

 

 

 

 

 

 

 

 

 

Per common share

 

 

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.47

 

$

0.39

 

$

1.51

 

$

0.96

 

Diluted net income per common share

 

$

0.47

 

$

0.39

 

$

1.51

 

$

0.96

 

Dividends

 

$

0.16

 

$

0.15

 

$

0.48

 

$

0.45

 

Basic weighted average common shares outstanding

 

24,213,063

 

24,247,236

 

24,246,041

 

24,247,468

 

Diluted weighted average common shares outstanding

 

24,223,432

 

24,253,883

 

24,255,357

 

24,254,026

 

 

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

 

28,677

 

 

 

28,677

 

 

 

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

 

11,283

 

 

 

 

 

11,283

 

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

 

(159

)

 

 

 

 

(159

)

Total Comprehensive Income

 

39,801

 

 

 

 

 

 

Issuance of 187,354 common shares under stock based compensation awards, including related tax effects

 

2,871

 

 

 

636

 

2,235

 

 

Cost of 94,927 shares of common stock acquired for treasury

 

(1,578

)

 

 

 

(1,578

)

 

Preferred stock discount accretion

 

 

987

 

 

(987

)

 

 

Preferred stock dividend (paid and/or accrued)

 

(4,163

)

 

 

(4,163

)

 

 

Common stock dividend ($0.45 per share)

 

(10,937

)

 

 

(10,937

)

 

 

Stock based compensation

 

9

 

 

9

 

 

 

 

Balance at September 30, 2010

 

$

596,323

 

$

105,917

 

$

350,278

 

$

155,633

 

$

(31,723

)

$

16,218

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2011

 

$

486,383

 

$

 

$

350,282

 

$

157,875

 

$

(32,284

)

$

10,510

 

Comprehensive Income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

37,013

 

 

 

37,013

 

 

 

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

 

9,091

 

 

 

 

 

9,091

 

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

 

(856

)

 

 

 

 

(856

)

Total Comprehensive Income

 

45,248

 

 

 

 

 

 

Issuance of 149,731 common shares under stock based compensation awards, including related tax effects

 

2,853

 

 

 

(165

)

3,018

 

 

Cost of 109,525 shares of common stock acquired for treasury

 

(2,142

)

 

 

 

(2,142

)

 

Repurchase of common stock warrant

 

(3,750

)

 

(3,750

)

 

 

 

Common stock dividend ($0.48 per share)

 

(11,716

)

 

 

(11,716

)

 

 

Stock based compensation

 

3

 

 

3

 

 

 

 

Balance at September 30, 2011

 

$

516,879

 

$

 

$

346,535

 

$

183,007

 

$

(31,408

)

$

18,745

 

 

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)

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

Operating activities:

 

 

 

 

 

Net income

 

$

37,013

 

$

28,677

 

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

 

 

 

 

 

Provision for loan and lease losses

 

3,525

 

15,764

 

Depreciation of premises and equipment

 

2,698

 

3,103

 

Depreciation of equipment owned and leased to others

 

14,250

 

15,841

 

Amortization of investment security premiums and accretion of discounts, net

 

1,610

 

1,232

 

Amortization of mortgage servicing rights

 

2,125

 

2,277

 

Mortgage servicing asset impairment

 

230

 

821

 

Deferred income taxes

 

3,015

 

(3,800

)

Investment securities and other investment gains

 

(1,686

)

(2,059

)

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

 

(67,655

)

(299,298

)

Proceeds from the sales of loans held for sale

 

88,372

 

215,678

 

Net gain on sale of loans held for sale

 

(1,337

)

(4,678

)

Change in trading account securities

 

19

 

 

Change in interest receivable

 

1,002

 

795

 

Change in interest payable

 

424

 

664

 

Change in other assets

 

1,251

 

(4,084

)

Change in other liabilities

 

(331

)

9,495

 

Other

 

2,901

 

616

 

Net change in operating activities

 

87,426

 

(18,956

)

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Proceeds from sales of investment securities

 

133,241

 

72,417

 

Proceeds from maturities of investment securities

 

269,416

 

330,904

 

Purchases of investment securities

 

(270,817

)

(357,465

)

Net change in other investments

 

2,370

 

2,901

 

Loans sold or participated to others

 

15,039

 

13,186

 

Net change in loans and leases

 

(33,899

)

(46,707

)

Net change in equipment owned under operating leases

 

(11,208

)

(3,267

)

Purchases of premises and equipment

 

(10,587

)

(1,577

)

Net change in investing activities

 

93,555

 

10,392

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Net change in demand deposits, NOW accounts and savings accounts

 

(129,250

)

(23,309

)

Net change in certificates of deposit

 

(45,910

)

(62,961

)

Net change in short-term borrowings

 

(15,051

)

22,114

 

Proceeds from issuance of long-term debt

 

10,710

 

15,418

 

Payments on long-term debt

 

(328

)

(363

)

Net proceeds from issuance of treasury stock

 

2,853

 

2,871

 

Acquisition of treasury stock

 

(2,142

)

(1,578

)

Repurchase of common stock warrant

 

(3,750

)

 

Cash dividends paid on preferred stock

 

 

(4,163

)

Cash dividends paid on common stock

 

(11,935

)

(11,125

)

Net change in financing activities

 

(194,803

)

(63,096

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(13,822

)

(71,660

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

96,872

 

210,102

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

83,050

 

$

138,442

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

Loans transferred to other real estate and repossessed assets

 

$

11,993

 

$

15,501

 

Common stock matching contribution to Employee Stock Ownership and Profit Sharing 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

 

Goodwill:  In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08 “Intangibles — Goodwill and Other (Topic 350) - Testing Goodwill for Impairment.”  ASU 2011-08 allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of the reporting unit.  ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted.  We are assessing the impact of ASU 2011-08 on our goodwill impairment test but do not expect an impact on our financial condition or results of operations.

 

Comprehensive Income:  In June 2011, the FASB issued 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

 

7



Table of Contents

 

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 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 restructurings.  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 was 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.  The impact of ASU 2011-02 on our disclosures is reflected in Note 4 — Loan and Lease Financings.

 

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.

 

8



Table of Contents

 

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

 

September 30, 2011

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

356,144

 

$

10,475

 

$

(113

)

$

366,506

 

U.S. States and political subdivisions securities

 

104,498

 

6,187

 

(674

)

110,011

 

Mortgage-backed securities — Federal agencies

 

315,188

 

11,806

 

(74

)

326,920

 

Corporate debt securities

 

36,461

 

386

 

(186

)

36,661

 

Foreign government and other securities

 

5,699

 

32

 

(1

)

5,730

 

Total debt securities

 

817,990

 

28,886

 

(1,048

)

845,828

 

Marketable equity securities

 

2,346

 

2,338

 

(5

)

4,679

 

Total investment securities available-for-sale

 

$

820,336

 

$

31,224

 

$

(1,053

)

$

850,507

 

 

 

 

 

 

 

 

 

 

 

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 September 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 September 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

 

$

37,493

 

$

37,748

 

Due after one year through five years

 

334,790

 

343,533

 

Due after five years through ten years

 

123,342

 

131,124

 

Due after ten years

 

7,177

 

6,503

 

Mortgage-backed securities

 

315,188

 

326,920

 

Total debt securities available-for-sale

 

$

817,990

 

$

845,828

 

 

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 nine months of 2011 primarily reflect the sale of municipal, Farmer Mac, FHLB, corporate 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 nine months of 2010 primarily reflect the disposition of FNMA and FHLMC debt securities.  There were no OTTI write-downs in 2011 or 2010.

 

9



Table of Contents

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(Dollars in thousands)

 

2011

 

2010

 

2011

 

2010

 

Gross realized gains

 

$

63

 

$

 

$

1,662

 

$

292

 

Gross realized losses

 

(46

)

(24

)

(284

)

(36

)

Net realized gains (losses)

 

$

17

 

$

(24

)

$

1,378

 

$

256

 

 

There were net losses of $19 thousand for the nine months ended September 30, 2011 and no gains or losses for the nine months ended September 30, 2010 on $0.12  million and $0.14 million in trading securities outstanding at September 30, 2011 and at December 31, 2010, respectively.

 

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

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

39,887

 

$

(113

)

$

 

$

 

$

39,887

 

$

(113

)

U.S. States and political subdivisions securities

 

 

 

6,503

 

(674

)

6,503

 

(674

)

Mortgage-backed securities - Federal agencies

 

19,777

 

(59

)

3,965

 

(14

)

23,742

 

(73

)

Corporate debt securities

 

10,245

 

(72

)

3,410

 

(115

)

13,655

 

(187

)

Foreign government and other securities

 

1,004

 

(1

)

 

 

1,004

 

(1

)

Total debt securities

 

70,913

 

(245

)

13,878

 

(803

)

84,791

 

(1,048

)

Marketable equity securities

 

4

 

(1

)

3

 

(4

)

7

 

(5

)

Total investment securities available-for-sale

 

$

70,917

 

$

(246

)

$

13,881

 

$

(807

)

$

84,798

 

$

(1,053

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 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 September 30, 2011, we believe the impairments detailed in the table above are temporary and no

 

10



Table of Contents

 

impairment loss has been realized in our consolidated statements of income.

 

At September 30, 2011 and December 31, 2010, investment securities with carrying values of $275.36 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).

 

11



Table of Contents

 

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

 

September 30, 2011

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

511,070

 

$

46,322

 

$

557,392

 

Auto, light truck and environmental equipment

 

437,914

 

4,213

 

442,127

 

Medium and heavy duty truck

 

145,420

 

7,283

 

152,703

 

Aircraft financing

 

571,714

 

41,992

 

613,706

 

Construction equipment financing

 

236,950

 

23,291

 

260,241

 

Commercial real estate

 

501,843

 

54,444

 

556,287

 

Total

 

$

2,404,911

 

$

177,545

 

$

2,582,456

 

 

 

 

 

 

 

 

 

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

 

September 30, 2011

 

 

 

 

 

 

 

Residential real estate

 

$

399,224

 

$

4,839

 

$

404,063

 

Consumer

 

96,312

 

463

 

96,775

 

Total

 

$

495,536

 

$

5,302

 

$

500,838

 

 

 

 

 

 

 

 

 

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

 

 

12


 


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

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

546,144

 

$

366

 

$

 

$

 

$

546,510

 

$

10,882

 

$

557,392

 

Auto, light truck and environmental equipment

 

439,360

 

439

 

246

 

 

440,045

 

2,082

 

442,127

 

Medium and heavy duty truck

 

149,070

 

61

 

 

 

149,131

 

3,572

 

152,703

 

Aircraft financing

 

596,710

 

228

 

3,356

 

 

600,294

 

13,412

 

613,706

 

Construction equipment financing

 

255,074

 

688

 

541

 

 

256,303

 

3,938

 

260,241

 

Commercial real estate

 

530,110

 

279

 

2,913

 

 

533,302

 

22,985

 

556,287

 

Residential real estate

 

396,369

 

2,289

 

566

 

517

 

399,741

 

4,322

 

404,063

 

Consumer

 

94,873

 

1,189

 

250

 

107

 

96,419

 

356

 

96,775

 

Total

 

$

3,007,710

 

$

5,539

 

$

7,872

 

$

624

 

$

3,021,745

 

$

61,549

 

$

3,083,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.  Loans or leases, for which the terms have been materially modified for borrowers experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.  The table below presents impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.

 

13



Table of Contents

 

 

 

 

 

Unpaid

 

 

 

 

 

Recorded

 

Principal

 

Related

 

(Dollars in thousands) 

 

Investment

 

Balance

 

Allowance

 

September 30, 2011

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

2,201

 

$

2,201

 

$

 

Auto, light truck and environmental equipment

 

1,002

 

1,002

 

 

Medium and heavy duty truck

 

2,725

 

2,725

 

 

Aircraft financing

 

1,412

 

1,412

 

 

Construction equipment financing

 

3,780

 

3,780

 

 

Commercial real estate

 

16,304

 

16,303

 

 

Residential real estate

 

 

 

 

Consumer

 

212

 

211

 

 

Total with no related allowance recorded

 

27,636

 

27,634

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

8,290

 

8,290

 

1,488

 

Auto, light truck and environmental equipment

 

107

 

107

 

5

 

Medium and heavy duty truck

 

859

 

859

 

161

 

Aircraft financing

 

11,829

 

11,829

 

3,120

 

Construction equipment financing

 

 

 

 

Commercial real estate

 

7,510

 

7,515

 

1,060

 

Residential real estate

 

 

 

 

Consumer

 

 

 

 

Total with an allowance recorded

 

28,595

 

28,600

 

5,834

 

Total impaired loans

 

$

56,231

 

$

56,234

 

$

5,834

 

 

 

 

 

 

 

 

 

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

 

 

Residential real estate

 

 

 

 

Consumer

 

 

 

 

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

 

Residential real estate

 

 

 

 

Consumer

 

 

 

 

Total with an allowance recorded

 

38,677

 

38,686

 

9,207

 

Total impaired loans

 

$

78,065

 

$

78,076

 

$

9,207

 

 

14



Table of Contents

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 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

 

$

10,437

 

$

101

 

$

244

 

$

11,583

 

$

331

 

$

450

 

Auto, light truck and environmental equipment

 

1,378

 

 

2

 

1,796

 

1

 

2

 

Medium and heavy duty truck

 

3,770

 

15

 

2

 

4,310

 

18

 

5

 

Aircraft financing

 

14,882

 

 

(29

)

16,076

 

15

 

74

 

Construction equipment financing

 

3,922

 

7

 

62

 

6,174

 

23

 

231

 

Commercial real estate

 

24,481

 

39

 

46

 

28,264

 

153

 

90

 

Residential real estate

 

 

 

 

 

 

 

Consumer

 

141

 

1

 

 

47

 

1

 

 

Total

 

$

59,011

 

$

163

 

$

327

 

$

68,250

 

$

542

 

$

852

 

 

Our loan and lease portfolio also includes certain loans and leases that have been modified in a troubled debt restructuring (TDR), where economic concessions have been granted to borrowers who have experienced financial difficulties.  These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.  Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

 

When we modify loans and leases in a TDR, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans.  If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.  In periods subsequent to modification, we evaluate all TDRs, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.

 

Performing loans and leases classified as troubled debt restructuring during the three and nine months ended September 30, 2011, segregated by class, are shown in the table below.  Nonperforming TDRs are shown as nonperforming assets.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2011

 

September 30, 2011

 

 

 

Number of

 

Recorded

 

Number of

 

Recorded

 

(Dollars in thousands)

 

Modifications

 

Investment

 

Modifications

 

Investment

 

Commercial and agricultural loans

 

6

 

$

356

 

7

 

$

504

 

Auto, light truck and environmental equipment

 

 

 

 

 

Medium and heavy duty truck

 

 

 

 

 

Aircraft financing

 

 

 

1

 

 

Construction equipment financing

 

 

 

1

 

224

 

Commercial real estate

 

3

 

196

 

4

 

262

 

Residential real estate

 

 

 

 

 

Consumer

 

2

 

212

 

2

 

212

 

Total

 

11

 

$

764

 

15

 

$

1,202

 

 

15



Table of Contents

 

Troubled debt restructured loans and leases which had payment defaults during the three and nine months ended September 30, 2011, segregated by class, are shown in the table below.  Default occurs when a loan or lease is 90 days or more past due or transferred to nonaccrual and is within 12 months of restructuring.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2011

 

September 30, 2011

 

 

 

Number of

 

Recorded

 

Number of

 

Recorded

 

(Dollars in thousands)

 

Defaults

 

Investment

 

Defaults

 

Investment

 

Commercial and agricultural loans

 

2

 

$

6,140

 

2

 

$

6,140