SRCE-2015.3.31-10Q
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 March 31, 2015
 
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 April 17, 2015 — 23,853,087 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)
 
March 31,
2015
 
December 31,
2014
ASSETS
 

 
 

Cash and due from banks
$
58,196

 
$
64,834

Federal funds sold and interest bearing deposits with other banks
11,068

 
1,356

Investment securities available-for-sale (amortized cost of $778,597 and $776,057 at March 31, 2015
and December 31, 2014, respectively)
796,604

 
791,118

Other investments
20,561

 
20,801

Trading account securities
208

 
205

Mortgages held for sale
22,820

 
13,604

Loans and leases, net of unearned discount:
 

 
 

Commercial and agricultural
712,293

 
710,758

Auto and light truck
402,389

 
397,902

Medium and heavy duty truck
240,187

 
247,153

Aircraft financing
696,943

 
727,665

Construction equipment financing
439,530

 
399,940

Commercial real estate
615,555

 
616,587

Residential real estate
443,375

 
445,759

Consumer
150,860

 
142,810

Total loans and leases
3,701,132

 
3,688,574

Reserve for loan and lease losses
(85,098
)
 
(85,068
)
Net loans and leases
3,616,034

 
3,603,506

Equipment owned under operating leases, net
82,640

 
74,143

Net premises and equipment
49,701

 
50,328

Goodwill and intangible assets
85,158

 
85,371

Accrued income and other assets
119,394

 
124,692

Total assets
$
4,862,384

 
$
4,829,958

 
 
 
 
LIABILITIES
 

 
 

Deposits:
 

 
 

Noninterest bearing
$
835,403

 
$
796,241

Interest bearing
3,035,057

 
3,006,619

Total deposits
3,870,460

 
3,802,860

Short-term borrowings:
 

 
 

Federal funds purchased and securities sold under agreements to repurchase
123,075

 
138,843

Other short-term borrowings
77,071

 
106,979

Total short-term borrowings
200,146

 
245,822

Long-term debt and mandatorily redeemable securities
57,515

 
56,232

Subordinated notes
58,764

 
58,764

Accrued expenses and other liabilities
50,994

 
51,807

Total liabilities
4,237,879

 
4,215,485

 
 
 
 
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 March 31, 2015 and December 31, 2014
346,535

 
346,535

Retained earnings
311,207

 
302,242

Cost of common stock in treasury (1,788,805 shares at March 31, 2015 and 1,779,442 shares at December 31, 2014)
(44,484
)
 
(43,711
)
Accumulated other comprehensive income
11,247

 
9,407

Total shareholders’ equity
624,505

 
614,473

Total liabilities and shareholders’ equity
$
4,862,384

 
$
4,829,958

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

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Table of Contents

1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Dollars in thousands, except per share amounts) 
 
 
Three Months Ended 
 March 31,
 
 
2015
 
2014
Interest income:
 
 

 
 

Loans and leases
 
$
39,604

 
$
38,914

Investment securities, taxable
 
3,004

 
3,345

Investment securities, tax-exempt
 
769

 
819

Other
 
255

 
277

Total interest income
 
43,632

 
43,355

 
 
 
 
 
Interest expense:
 
 

 
 

Deposits
 
2,559

 
2,971

Short-term borrowings
 
103

 
136

Subordinated notes
 
1,055

 
1,055

Long-term debt and mandatorily redeemable securities
 
479

 
575

Total interest expense
 
4,196

 
4,737

 
 
 
 
 
Net interest income
 
39,436

 
38,618

Provision for loan and lease losses
 
357

 
804

Net interest income after provision for loan and lease losses
 
39,079

 
37,814

 
 
 
 
 
Noninterest income:
 
 

 
 

Trust fees
 
4,557

 
4,476

Service charges on deposit accounts
 
2,197

 
2,066

Debit card income
 
2,399

 
2,232

Mortgage banking income
 
1,251

 
1,334

Insurance commissions
 
1,305

 
1,563

Equipment rental income
 
5,079

 
4,082

Gains on investment securities available-for-sale
 

 
963

Other income
 
2,963

 
2,682

Total noninterest income
 
19,751

 
19,398

 
 
 
 
 
Noninterest expense:
 
 

 
 

Salaries and employee benefits
 
20,925

 
19,482

Net occupancy expense
 
2,461

 
2,437

Furniture and equipment expense
 
4,336

 
4,237

Depreciation - leased equipment
 
4,088

 
3,249

Professional fees
 
870

 
1,128

Supplies and communication
 
1,406

 
1,392

FDIC and other insurance
 
849

 
864

Business development and marketing expense
 
1,049

 
1,684

Loan and lease collection and repossession expense
 
363

 
(494
)
Other expense
 
1,714

 
1,994

Total noninterest expense
 
38,061

 
35,973

 
 
 
 
 
Income before income taxes
 
20,769

 
21,239

Income tax expense
 
7,258

 
7,607

 
 
 
 
 
Net income
 
$
13,511

 
$
13,632

 
 
 
 
 
Per common share:
 
 

 
 

Basic net income per common share
 
$
0.56

 
$
0.55

Diluted net income per common share
 
$
0.56

 
$
0.55

Dividends
 
$
0.18

 
$
0.17

Basic weighted average common shares outstanding
 
23,871,157

 
24,317,446

Diluted weighted average common shares outstanding
 
23,871,157

 
24,317,446

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 
 March 31,
 
 
2015
 
2014
 
 
 
 
 
Net income
 
$
13,511

 
$
13,632

 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

Change in unrealized appreciation (depreciation) of available-for-sale securities
 
2,946

 
4,016

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

 
(963
)
Income tax effect
 
(1,106
)
 
(1,146
)
Other comprehensive income (loss), net of tax
 
1,840

 
1,907

 
 
 
 
 
Comprehensive income
 
$
15,351

 
$
15,539

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, 2014
$

 
$
346,535

 
$
261,626

 
$
(29,364
)
 
$
6,581

 
$
585,378

Net income

 

 
13,632

 

 

 
13,632

Other comprehensive income

 

 

 

 
1,907

 
1,907

Issuance of 61,978 common shares under stock based compensation awards, including related tax effects

 

 
(243
)
 
1,480

 

 
1,237

Cost of 48,607 shares of common stock acquired for treasury

 

 

 
(1,401
)
 

 
(1,401
)
Common stock dividend ($0.17 per share)

 

 
(4,167
)
 

 

 
(4,167
)
Balance at March 31, 2014
$

 
$
346,535

 
$
270,848

 
$
(29,285
)
 
$
8,488

 
$
596,586

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
$

 
$
346,535

 
$
302,242

 
$
(43,711
)
 
$
9,407

 
$
614,473

Net income

 

 
13,511

 

 

 
13,511

Other comprehensive income

 

 

 

 
1,840

 
1,840

Issuance of 85,783 common shares under stock based compensation awards, including related tax effects

 

 
(221
)
 
2,191

 

 
1,970

Cost of 95,146 shares of common stock acquired for treasury

 

 

 
(2,964
)
 

 
(2,964
)
Common stock dividend ($0.18 per share)

 

 
(4,325
)
 

 

 
(4,325
)
Balance at March 31, 2015
$

 
$
346,535

 
$
311,207

 
$
(44,484
)
 
$
11,247

 
$
624,505

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


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Table of Contents

1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Dollars in thousands)
 
Three Months Ended March 31,
 
2015
 
2014
Operating activities:
 

 
 

Net income
$
13,511

 
$
13,632

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

 
 

Provision for loan and lease losses
357

 
804

Depreciation of premises and equipment
1,148

 
1,189

Depreciation of equipment owned and leased to others
4,088

 
3,249

Amortization of investment securities premiums and accretion of discounts, net
1,111

 
1,044

Amortization of mortgage servicing rights
393

 
286

Deferred income taxes
(139
)
 
(905
)
Gains on investment securities available-for-sale

 
(963
)
Originations of loans held for sale, net of principal collected
(34,517
)
 
(22,470
)
Proceeds from the sales of loans held for sale
26,347

 
18,373

Net gain on sale of loans held for sale
(1,046
)
 
(785
)
Net gain on sale of other real estate and repossessions
(564
)
 
(760
)
Change in trading account securities
(3
)
 

Change in interest receivable
(224
)
 
(714
)
Change in interest payable
(250
)
 
100

Change in other assets
167

 
(812
)
Change in other liabilities
5,120

 
905

Other
230

 
1,271

Net change in operating activities
15,729

 
13,444

Investing activities:
 

 
 

Proceeds from sales of investment securities

 
1,236

Proceeds from maturities of investment securities
19,807

 
64,251

Purchases of investment securities
(23,458
)
 
(69,412
)
Net change in other investments
240

 

Loans sold or participated to others
1,373

 
689

Net change in loans and leases
(19,203
)
 
(33,676
)
Net change in equipment owned under operating leases
(12,585
)
 
(750
)
Purchases of premises and equipment
(520
)
 
(421
)
Proceeds from sales of other real estate and repossessions
5,654

 
5,005

Net change in investing activities
(28,692
)
 
(33,078
)
Financing activities:
 

 
 

Net change in demand deposits and savings accounts
37,774

 
(6,167
)
Net change in time deposits
29,826

 
60,940

Net change in short-term borrowings
(45,676
)
 
(16,484
)
Proceeds from issuance of long-term debt

 
5,647

Payments on long-term debt
(459
)
 
(6,096
)
Net proceeds from issuance of treasury stock
1,970

 
1,237

Acquisition of treasury stock
(2,964
)
 
(1,401
)
Cash dividends paid on common stock
(4,434
)
 
(4,267
)
Net change in financing activities
16,037

 
33,409

 
 
 
 
Net change in cash and cash equivalents
3,074

 
13,775

 
 
 
 
Cash and cash equivalents, beginning of year
66,190

 
80,052

 
 
 
 
Cash and cash equivalents, end of period
$
69,264

 
$
93,827

Supplemental Information:
 

 
 

Non-cash transactions:
 

 
 

Loans transferred to other real estate and repossessed assets
$
4,945

 
$
5,444

Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan
500

 

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 (2014 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, 2014 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
Consolidations: In February 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-02 “Consolidation (Topic 810) - Amendments to the Consolidation Analysis.” ASU 2015-02 includes amendments that are intended to improve targeted areas of consolidation for legal entities including reducing the number of consolidation models from four to two and simplifying the FASB Accounting Standards Codification. ASU 2015-02 is effective for annual and interim periods within those annual periods, beginning after December 15, 2015. The amendments may be applied retrospectively in previously issued financial statements for one or more years with a cumulative effect adjustment to retained earnings as of the beginning of the first year restated. Early adoption is permitted, including adoption in an interim period. The Company is assessing the impact of ASU 2015-02 on its accounting and disclosures.
Troubled Debt Restructurings by Creditors: In August 2014, the FASB issued 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 adopted ASU 2014-14 on January 1, 2015 and it did 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 adopted ASU 2014-11 on January 1, 2015 and it did not have an impact on its accounting and disclosures.

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Table of Contents

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 adopted ASU 2014-04 on January 1, 2015 and it did not have a material impact 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 adopted ASU 2014-01 on January 1, 2015 and it did not have a material impact on its accounting and disclosures for affordable housing projects.
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
March 31, 2015
 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
386,301

 
$
4,457

 
$
(402
)
 
$
390,356

U.S. States and political subdivisions securities
 
118,503

 
3,659

 
(99
)
 
122,063

Mortgage-backed securities — Federal agencies
 
239,476

 
5,623

 
(491
)
 
244,608

Corporate debt securities
 
31,624

 
422

 
(20
)
 
32,026

Foreign government and other securities
 
800

 
8

 

 
808

Total debt securities
 
776,704

 
14,169

 
(1,012
)
 
789,861

Marketable equity securities
 
1,893

 
4,852

 
(2
)
 
6,743

Total investment securities available-for-sale
 
$
778,597

 
$
19,021

 
$
(1,014
)
 
$
796,604

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
371,878

 
$
3,593

 
$
(1,968
)
 
$
373,503

U.S. States and political subdivisions securities
 
121,510

 
3,392

 
(214
)
 
124,688

Mortgage-backed securities — Federal agencies
 
248,299

 
5,490

 
(781
)
 
253,008

Corporate debt securities
 
31,677

 
281

 
(26
)
 
31,932

Foreign government and other securities
 
800

 
11

 

 
811

Total debt securities
 
774,164

 
12,767

 
(2,989
)
 
783,942

Marketable equity securities
 
1,893

 
5,285

 
(2
)
 
7,176

Total investment securities available-for-sale
 
$
776,057

 
$
18,052

 
$
(2,991
)
 
$
791,118

 
At March 31, 2015 and December 31, 2014, 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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The following table shows the contractual maturities of investments in securities available-for-sale at March 31, 2015. 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
 
$
88,873

 
$
89,575

Due after one year through five years
 
420,722

 
427,387

Due after five years through ten years
 
27,633

 
28,291

Due after ten years
 

 

Mortgage-backed securities
 
239,476

 
244,608

Total debt securities available-for-sale
 
$
776,704

 
$
789,861

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 three months ended March 31, 2014 reflect the sale of marketable equity securities.
 
 
 
Three Months Ended 
 March 31,
(Dollars in thousands)
 
 
2015
 
2014
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
March 31, 2015
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$

 
$

 
$
104,605

 
$
(402
)
 
$
104,605

 
$
(402
)
U.S. States and political subdivisions securities
 
9,010

 
(72
)
 
2,083

 
(27
)
 
11,093

 
(99
)
Mortgage-backed securities - Federal agencies
 
11,841

 
(50
)
 
22,971

 
(441
)
 
34,812

 
(491
)
Corporate debt securities
 

 

 
980

 
(20
)
 
980

 
(20
)
Foreign government and other securities
 

 

 

 

 

 

Total debt securities
 
20,851

 
(122
)
 
130,639

 
(890
)
 
151,490

 
(1,012
)
Marketable equity securities
 

 

 
3

 
(2
)
 
3

 
(2
)
Total investment securities available-for-sale
 
$
20,851

 
$
(122
)
 
$
130,642

 
$
(892
)
 
$
151,493

 
$
(1,014
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
54,944

 
$
(148
)
 
$
115,195

 
$
(1,820
)
 
$
170,139

 
$
(1,968
)
U.S. States and political subdivisions securities
 
16,805

 
(112
)
 
8,333

 
(102
)
 
25,138

 
(214
)
Mortgage-backed securities - Federal agencies
 
21,754

 
(62
)
 
32,781

 
(719
)
 
54,535

 
(781
)
Corporate debt securities
 
3,072

 
(26
)
 

 

 
3,072

 
(26
)
Foreign government and other securities
 

 

 

 

 

 

Total debt securities
 
96,575

 
(348
)
 
156,309

 
(2,641
)
 
252,884

 
(2,989
)
Marketable equity securities
 

 

 
3

 
(2
)
 
3

 
(2
)
Total investment securities available-for-sale
 
$
96,575

 
$
(348
)
 
$
156,312

 
$
(2,643
)
 
$
252,887

 
$
(2,991
)
 
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.

9

Table of Contents

There were no OTTI write-downs in 2015 or 2014.
At March 31, 2015, 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 March 31, 2015 and December 31, 2014, investment securities with carrying values of $230.65 million and $231.50 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
March 31, 2015
 
 

 
 

 
 

Commercial and agricultural
 
$
696,045

 
$
16,248

 
$
712,293

Auto and light truck
 
382,295

 
20,094

 
402,389

Medium and heavy duty truck
 
237,164

 
3,023

 
240,187

Aircraft financing
 
670,440

 
26,503

 
696,943

Construction equipment financing
 
432,926

 
6,604

 
439,530

Commercial real estate
 
593,959

 
21,596

 
615,555

Total
 
$
3,012,829

 
$
94,068

 
$
3,106,897

 
 
 
 
 
 
 
December 31, 2014
 
 

 
 

 
 

Commercial and agricultural
 
$
683,169

 
$
27,589

 
$
710,758

Auto and light truck
 
380,425

 
17,477

 
397,902

Medium and heavy duty truck
 
243,798

 
3,355

 
247,153

Aircraft financing
 
691,018

 
36,647

 
727,665

Construction equipment financing
 
393,965

 
5,975

 
399,940

Commercial real estate
 
592,787

 
23,800

 
616,587

Total
 
$
2,985,162

 
$
114,843

 
$
3,100,005


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
March 31, 2015
 
 

 
 

 
 

Residential real estate
 
$
441,080

 
$
2,295

 
$
443,375

Consumer
 
150,531

 
329

 
150,860

Total
 
$
591,611

 
$
2,624

 
$
594,235

 
 
 
 
 
 
 
December 31, 2014
 
 

 
 

 
 

Residential real estate
 
$
442,918

 
$
2,841

 
$
445,759

Consumer
 
142,476

 
334

 
142,810

Total
 
$
585,394

 
$
3,175

 
$
588,569

 
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
March 31, 2015
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and agricultural
 
$
705,062

 
$
440

 
$

 
$

 
$
705,502

 
$
6,791

 
$
712,293

Auto and light truck
 
402,165

 
194

 
9

 

 
402,368

 
21

 
402,389

Medium and heavy duty truck
 
240,150

 

 

 

 
240,150

 
37

 
240,187

Aircraft financing
 
678,045

 
8,350

 
3,116

 

 
689,511

 
7,432

 
696,943

Construction equipment financing
 
438,792

 

 

 

 
438,792

 
738

 
439,530

Commercial real estate
 
611,649

 

 

 

 
611,649

 
3,906

 
615,555

Residential real estate
 
439,694

 
1,088

 
298

 
102

 
441,182

 
2,193

 
443,375

Consumer
 
149,605

 
839

 
87

 
88

 
150,619

 
241

 
150,860

Total
 
$
3,665,162

 
$
10,911

 
$
3,510

 
$
190

 
$
3,679,773

 
$
21,359

 
$
3,701,132

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and agricultural
 
$
696,351

 
$

 
$
123

 
$

 
$
696,474

 
$
14,284

 
$
710,758

Auto and light truck
 
397,815

 
48

 
1

 

 
397,864

 
38

 
397,902

Medium and heavy duty truck
 
247,097

 

 

 

 
247,097

 
56

 
247,153

Aircraft financing
 
699,054

 
541

 
15,597

 

 
715,192

 
12,473

 
727,665

Construction equipment financing
 
396,821

 
999

 
1,369

 

 
399,189

 
751

 
399,940

Commercial real estate
 
611,780

 

 

 

 
611,780

 
4,807

 
616,587

Residential real estate
 
441,508

 
1,099

 
311

 
873

 
443,791

 
1,968

 
445,759

Consumer
 
141,577

 
676

 
223

 
109

 
142,585

 
225

 
142,810

Total
 
$
3,632,003

 
$
3,363

 
$
17,624

 
$
982

 
$
3,653,972

 
$
34,602

 
$
3,688,574


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 Reserve
March 31, 2015
 
 

 
 

 
 

With no related reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 
$
6,096

 
$
6,095

 
$

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 
4,919

 
4,919

 

Construction equipment financing
 
734

 
734

 

Commercial real estate
 
10,771

 
10,771

 

Residential real estate
 

 

 

Consumer
 

 

 

Total with no related reserve recorded
 
22,520

 
22,519

 

With a reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 
598

 
598

 
13

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 
2,460

 
2,460

 
501

Construction equipment financing
 

 

 

Commercial real estate
 
775

 
775

 
67

Residential real estate
 
371

 
374

 
154

Consumer
 

 

 

Total with a reserve recorded
 
4,204

 
4,207

 
735

Total impaired loans
 
$
26,724

 
$
26,726

 
$
735

 
 
 
 
 
 
 
December 31, 2014
 
 

 
 

 
 

With no related reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 
$
14,468

 
$
14,467

 
$

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 
12,740

 
12,741

 

Construction equipment financing
 
746

 
746

 

Commercial real estate
 
11,707

 
11,707

 

Residential real estate
 

 

 

Consumer
 

 

 

Total with no related reserve recorded
 
39,661

 
39,661

 

With a reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 
74

 
74

 
5

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 

 

 

Construction equipment financing
 

 

 

Commercial real estate
 
798

 
798

 
80

Residential real estate
 
373

 
376

 
156

Consumer
 

 

 

Total with a reserve recorded
 
1,245

 
1,248

 
241

Total impaired loans
 
$
40,906

 
$
40,909

 
$
241


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 March 31,
 
 
2015
 
2014
(Dollars in thousands) 
 
Average
Recorded
Investment
 
Interest
Income
 
Average
Recorded
Investment
 
Interest
Income
Commercial and agricultural
 
$
9,808

 
$
10

 
$
11,255

 
$
16

Auto and light truck
 

 

 
1,627

 

Medium and heavy duty truck
 

 

 

 

Aircraft financing
 
9,144

 
6

 
6,976

 
9

Construction equipment financing
 
739

 

 
949

 

Commercial real estate
 
11,904

 
142

 
13,666

 
147

Residential real estate
 
373

 
4

 
378

 
4

Consumer
 

 

 

 

Total
 
$
31,968

 
$
162

 
$
34,851

 
$
176

 
The following table shows the number of loans and leases classified as troubled debt restructuring (TDR) during the three months ended March 31, 2015 and 2014, segregated by class, as well as the recorded investment as of March 31. The classification between nonperforming and performing is shown at the time of modification. Modification programs focus 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 no modifications during the three months ended March 31, 2015 and 2014 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modifications was immaterial.
 
 
Three Months Ended March 31,
 
 
2015
 
2014
(Dollars in thousands)
 
Number of Modifications
 
Recorded Investment
 
Number of Modifications
 
Recorded Investment
Performing TDRs:
 
 

 
 

 
 

 
 

Commercial and agricultural
 

 
$

 

 
$

Auto and light truck
 

 

 

 

Medium and heavy duty truck
 

 

 

 

Aircraft financing
 

 

 
1

 
596

Construction equipment financing
 

 

 

 

Commercial real estate
 

 

 

 

Residential real estate
 

 

 

 

Consumer
 

 

 

 

Total performing TDR modifications
 

 
$

 
1

 
$
596

 
 
 
 
 
 
 
 
 
Nonperforming TDRs:
 
 

 
 

 
 

 
 

Commercial and agricultural
 

 
$

 

 
$

Auto and light truck
 

 

 

 

Medium and heavy duty truck
 

 

 

 

Aircraft financing
 

 

 

 

Construction equipment financing
 

 

 

 

Commercial real estate
 

 

 

 

Residential real estate
 

 

 

 

Consumer
 

 

 

 

Total nonperforming TDR modifications
 

 
$

 

 
$

Total TDR modifications
 

 
$

 
1

 
$
596

 
There were no TDRs which had payment defaults within the twelve months following modification during the three months ended March 31, 2015 and 2014. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.

13

Table of Contents

The following table shows the recorded investment of loans and leases classified as troubled debt restructurings as of March 31, 2015 and December 31, 2014.
(Dollars in thousands)
 
March 31,
2015
 
December 31,
2014
Performing TDRs
 
$
8,426

 
$
9,118

Nonperforming TDRs
 
6,939

 
14,507

Total TDRs
 
$
15,365

 
$
23,625

 
Note 5.       Reserve for Loan and Lease Losses
The reserve for loan and lease loss methodology has been consistently applied for several years, with enhancements instituted periodically. Reserve ratios are reviewed quarterly and revised periodically to reflect recent loss history and to incorporate current risks and trends which may not be recognized in historical data. As the historical charge-off analysis is updated, the Company reviews the look-back periods for each business loan portfolio. Furthermore, a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency is performed in order to review portfolio trends and other factors, including specific industry risks and economic conditions, which may have an impact on the reserves and reserve ratios applied to various portfolios. The Company adjusts the calculated historical based ratio as a result of the analysis of environmental factors, principally economic risk and concentration risk. Key economic factors affecting the portfolios are growth in gross domestic product, unemployment rates, housing market trends, commodity prices, inflation and global economic and political issues. Concentration risk is impacted primarily by geographic concentration in Northern Indiana and Southwestern Lower Michigan in the business banking and commercial real estate portfolios and by collateral concentration in the specialty finance portfolios and exposure to foreign markets by geographic risk.
The reserve for loan and lease losses is maintained at a level believed to be appropriate by the Company to absorb probable losses inherent in the loan and lease portfolio. The determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable loan and lease losses related to specifically identified impaired loans and leases as well as probable losses in the remainder of the various loan and lease portfolios. For purposes of determining the reserve, the Company has segmented loans and leases into classes based on the associated risk within these segments. The Company has determined that eight classes exist within the loan and lease portfolio. The methodology for assessing the appropriateness of the reserve consists of several key elements, which include: specific reserves for impaired loans, formula reserves for each business lending division portfolio including percentage allocations for special attention loans and leases not deemed impaired, and reserves for pooled homogeneous loans and leases. The Company’s evaluation is based upon a continuing review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic and geopolitical events, all of which are subject to judgment and will change.

14

Table of Contents

The following table shows the changes in the reserve for loan and lease losses, segregated by class, for the three months ended March 31, 2015 and 2014.
(Dollars in thousands)
 
Commercial and
agricultural
 
Auto and
light truck
 
Medium and
heavy duty truck
 
Aircraft
financing
 
Construction
equipment
financing
 
Commercial
real estate
 
Residential
real estate
 
Consumer
 
Total
March 31, 2015
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Reserve for loan and lease losses
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of period
 
$
11,760

 
$
10,326

 
$
4,500

 
$
32,234

 
$
7,008

 
$
13,270

 
$
4,102

 
$
1,868

 
$
85,068

Charge-offs
 
943

 
22

 

 
49

 

 

 
40

 
147

 
1,201

Recoveries
 
478

 
60

 
3

 
44

 
122

 
97

 
2

 
68

 
874

Net charge-offs (recoveries)
 
465

 
(38
)
 
(3
)
 
5

 
(122
)
 
(97
)
 
38

 
79

 
327

Provision (recovery of provision)
 
325

 
429

 
(139
)
 
(928
)
 
610

 
(181
)
 
51

 
190

 
357

Balance, end of period
 
$
11,620

 
$
10,793

 
$
4,364

 
$
31,301

 
$
7,740

 
$
13,186

 
$
4,115

 
$
1,979

 
$
85,098

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, individually evaluated for impairment
 
$
13

 
$

 
$

 
$
501

 
$

 
$
67

 
$
154

 
$

 
$
735

Ending balance, collectively evaluated for impairment
 
11,607

 
10,793

 
4,364