SRCE-2014.9.30-10Q
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 September 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 October 17, 2014 — 23,862,253 shares
 


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EXHIBITS
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents



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

 
 

Cash and due from banks
$
54,542

 
$
77,568

Federal funds sold and interest bearing deposits with other banks
27,169

 
2,484

Investment securities available-for-sale (amortized cost of $799,862 and $822,163 at September 30, 2014
and December 31, 2013, respectively)
813,704

 
832,700

Other investments
23,017

 
22,400

Trading account securities
196

 
192

Mortgages held for sale
13,070

 
6,079

Loans and leases, net of unearned discount:
 

 
 

Commercial and agricultural loans
696,209

 
679,492

Auto and light truck
422,742

 
391,649

Medium and heavy duty truck
249,014

 
237,854

Aircraft financing
700,794

 
738,133

Construction equipment financing
375,069

 
333,088

Commercial real estate
615,420

 
583,997

Residential real estate
451,508

 
460,981

Consumer loans
143,665

 
124,130

Total loans and leases
3,654,421

 
3,549,324

Reserve for loan and lease losses
(87,400
)
 
(83,505
)
Net loans and leases
3,567,021

 
3,465,819

Equipment owned under operating leases, net
66,013

 
60,967

Net premises and equipment
47,350

 
46,630

Goodwill and intangible assets
85,583

 
86,343

Accrued income and other assets
123,128

 
121,644

Total assets
$
4,820,793

 
$
4,722,826

 
 
 
 
LIABILITIES
 

 
 

Deposits:
 

 
 

Noninterest bearing
$
818,679

 
$
735,212

Interest bearing
3,017,293

 
2,918,438

Total deposits
3,835,972

 
3,653,650

Short-term borrowings:
 

 
 

Federal funds purchased and securities sold under agreements to repurchase
106,769

 
181,120

Other short-term borrowings
109,953

 
133,011

Total short-term borrowings
216,722

 
314,131

Long-term debt and mandatorily redeemable securities
56,171

 
58,335

Subordinated notes
58,764

 
58,764

Accrued expenses and other liabilities
50,131

 
52,568

Total liabilities
4,217,760

 
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 September 30, 2014 and December 31, 2013
346,535

 
346,535

Retained earnings
291,569

 
261,626

Cost of common stock in treasury (1,779,634 shares at September 30, 2014 and 1,319,377 shares at December 31, 2013)
(43,716
)
 
(29,364
)
Accumulated other comprehensive income
8,645

 
6,581

Total shareholders’ equity
603,033

 
585,378

Total liabilities and shareholders’ equity
$
4,820,793

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Interest income:
 

 
 

 
 

 
 

Loans and leases
$
41,118

 
$
42,392

 
$
120,434

 
$
121,674

Investment securities, taxable
2,962

 
3,581

 
9,708

 
10,774

Investment securities, tax-exempt
831

 
764

 
2,466

 
2,295

Other
241

 
229

 
750

 
712

Total interest income
45,152

 
46,966

 
133,358

 
135,455

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

 
 

Deposits
2,765

 
4,089

 
8,730

 
13,043

Short-term borrowings
134

 
72

 
440

 
149

Subordinated notes
1,055

 
1,055

 
3,165

 
3,165

Long-term debt and mandatorily redeemable securities
488

 
592

 
1,533

 
1,315

Total interest expense
4,442

 
5,808

 
13,868

 
17,672

 
 
 
 
 
 
 
 
Net interest income
40,710

 
41,158

 
119,490

 
117,783

Provision for (recovery of) loan and lease losses
1,206

 
(419
)
 
4,553

 
1,631

Net interest income after provision for loan and lease losses
39,504

 
41,577

 
114,937

 
116,152

 
 
 
 
 
 
 
 
Noninterest income:
 

 
 

 
 

 
 

Trust fees
4,499

 
5,260

 
13,930

 
13,800

Service charges on deposit accounts
2,225

 
2,364

 
6,498

 
6,928

Debit card income
2,382

 
2,343

 
7,077

 
6,752

Mortgage banking income
1,446

 
1,103

 
3,961

 
4,667

Insurance commissions
1,317

 
1,292

 
4,168

 
4,131

Equipment rental income
4,361

 
4,000

 
12,541

 
12,098

Gains (losses) on investment securities available-for-sale

 
(28
)
 
963

 
(28
)
Other income
3,162

 
3,824

 
8,873

 
10,879

Total noninterest income
19,392

 
20,158

 
58,011

 
59,227

 
 
 
 
 
 
 
 
Noninterest expense:
 

 
 

 
 

 
 

Salaries and employee benefits
20,790

 
20,441

 
59,099

 
59,553

Net occupancy expense
2,252

 
2,126

 
6,924

 
6,480

Furniture and equipment expense
4,415

 
4,477

 
13,065

 
12,285

Depreciation - leased equipment
3,571

 
3,246

 
10,110

 
9,745

Professional fees
1,158

 
1,178

 
3,348

 
3,843

Supplies and communication
1,424

 
1,330

 
4,153

 
4,365

FDIC and other insurance
856

 
874

 
2,570

 
2,679

Business development and marketing expense
1,218

 
1,306

 
3,801

 
3,011

Loan and lease collection and repossession expense
652

 
1,530

 
140

 
3,382

Other expense
1,317

 
1,922

 
4,839

 
5,381

Total noninterest expense
37,653

 
38,430

 
108,049

 
110,724

 
 
 
 
 
 
 
 
Income before income taxes
21,243

 
23,305

 
64,899

 
64,655

Income tax expense
6,296

 
8,409

 
21,826

 
23,413

 
 
 
 
 
 
 
 
Net income
$
14,947

 
$
14,896

 
$
43,073

 
$
41,242

 
 
 
 
 
 
 
 
Per common share:
 

 
 

 
 

 
 

Basic net income per common share
$
0.62

 
$
0.60

 
$
1.77

 
$
1.67

Diluted net income per common share
$
0.62

 
$
0.60

 
$
1.77

 
$
1.67

Dividends
$
0.18

 
$
0.17

 
$
0.53

 
$
0.51

Basic weighted average common shares outstanding
23,875,331

 
24,366,220

 
24,088,636

 
24,352,073

Diluted weighted average common shares outstanding
23,875,331

 
24,367,109

 
24,088,636

 
24,352,854

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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income
$
14,947

 
$
14,896

 
$
43,073

 
$
41,242

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 

 
 

Change in unrealized (depreciation) appreciation of available-for-sale securities
(2,507
)
 
1,853

 
4,268

 
(16,881
)
Reclassification adjustment for realized losses (gains) included in net income

 
28

 
(963
)
 
28

Income tax effect
941

 
(706
)
 
(1,241
)
 
6,327

Other comprehensive (loss) income, net of tax
(1,566
)
 
1,175

 
2,064

 
(10,526
)
 
 
 
 
 
 
 
 
Comprehensive income
$
13,381

 
$
16,071

 
$
45,137

 
$
30,716

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

 

 
41,242

 

 

 
41,242

Other comprehensive loss

 

 

 

 
(10,526
)
 
(10,526
)
Issuance of 169,792 common shares under stock based compensation awards, including related tax effects

 

 
(390
)
 
4,040

 

 
3,650

Cost of 89,867 shares of common stock acquired for treasury

 

 

 
(2,268
)
 

 
(2,268
)
Common stock dividend ($0.51 per share)

 

 
(12,524
)
 

 

 
(12,524
)
Balance at September 30, 2013
$

 
$
346,535

 
$
252,043

 
$
(29,362
)
 
$
9,013

 
$
578,229

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
$

 
$
346,535

 
$
261,626

 
$
(29,364
)
 
$
6,581

 
$
585,378

Net income

 

 
43,073

 

 

 
43,073

Other comprehensive income

 

 

 

 
2,064

 
2,064

Issuance of 83,149 common shares under stock based compensation awards, including related tax effects

 

 
(244
)
 
1,990

 

 
1,746

Cost of 543,406 shares of common stock acquired for treasury

 

 

 
(16,342
)
 

 
(16,342
)
Common stock dividend ($0.53 per share)

 

 
(12,886
)
 

 

 
(12,886
)
Balance at September 30, 2014
$

 
$
346,535

 
$
291,569

 
$
(43,716
)
 
$
8,645

 
$
603,033

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,
 
2014
 
2013
Operating activities:
 

 
 

Net income
$
43,073

 
$
41,242

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

 
 

Provision for loan and lease losses
4,553

 
1,631

Depreciation of premises and equipment
3,502

 
3,515

Depreciation of equipment owned and leased to others
10,110

 
9,745

Amortization of investment securities premiums and accretion of discounts, net
3,411

 
2,745

Amortization of mortgage servicing rights
930

 
1,265

Deferred income taxes
(1,629
)
 
(3,265
)
(Gains) losses on investment securities available-for-sale
(963
)
 
28

Originations of loans held for sale, net of principal collected
(91,936
)
 
(85,010
)
Proceeds from the sales of loans held for sale
87,518

 
91,395

Net gain on sale of loans held for sale
(2,573
)
 
(2,663
)
Change in trading account securities
(4
)
 
(31
)
Change in interest receivable
(945
)
 
(215
)
Change in interest payable
(955
)
 
(1,506
)
Change in other assets
5,004

 
13,085

Change in other liabilities
(127
)
 
(3,636
)
Other
2,288

 
328

Net change in operating activities
61,257

 
68,653

 
 
 
 
Investing activities:
 

 
 

Proceeds from sales of investment securities
1,236

 
47,028

Proceeds from maturities of investment securities
138,316

 
152,706

Purchases of investment securities
(119,700
)
 
(172,789
)
Net change in other investments
(617
)
 
200

Loans sold or participated to others
15,363

 
25,054

Net change in loans and leases
(127,646
)
 
(171,771
)
Net change in equipment owned under operating leases
(15,156
)
 
(18,732
)
Purchases of premises and equipment
(4,254
)
 
(4,040
)
Net change in investing activities
(112,458
)
 
(142,344
)
 
 
 
 
Financing activities:
 

 
 

Net change in demand deposits and savings accounts
52,369

 
79,907

Net change in time deposits
129,953

 
(24,838
)
Net change in short-term borrowings
(97,409
)
 
52,254

Proceeds from issuance of long-term debt
7,185

 
5,951

Payments on long-term debt
(11,433
)
 
(20,313
)
Net proceeds from issuance of treasury stock
1,746

 
3,650

Acquisition of treasury stock
(16,342
)
 
(2,268
)
Cash dividends paid on common stock
(13,209
)
 
(12,820
)
Net change in financing activities
52,860

 
81,523

 
 
 
 
Net change in cash and cash equivalents
1,659

 
7,832

 
 
 
 
Cash and cash equivalents, beginning of year
80,052

 
83,934

 
 
 
 
Cash and cash equivalents, end of period
$
81,711

 
$
91,766

 
 
 
 
Supplemental Information:
 

 
 

Non-cash transactions:
 

 
 

Loans transferred to other real estate and repossessed assets
$
6,528

 
$
5,717

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
 
Troubled Debt Restructurings by Creditors: In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-14 "Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Classification of Certain Government Guaranteed Mortgage Loans upon Foreclosure." ASU 2014-14 requires that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. ASU 2014-14 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014. The amendments can be applied using either a prospective transition method or a modified retrospective transition method. Early adoption is permitted. The Company has determined that ASU 2014-14 will not have an impact on its accounting and disclosures.

Share Based Payments: In June 2014, the FASB issued 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.


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Table of Contents

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.

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
September 30, 2014
 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
392,578

 
$
3,793

 
$
(2,472
)
 
$
393,899

U.S. States and political subdivisions securities
 
123,152

 
4,012

 
(149
)
 
127,015

Mortgage-backed securities — Federal agencies
 
249,710

 
5,337

 
(1,586
)
 
253,461

Corporate debt securities
 
31,729

 
285

 
(35
)
 
31,979

Foreign government and other securities
 
800

 
8

 

 
808

Total debt securities
 
797,969

 
13,435

 
(4,242
)
 
807,162

Marketable equity securities
 
1,893

 
4,651

 
(2
)
 
6,542

Total investment securities available-for-sale
 
$
799,862

 
$
18,086

 
$
(4,244
)
 
$
813,704

 
 
 
 
 
 
 
 
 
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 September 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).
 

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Table of Contents

The following table shows the contractual maturities of investments in securities available-for-sale at September 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
 
$
34,526

 
$
34,874

Due after one year through five years
 
416,243

 
421,493

Due after five years through ten years
 
95,275

 
95,054

Due after ten years
 
2,215

 
2,280

Mortgage-backed securities
 
249,710

 
253,461

Total debt securities available-for-sale
 
$
797,969

 
$
807,162


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 nine months ended September 30, 2014 reflect the sale of marketable equity securities during the first quarter. The gross gains and losses for the three and nine months ended September 30, 2013 primarily reflect the sale of federal agency securities. The trades were done for the purpose of balance sheet realignment and managing reinvestment risk by adjusting the timing of future cash flows.
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Gross realized gains
 
$

 
$
903

 
$
963

 
$
903

Gross realized losses
 

 
(931
)
 

 
(931
)
Net realized gains (losses)
 
$

 
$
(28
)
 
$
963

 
$
(28
)
 
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
September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
81,375

 
$
(285
)
 
$
119,848

 
$
(2,187
)
 
$
201,223

 
$
(2,472
)
U.S. States and political subdivisions securities
 
5,130

 
(36
)
 
8,630

 
(113
)
 
13,760

 
(149
)
Mortgage-backed securities - Federal agencies
 
48,001

 
(287
)
 
36,914

 
(1,299
)
 
84,915

 
(1,586
)
Corporate debt securities
 
8,560

 
(35
)
 

 

 
8,560

 
(35
)
Foreign government and other securities
 

 

 

 

 

 

Total debt securities
 
143,066

 
(643
)
 
165,392

 
(3,599
)
 
308,458

 
(4,242
)
Marketable equity securities
 
1

 

 
3

 
(2
)
 
4

 
(2
)
Total investment securities available-for-sale
 
$
143,067

 
$
(643
)
 
$
165,395

 
$
(3,601
)
 
$
308,462

 
$
(4,244
)
 
 
 
 
 
 
 
 
 
 
 
 
 
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
)
 

9

Table of Contents

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 September 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. 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.

At September 30, 2014 and December 31, 2013, investment securities with carrying values of $210.52 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).
 

10

Table of Contents

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
September 30, 2014
 
 

 
 

 
 

Commercial and agricultural loans
 
$
660,946

 
$
35,263

 
$
696,209

Auto and light truck
 
404,514

 
18,228

 
422,742

Medium and heavy duty truck
 
245,058

 
3,956

 
249,014

Aircraft financing
 
672,847

 
27,947

 
700,794

Construction equipment financing
 
368,574

 
6,495

 
375,069

Commercial real estate
 
589,667

 
25,753

 
615,420

Total
 
$
2,941,606

 
$
117,642

 
$
3,059,248

 
 
 
 
 
 
 
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


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
September 30, 2014
 
 

 
 

 
 

Residential real estate
 
$
448,999

 
$
2,509

 
$
451,508

Consumer
 
143,288

 
377

 
143,665

Total
 
$
592,287

 
$
2,886

 
$
595,173

 
 
 
 
 
 
 
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

 

11

Table of Contents

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
September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and agricultural loans
 
$
678,943

 
$
124

 
$
101

 
$

 
$
679,168

 
$
17,041

 
$
696,209

Auto and light truck
 
422,441

 
264

 

 

 
422,705

 
37

 
422,742

Medium and heavy duty truck
 
248,894

 
40

 

 

 
248,934

 
80

 
249,014

Aircraft financing
 
690,979

 
5,401

 
3,324

 

 
699,704

 
1,090

 
700,794

Construction equipment financing
 
373,290

 
981

 

 

 
374,271

 
798

 
375,069

Commercial real estate
 
610,005

 
14

 
57

 

 
610,076

 
5,344

 
615,420

Residential real estate
 
447,845

 
959

 
195

 
671

 
449,670

 
1,838

 
451,508

Consumer
 
142,565

 
526

 
197

 
81

 
143,369

 
296

 
143,665

Total
 
$
3,614,962

 
$
8,309

 
$
3,874

 
$
752

 
$
3,627,897

 
$
26,524

 
$
3,654,421

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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



12

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 Reserve
September 30, 2014
 
 

 
 

 
 

With no related reserve recorded:
 
 

 
 

 
 

Commercial and agricultural loans
 
$
6,862

 
$
6,862

 
$

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 
1,341

 
1,341

 

Construction equipment financing
 
758

 
758

 

Commercial real estate
 
12,410

 
12,410

 

Residential real estate
 

 

 

Consumer loans
 

 

 

Total with no related reserve recorded
 
21,371

 
21,371

 

With a reserve recorded:
 
 

 
 

 
 

Commercial and agricultural loans
 
10,466

 
10,466

 
3,415

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 

 

 

Construction equipment financing
 

 

 

Commercial real estate
 
820

 
820

 
76

Residential real estate
 
375

 
377

 
157

Consumer loans
 

 

 

Total with a reserve recorded
 
11,661

 
11,663

 
3,648

Total impaired loans
 
$
33,032

 
$
33,034

 
$
3,648

 
 
 
 
 
 
 
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 a reserve 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



13

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 September 30,
 
Nine Months Ended September 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
 
$
22,095

 
$
9

 
$
11,766

 
$
98

 
$
16,203

 
$
34

 
$
9,645

 
$
133

Auto and light truck
 

 

 

 

 
542

 

 

 

Medium and heavy duty truck
 

 

 
677

 

 

 

 
513

 

Aircraft financing
 
1,157

 
3

 
10,361

 
79

 
3,212

 
16

 
8,832

 
79

Construction equipment financing
 
941

 

 
1,447

 
1

 
1,001

 

 
3,376

 
4

Commercial real estate
 
13,415

 
148

 
16,531

 
155

 
13,263

 
442

 
18,507

 
459

Residential real estate
 
375

 
4

 

 

 
377

 
12

 

 

Consumer
 

 

 

 

 

 

 

 

Total
 
$
37,983

 
$
164

 
$
40,782

 
$
333

 
$
34,598

 
$
504

 
$
40,873

 
$
675

 
The following table shows the number of loans and leases classified as troubled debt restructuring (TDR) during the three and nine months ended September 30, 2014 and 2013, segregated by class, as well as the recorded investment as of September 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 were three modifications during 2014 and two during 2013 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modifications is immaterial.
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 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
 
2

 
$
346

 

 
$

 
2

 
$
346

 
1

 
$
750

Auto and light truck
 

 

 

 

 

 

 

 

Medium and heavy duty truck
 

 

 

 

 

 

 

 

Aircraft financing
 
1

 
337

 

 

 
2

 
337

 

 

Construction equipment financing
 

 

 

 

 

 

 

 

Commercial real estate