SRCE-2014.6.30-10Q
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, 2014
 
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
 
(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
 
46601
(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 July 18, 2014 23,873,001 shares
 


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CERTIFICATIONS
 
 
 
 
 


2

Table of Contents



1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited - Dollars in thousands)
 
June 30,
2014
 
December 31,
2013
ASSETS
 

 
 

Cash and due from banks
$
110,933

 
$
77,568

Federal funds sold and interest bearing deposits with other banks
6,445

 
2,484

Investment securities available-for-sale (amortized cost of $798,708 and $822,163 at June 30, 2014
and December 31, 2013, respectively)
815,056

 
832,700

Other investments
23,597

 
22,400

Trading account securities
198

 
192

Mortgages held for sale
19,034

 
6,079

Loans and leases, net of unearned discount:
 

 
 

Commercial and agricultural loans
720,226

 
679,492

Auto and light truck
471,080

 
391,649

Medium and heavy duty truck
243,358

 
237,854

Aircraft financing
733,194

 
738,133

Construction equipment financing
369,755

 
333,088

Commercial real estate
602,321

 
583,997

Residential real estate
454,845

 
460,981

Consumer loans
128,756

 
124,130

Total loans and leases
3,723,535

 
3,549,324

Reserve for loan and lease losses
(88,776
)
 
(83,505
)
Net loans and leases
3,634,759

 
3,465,819

Equipment owned under operating leases, net
63,350

 
60,967

Net premises and equipment
45,840

 
46,630

Goodwill and intangible assets
85,796

 
86,343

Accrued income and other assets
120,719

 
121,644

Total assets
$
4,925,727

 
$
4,722,826

 
 
 
 
LIABILITIES
 

 
 

Deposits:
 

 
 

Noninterest bearing
$
768,710

 
$
735,212

Interest bearing
3,047,025

 
2,918,438

Total deposits
3,815,735

 
3,653,650

Short-term borrowings:
 

 
 

Federal funds purchased and securities sold under agreements to repurchase
191,545

 
181,120

Other short-term borrowings
158,457

 
133,011

Total short-term borrowings
350,002

 
314,131

Long-term debt and mandatorily redeemable securities
59,726

 
58,335

Subordinated notes
58,764

 
58,764

Accrued expenses and other liabilities
47,282

 
52,568

Total liabilities
4,331,509

 
4,137,448

 
 
 
 
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 25,641,887 at June 30, 2014 and December 31, 2013
346,535

 
346,535

Retained earnings
280,917

 
261,626

Cost of common stock in treasury (1,772,486 shares at June 30, 2014 and 1,319,377 shares at December 31, 2013)
(43,445
)
 
(29,364
)
Accumulated other comprehensive income
10,211

 
6,581

Total shareholders’ equity
594,218

 
585,378

Total liabilities and shareholders’ equity
$
4,925,727

 
$
4,722,826

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,
 
2014
 
2013
 
2014
 
2013
Interest income:
 

 
 

 
 

 
 

Loans and leases
$
40,401

 
$
40,112

 
$
79,316

 
$
79,282

Investment securities, taxable
3,401

 
3,498

 
6,746

 
7,193

Investment securities, tax-exempt
816

 
760

 
1,635

 
1,531

Other
232

 
241

 
509

 
483

Total interest income
44,850

 
44,611

 
88,206

 
88,489

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

 
 

Deposits
2,994

 
4,412

 
5,965

 
8,954

Short-term borrowings
169

 
45

 
306

 
77

Subordinated notes
1,055

 
1,055

 
2,110

 
2,110

Long-term debt and mandatorily redeemable securities
470

 
228

 
1,045

 
723

Total interest expense
4,688

 
5,740

 
9,426

 
11,864

 
 
 
 
 
 
 
 
Net interest income
40,162

 
38,871

 
78,780

 
76,625

Provision for loan and lease losses
2,543

 
1,293

 
3,347

 
2,050

Net interest income after provision for loan and lease losses
37,619

 
37,578

 
75,433

 
74,575

 
 
 
 
 
 
 
 
Noninterest income:
 

 
 

 
 

 
 

Trust fees
4,955

 
4,439

 
9,431

 
8,540

Service charges on deposit accounts
2,207

 
2,325

 
4,273

 
4,564

Debit card income
2,463

 
2,344

 
4,695

 
4,409

Mortgage banking income
1,181

 
1,936

 
2,515

 
3,564

Insurance commissions
1,288

 
1,393

 
2,851

 
2,839

Equipment rental income
4,098

 
4,086

 
8,180

 
8,098

Gains on investment securities available-for-sale

 

 
963

 

Other income
3,029

 
3,598

 
5,711

 
7,055

Total noninterest income
19,221

 
20,121

 
38,619

 
39,069

 
 
 
 
 
 
 
 
Noninterest expense:
 

 
 

 
 

 
 

Salaries and employee benefits
18,827

 
19,176

 
38,309

 
39,112

Net occupancy expense
2,235

 
2,147

 
4,672

 
4,354

Furniture and equipment expense
4,413

 
3,909

 
8,650

 
7,808

Depreciation - leased equipment
3,290

 
3,274

 
6,539

 
6,499

Professional fees
1,062

 
1,310

 
2,190

 
2,665

Supplies and communication
1,337

 
1,499

 
2,729

 
3,035

FDIC and other insurance
850

 
927

 
1,714

 
1,805

Business development and marketing expense
899

 
932

 
2,583

 
1,705

Loan and lease collection and repossession expense
(17
)
 
1,095

 
(512
)
 
1,852

Other expense
1,528

 
1,475

 
3,522

 
3,459

Total noninterest expense
34,424

 
35,744

 
70,396

 
72,294

 
 
 
 
 
 
 
 
Income before income taxes
22,416

 
21,955

 
43,656

 
41,350

Income tax expense
7,922

 
8,013

 
15,530

 
15,004

 
 
 
 
 
 
 
 
Net income
$
14,494

 
$
13,942

 
$
28,126

 
$
26,346

 
 
 
 
 
 
 
 
Per common share:
 

 
 

 
 

 
 

Basic net income per common share
$
0.59

 
$
0.56

 
$
1.15

 
$
1.07

Diluted net income per common share
$
0.59

 
$
0.56

 
$
1.15

 
$
1.07

Dividends
$
0.18

 
$
0.17

 
$
0.35

 
$
0.34

Basic weighted average common shares outstanding
24,077,990

 
24,367,529

 
24,197,057

 
24,344,882

Diluted weighted average common shares outstanding
24,077,990

 
24,368,973

 
24,197,057

 
24,346,053

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

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Table of Contents

1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - Dollars in thousands)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income
$
14,494

 
$
13,942

 
$
28,126

 
$
26,346

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 

 
 

Change in unrealized appreciation (depreciation) of available-for-sale securities
2,759

 
(16,803
)
 
6,775

 
(18,734
)
Reclassification adjustment for realized (gains) losses included in net income

 

 
(963
)
 

Income tax effect
(1,036
)
 
6,308

 
(2,182
)
 
7,033

Other comprehensive income (loss), net of tax
1,723

 
(10,495
)
 
3,630

 
(11,701
)
 
 
 
 
 
 
 
 
Comprehensive income
$
16,217

 
$
3,447

 
$
31,756

 
$
14,645

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

1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited - Dollars in thousands, except per share amounts)
 
Preferred
Stock
 
Common
Stock
 
Retained
Earnings
 
Cost of
Common
Stock
in Treasury
 
Accumulated
Other
Comprehensive
Income (Loss), Net
 
Total
Balance at January 1, 2013
$

 
$
346,535

 
$
223,715

 
$
(31,134
)
 
$
19,539

 
$
558,655

Net income

 

 
26,346

 

 

 
26,346

Other comprehensive loss

 

 

 

 
(11,701
)
 
(11,701
)
Issuance of 157,032 common shares under stock based compensation awards, including related tax effects

 

 
(313
)
 
3,732

 

 
3,419

Cost of 27,063 shares of common stock acquired for treasury

 

 

 
(619
)
 

 
(619
)
Common stock dividend ($0.34 per share)

 

 
(8,347
)
 

 

 
(8,347
)
Balance at June 30, 2013
$

 
$
346,535

 
$
241,401

 
$
(28,021
)
 
$
7,838

 
$
567,753

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
$

 
$
346,535

 
$
261,626

 
$
(29,364
)
 
$
6,581

 
$
585,378

Net income

 

 
28,126

 

 

 
28,126

Other comprehensive income

 

 

 

 
3,630

 
3,630

Issuance of 71,749 common shares under stock based compensation awards, including related tax effects

 

 
(276
)
 
1,716

 

 
1,440

Cost of 524,858 shares of common stock acquired for treasury

 

 

 
(15,797
)
 

 
(15,797
)
Common stock dividend ($0.35 per share)

 

 
(8,559
)
 

 

 
(8,559
)
Balance at June 30, 2014
$

 
$
346,535

 
$
280,917

 
$
(43,445
)
 
$
10,211

 
$
594,218

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,
 
2014
 
2013
Operating activities:
 

 
 

Net income
$
28,126

 
$
26,346

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Provision for loan and lease losses
3,347

 
2,050

Depreciation of premises and equipment
2,370

 
2,331

Depreciation of equipment owned and leased to others
6,539

 
6,499

Amortization of investment securities premiums and accretion of discounts, net
2,093

 
1,929

Amortization of mortgage servicing rights
596

 
937

Deferred income taxes
(3,335
)
 
(2,020
)
Gains on investment securities available-for-sale
(963
)
 

Originations of loans held for sale, net of principal collected
(57,503
)
 
(59,773
)
Proceeds from the sales of loans held for sale
46,154

 
62,295

Net gain on sale of loans held for sale
(1,606
)
 
(2,492
)
Change in trading account securities
(6
)
 
(20
)
Change in interest receivable
(479
)
 
(912
)
Change in interest payable
(19
)
 
1,041

Change in other assets
7,679

 
10,939

Change in other liabilities
(3,912
)
 
(7,795
)
Other
1,898

 
130

Net change in operating activities
30,979

 
41,485

 
 
 
 
Investing activities:
 

 
 

Proceeds from sales of investment securities
1,236

 

Proceeds from maturities of investment securities
106,541

 
112,836

Purchases of investment securities
(85,452
)
 
(81,041
)
Net change in other investments
(1,197
)
 
200

Loans sold or participated to others
7,805

 
19,819

Net change in loans and leases
(186,436
)
 
(187,832
)
Net change in equipment owned under operating leases
(8,922
)
 
(7,182
)
Purchases of premises and equipment
(1,587
)
 
(3,361
)
Net change in investing activities
(168,012
)
 
(146,561
)
 
 
 
 
Financing activities:
 

 
 

Net change in demand deposits, NOW accounts and savings accounts
70,848

 
61,457

Net change in certificates of deposit
91,237

 
14,995

Net change in short-term borrowings
35,871

 
32,716

Proceeds from issuance of long-term debt
5,791

 
12,035

Payments on long-term debt
(6,261
)
 
(26,296
)
Net proceeds from issuance of treasury stock
1,440

 
3,419

Acquisition of treasury stock
(15,797
)
 
(619
)
Cash dividends paid on common stock
(8,770
)
 
(8,544
)
Net change in financing activities
174,359

 
89,163

 
 
 
 
Net change in cash and cash equivalents
37,326

 
(15,913
)
 
 
 
 
Cash and cash equivalents, beginning of year
80,052

 
83,934

 
 
 
 
Cash and cash equivalents, end of period
$
117,378

 
$
68,021

 
 
 
 
Supplemental Information:
 

 
 

Non-cash transactions:
 

 
 

Loans transferred to other real estate and repossessed assets
$
6,344

 
$
2,510

Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan

 
2,801

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

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Table of Contents

1ST SOURCE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.       Basis of Presentation
 
1st Source Corporation is a bank holding company headquartered in South Bend, Indiana that provides, through its subsidiaries (collectively referred to as “1st Source” or “the Company”), a broad array of financial products and services. 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 comprehensive income, 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 (2013 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements. The Consolidated Statement of Financial Condition at December 31, 2013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current year presentation.
 
Note 2.       Recent Accounting Pronouncements
 
Share Based Payments: In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-12 "Compensation - Stock Compensation (Topic 718) - Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for interim and annual periods beginning after December 15, 2015. The amendments can be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and to all new or modified awards thereafter. Early adoption is permitted. The Company has determined that ASU 2014-12 will not have an impact on its accounting and disclosures.

Repurchase to Maturity Transactions, Repurchase Financings and Disclosures: In June 2014, the FASB issued ASU No. 2014-11 "Transfers and Servicing (Topic 860) - Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures." ASU 2014-11 aligns the accounting for repurchase to maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. ASU 2014-11 is effective for the first interim or annual period beginning after December 15, 2014. In addition the disclosure of certain transactions accounted for as a sale is effective for the first interim or annual period beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is prohibited. The Company is assessing the impact of ASU 2014-11 on its accounting and disclosures.

Revenue from Contracts with Customers: In May 2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)." The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. Early application is not permitted. The Company is assessing the impact of ASU 2014-09 on its accounting and disclosures.

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure: In January 2014, the FASB issued ASU No. 2014-04 "Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure." ASU 2014-04 clarifies when an in substance repossession or foreclosure occurs and requires interim and annual disclosures of the amount of foreclosed residential real estate property and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. ASU 2014-04 is effective either on a modified retrospective transition method or a prospective transition method for interim and annual periods beginning after December 15, 2014. Early adoption is permitted. The Company is assessing the impact of ASU 2014-04 on its disclosures.


7

Table of Contents

Accounting for Investments in Qualified Affordable Housing Projects: In January 2014, the FASB issued ASU No. 2014-01 "Investments - Equity method and Joint Ventures (Topic 323) - Accounting for Investments in Qualified Affordable Housing Projects." ASU 2014-01 allows investors to use the proportional amortization method to account for investments in limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits if certain conditions are met. ASU 2014-01 is effective retrospectively for interim and annual periods in fiscal years that begin after December 15, 2014. Early adoption is permitted. The Company is assessing the impact of ASU 2014-01 on its accounting for affordable housing projects.

Investment Companies: In June 2013, the FASB issued ASU No. 2013-08 “Financial Services-Investment Companies (Topic 946) — Amendments to the Scope, Measurement and Disclosure Requirements.” ASU 2013-08 changes the approach to the investment company assessment in Topic 946, clarifies the characteristics of an investment company and provides comprehensive guidance for assessing whether an entity is an investment company. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. Early application is prohibited. The Company determined that 1st Source Capital Corporation, a wholly-owned subsidiary of 1st Source Bank, is considered an investment company and is applying the guidance in Topic 946 in accordance with ASU 2013-08. 

Note 3.       Investment Securities
 
The following table shows investment securities available-for-sale.
 
(Dollars in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
June 30, 2014
 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
378,313

 
$
4,958

 
$
(2,204
)
 
$
381,067

U.S. States and political subdivisions securities
 
125,692

 
4,093

 
(198
)
 
129,587

Mortgage-backed securities — Federal agencies
 
260,129

 
6,058

 
(1,366
)
 
264,821

Corporate debt securities
 
31,781

 
401

 
(14
)
 
32,168

Foreign government and other securities
 
900

 
5

 

 
905

Total debt securities
 
796,815

 
15,515

 
(3,782
)
 
808,548

Marketable equity securities
 
1,893

 
4,617

 
(2
)
 
6,508

Total investment securities available-for-sale
 
$
798,708

 
$
20,132

 
$
(3,784
)
 
$
815,056

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
394,558

 
$
5,008

 
$
(4,527
)
 
$
395,039

U.S. States and political subdivisions securities
 
120,416

 
3,670

 
(847
)
 
123,239

Mortgage-backed securities — Federal agencies
 
273,495

 
5,148

 
(3,563
)
 
275,080

Corporate debt securities
 
30,828

 
241

 
(4
)
 
31,065

Foreign government and other securities
 
700

 
9

 

 
709

Total debt securities
 
819,997

 
14,076

 
(8,941
)
 
825,132

Marketable equity securities
 
2,166

 
5,404

 
(2
)
 
7,568

Total investment securities available-for-sale
 
$
822,163

 
$
19,480

 
$
(8,943
)
 
$
832,700

 
At June 30, 2014 and December 31, 2013, the residential mortgage-backed securities held by the Company consisted primarily of GNMA, FNMA and FHLMC pass-through certificates which are guaranteed by those respective agencies of the United States government (Government Sponsored Enterprise, GSEs).
 
The following table shows the contractual maturities of investments in securities available-for-sale at June 30, 2014. 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
 
$
23,373

 
$
23,684

Due after one year through five years
 
400,829

 
407,449

Due after five years through ten years
 
109,676

 
109,738

Due after ten years
 
2,808

 
2,856

Mortgage-backed securities
 
260,129

 
264,821

Total debt securities available-for-sale
 
$
796,815

 
$
808,548


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Table of Contents


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 for the six months ended June 30, 2014 reflect the sale of marketable equity securities during the first quarter.
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Gross realized gains
 
$

 
$

 
$
963

 
$

Gross realized losses
 

 

 

 

Net realized gains (losses)
 
$

 
$

 
$
963

 
$

 
The following table summarizes gross unrealized losses and fair value by investment category and age.
 
 
 
Less than 12 Months
 
12 months or Longer
 
Total
(Dollars in thousands) 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
June 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
22,478

 
$
(68
)
 
$
135,096

 
$
(2,136
)
 
$
157,574

 
$
(2,204
)
U.S. States and political subdivisions securities
 
10,563

 
(46
)
 
9,433

 
(152
)
 
19,996

 
(198
)
Mortgage-backed securities - Federal agencies
 
31,984

 
(131
)
 
32,740

 
(1,235
)
 
64,724

 
(1,366
)
Corporate debt securities
 
3,474

 
(14
)
 

 

 
3,474

 
(14
)
Foreign government and other securities
 
100

 

 

 

 
100

 

Total debt securities
 
68,599

 
(259
)
 
177,269

 
(3,523
)
 
245,868

 
(3,782
)
Marketable equity securities
 

 

 
3

 
(2
)
 
3

 
(2
)
Total investment securities available-for-sale
 
$
68,599

 
$
(259
)
 
$
177,272

 
$
(3,525
)
 
$
245,871

 
$
(3,784
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
153,868

 
$
(4,404
)
 
$
15,085

 
$
(123
)
 
$
168,953

 
$
(4,527
)
U.S. States and political subdivisions securities
 
37,115

 
(814
)
 
1,419

 
(33
)
 
38,534

 
(847
)
Mortgage-backed securities - Federal agencies
 
99,488

 
(3,099
)
 
5,352

 
(464
)
 
104,840

 
(3,563
)
Corporate debt securities
 
6,332

 
(4
)
 

 

 
6,332

 
(4
)
Foreign government and other securities
 

 

 

 

 

 

Total debt securities
 
296,803

 
(8,321
)
 
21,856

 
(620
)
 
318,659

 
(8,941
)
Marketable equity securities
 

 

 
4

 
(2
)
 
4

 
(2
)
Total investment securities available-for-sale
 
$
296,803

 
$
(8,321
)
 
$
21,860

 
$
(622
)
 
$
318,663

 
$
(8,943
)
 
The initial indication of other-than-temporary-impairment (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, the Company considers 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 the Company will not have to sell any such securities before a recovery of cost.
 
There were no OTTI write-downs in 2014 or 2013.

At June 30, 2014, the Company does not have the intent to sell any of the available-for-sale securities in the table above and believes that it is more likely than not, that it will not have to sell any such securities before an anticipated recovery of cost. Primarily the unrealized losses on debt securities are due to increases in market 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. The fair value is expected to recover on all debt securities as they approach their maturity date or re-pricing date or if market yields for such investments decline. The Company does not believe any of the securities are impaired due to reasons of credit quality.


9

Table of Contents

At June 30, 2014 and December 31, 2013, investment securities with carrying values of $196.18 million and $237.42 million, respectively, were pledged as collateral for security repurchase agreements and for other purposes.
 
Note 4.       Loan and Lease Financings
 
The Company evaluates loans and leases for credit quality at least annually but more frequently if certain circumstances occur (such as material new information which becomes available and indicates a potential change in credit risk). The Company uses two methods to assess credit risk: loan or lease credit quality grades and credit risk classifications. The purpose of the loan or lease credit quality grade is to document the degree of risk associated with individual credits as well as inform management of the degree of risk in the portfolio taken as a whole. Credit risk classifications are used to categorize loans by degree of risk and to designate individual or committee approval authorities for higher risk credits at the time of origination. Credit risk classifications include categories for: Acceptable, Marginal, Special Attention, Special Risk, Restricted by Policy, Regulated and Prohibited by Law.
 
All loans and leases, except residential real estate loans and consumer loans, are assigned credit quality grades on a scale from 1 to 12 with grade 1 representing superior credit quality. The criteria used to assign grades to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Company’s safety and soundness. Loans or leases graded 7 or weaker are considered “special attention” credits and, as such, relationships in excess of $100,000 are reviewed quarterly as part of management’s evaluation of the appropriateness 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 the exposure to increased risk; grade 8 credits are “special mention” and, following regulatory guidelines, are defined as having potential weaknesses that deserve management’s close attention. Credits that exhibit well-defined weaknesses and a distinct possibility of loss are considered “classified” and are graded 9 through 12 corresponding to the regulatory definitions of “substandard” (grades 9 and 10) and the more severe “doubtful” (grade 11) and “loss” (grade 12).
 
The following table shows 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, 2014
 
 

 
 

 
 

Commercial and agricultural loans
 
$
678,747

 
$
41,479

 
$
720,226

Auto and light truck
 
461,907

 
9,173

 
471,080

Medium and heavy duty truck
 
239,313

 
4,045

 
243,358

Aircraft financing
 
703,247

 
29,947

 
733,194

Construction equipment financing
 
362,342

 
7,413

 
369,755

Commercial real estate
 
578,005

 
24,316

 
602,321

Total
 
$
3,023,561

 
$
116,373

 
$
3,139,934

 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

Commercial and agricultural loans
 
$
652,620

 
$
26,872

 
$
679,492

Auto and light truck
 
378,392

 
13,257

 
391,649

Medium and heavy duty truck
 
235,465

 
2,389

 
237,854

Aircraft financing
 
704,997

 
33,136

 
738,133

Construction equipment financing
 
325,849

 
7,239

 
333,088

Commercial real estate
 
557,692

 
26,305

 
583,997

Total
 
$
2,855,015

 
$
109,198

 
$
2,964,213



10

Table of Contents

For residential real estate and consumer loans, credit quality is based on the aging status of the loan and by payment activity. The following table shows the recorded investment in residential real estate and consumer loans by performing or nonperforming status. Nonperforming 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, 2014
 
 

 
 

 
 

Residential real estate
 
$
452,620

 
$
2,225

 
$
454,845

Consumer
 
128,321

 
435

 
128,756

Total
 
$
580,941

 
$
2,660

 
$
583,601

 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

Residential real estate
 
$
458,385

 
$
2,596

 
$
460,981

Consumer
 
123,663

 
467

 
124,130

Total
 
$
582,048

 
$
3,063

 
$
585,111

 
The following table shows the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.
 
(Dollars in thousands) 
 
Current
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due and Accruing
 
Total Accruing Loans
 
Nonaccrual
 
Total Financing Receivables
June 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and agricultural loans
 
$
695,217

 
$
2,194

 
$
50

 
$

 
$
697,461

 
$
22,765

 
$
720,226

Auto and light truck
 
470,733

 
272

 

 

 
471,005

 
75

 
471,080

Medium and heavy duty truck
 
243,252

 

 

 

 
243,252

 
106

 
243,358

Aircraft financing
 
723,443

 
5,097

 
3,427

 

 
731,967

 
1,227

 
733,194

Construction equipment financing
 
368,087

 
547

 

 

 
368,634

 
1,121

 
369,755

Commercial real estate
 
597,221

 
20

 
72

 

 
597,313

 
5,008

 
602,321

Residential real estate
 
451,460

 
820

 
340

 
444

 
453,064

 
1,781

 
454,845

Consumer
 
127,616

 
434

 
271

 
32

 
128,353

 
403

 
128,756

Total
 
$
3,677,029

 
$
9,384

 
$
4,160

 
$
476

 
$
3,691,049

 
$
32,486

 
$
3,723,535

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and agricultural loans
 
$
667,462

 
$
263

 
$
2

 
$

 
$
667,727

 
$
11,765

 
$
679,492

Auto and light truck
 
387,881

 
222

 
36

 

 
388,139

 
3,510

 
391,649

Medium and heavy duty truck
 
237,645

 
20

 

 

 
237,665

 
189

 
237,854

Aircraft financing
 
713,832

 
10,309

 
3,627

 

 
727,768

 
10,365

 
738,133

Construction equipment financing
 
331,083

 
973

 

 

 
332,056

 
1,032

 
333,088

Commercial real estate
 
576,933

 

 

 

 
576,933

 
7,064

 
583,997

Residential real estate
 
456,782

 
1,334

 
269

 
197

 
458,582

 
2,399

 
460,981

Consumer
 
122,657

 
786

 
220

 
84

 
123,747

 
383

 
124,130

Total
 
$
3,494,275

 
$
13,907

 
$
4,154

 
$
281

 
$
3,512,617

 
$
36,707

 
$
3,549,324



11

Table of Contents

The following table shows impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.
 
(Dollars in thousands) 
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
June 30, 2014
 
 

 
 

 
 

With no related reserve recorded:
 
 

 
 

 
 

Commercial and agricultural loans
 
$
10,951

 
$
10,951

 
$

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 
1,120

 
1,120

 

Construction equipment financing
 
1,105

 
1,105

 

Commercial real estate
 
12,699

 
12,699

 

Residential real estate
 

 

 

Consumer loans
 

 

 

Total with no related reserve recorded
 
25,875

 
25,875

 

With a reserve recorded:
 
 

 
 

 
 

Commercial and agricultural loans
 
11,582

 
11,582

 
4,769

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 

 

 

Construction equipment financing
 

 

 

Commercial real estate
 

 

 

Residential real estate
 
376

 
378

 
159

Consumer loans
 

 

 

Total with a reserve recorded
 
11,958

 
11,960

 
4,928

Total impaired loans
 
$
37,833

 
$
37,835

 
$
4,928

 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

With no related reserve recorded:
 
 

 
 

 
 

Commercial and agricultural loans
 
$
11,231

 
$
11,230

 
$

Auto and light truck
 
3,499

 
3,499

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 
9,764

 
9,764

 

Construction equipment financing
 
938

 
938

 

Commercial real estate
 
14,897

 
14,897

 

Residential real estate
 

 

 

Consumer loans
 

 

 

Total with no related reserve recorded
 
40,329

 
40,328

 

With an allowance recorded:
 
 

 
 

 
 

Commercial and agricultural loans
 

 

 

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 
563

 
563

 
113

Construction equipment financing
 

 

 

Commercial real estate
 

 

 

Residential real estate
 
381

 
381

 
161

Consumer loans
 

 

 

Total with a reserve recorded
 
944

 
944

 
274

Total impaired loans
 
$
41,273

 
$
41,272

 
$
274



12

Table of Contents

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by class.
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
(Dollars in thousands) 
 
Average
Recorded
Investment
 
Interest
Income
 
Average
Recorded
Investment
 
Interest
Income
 
Average
Recorded
Investment
 
Interest
Income
 
Average
Recorded
Investment
 
Interest
Income
Commercial and agricultural loans
 
$
15,261

 
$
9

 
$
8,850

 
$
32

 
$
13,258

 
$
24

 
$
8,585

 
$
35

Auto and light truck
 

 

 

 

 
814

 

 

 

Medium and heavy duty truck
 

 

 
396

 

 

 

 
431

 

Aircraft financing
 
1,573

 
4

 
7,868

 

 
4,274

 
14

 
8,068

 

Construction equipment financing
 
1,113

 

 
3,975

 
1

 
1,031

 

 
4,340

 
3

Commercial real estate
 
12,709

 
147

 
18,446

 
152

 
13,188

 
294

 
19,495

 
304

Residential real estate
 
377

 
4

 

 

 
377

 
8

 

 

Consumer
 

 

 

 

 

 

 

 

Total
 
$
31,033

 
$
164

 
$
39,535

 
$
185

 
$
32,942

 
$
340

 
$
40,919

 
$
342

 
The following table shows the number of loans and leases classified as troubled debt restructuring (TDR) during the three and six months ended June 30, 2014 and 2013, segregated by class, as well as the recorded investment as of June 30. The classification between nonperforming and performing is shown at the time of modification. During 2014 and 2013, modification programs focused on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. The modifications did not result in the contractual forgiveness of principal or interest. There was one modification during 2013 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modifications is immaterial.
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
(Dollars in thousands)
 
Number of Modifications
 
Recorded Investment
 
Number of Modifications
 
Recorded Investment
 
Number of Modifications
 
Recorded Investment
 
Number of Modifications
 
Recorded Investment
Performing TDRs:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and agricultural loans
 

 
$

 
1

 
$
750

 

 
$

 
1

 
$
750

Auto and light truck
 

 

 

 

 

 

 

 

Medium and heavy duty truck
 

 

 

 

 

 

 

 

Aircraft financing
 

 

 

 

 
1

 

 

 

Construction equipment financing
 

 

 

 

 

 

 

 

Commercial real estate
 

 

 

 

 

 

 

 

Residential real estate