SRCE-2015.6.30-10Q
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, 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 July 17, 2015 — 26,199,344 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)
 
June 30,
2015
 
December 31,
2014
ASSETS
 

 
 

Cash and due from banks
$
66,302

 
$
64,834

Federal funds sold and interest bearing deposits with other banks
11,396

 
1,356

Investment securities available-for-sale (amortized cost of $773,195 and $776,057 at June 30, 2015
and December 31, 2014, respectively)
786,471

 
791,118

Other investments
20,743

 
20,801

Trading account securities
211

 
205

Mortgages held for sale
14,782

 
13,604

Loans and leases, net of unearned discount:
 

 
 

Commercial and agricultural
719,972

 
710,758

Auto and light truck
446,731

 
397,902

Medium and heavy duty truck
250,045

 
247,153

Aircraft financing
751,665

 
727,665

Construction equipment financing
445,479

 
399,940

Commercial real estate
641,205

 
616,587

Residential real estate
454,730

 
445,759

Consumer
142,872

 
142,810

Total loans and leases
3,852,699

 
3,688,574

Reserve for loan and lease losses
(86,588
)
 
(85,068
)
Net loans and leases
3,766,111

 
3,603,506

Equipment owned under operating leases, net
93,875

 
74,143

Net premises and equipment
50,931

 
50,328

Goodwill and intangible assets
84,967

 
85,371

Accrued income and other assets
118,234

 
124,692

Total assets
$
5,014,023

 
$
4,829,958

 
 
 
 
LIABILITIES
 

 
 

Deposits:
 

 
 

Noninterest bearing
$
857,079

 
$
796,241

Interest bearing
3,105,506

 
3,006,619

Total deposits
3,962,585

 
3,802,860

Short-term borrowings:
 

 
 

Federal funds purchased and securities sold under agreements to repurchase
122,658

 
138,843

Other short-term borrowings
139,529

 
106,979

Total short-term borrowings
262,187

 
245,822

Long-term debt and mandatorily redeemable securities
57,488

 
56,232

Subordinated notes
58,764

 
58,764

Accrued expenses and other liabilities
41,368

 
51,807

Total liabilities
4,382,392

 
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 28,206,076 at June 30, 2015 and December 31, 2014*
436,538

 
346,535

Retained earnings*
232,507

 
302,242

Cost of common stock in treasury (2,009,732 shares at June 30, 2015 and 1,957,386 shares at December 31, 2014)*
(45,706
)
 
(43,711
)
Accumulated other comprehensive income
8,292

 
9,407

Total shareholders’ equity
631,631

 
614,473

Total liabilities and shareholders’ equity
$
5,014,023

 
$
4,829,958

*Share data and June 30, 2015 common stock and retained earnings gives retrospective recognition to a 10% stock dividend declared on July 22, 2015.
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,
 
2015
 
2014
 
2015
 
2014
Interest income:
 

 
 

 
 

 
 

Loans and leases
$
42,583

 
$
40,401

 
$
82,187

 
$
79,316

Investment securities, taxable
2,648

 
3,401

 
5,652

 
6,746

Investment securities, tax-exempt
754

 
816

 
1,523

 
1,635

Other
229

 
232

 
484

 
509

Total interest income
46,214

 
44,850

 
89,846

 
88,206

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

 
 

Deposits
2,838

 
2,994

 
5,397

 
5,965

Short-term borrowings
131

 
169

 
234

 
306

Subordinated notes
1,055

 
1,055

 
2,110

 
2,110

Long-term debt and mandatorily redeemable securities
525

 
470

 
1,004

 
1,045

Total interest expense
4,549

 
4,688

 
8,745

 
9,426

 
 
 
 
 
 
 
 
Net interest income
41,665

 
40,162

 
81,101

 
78,780

Provision for loan and lease losses
811

 
2,543

 
1,168

 
3,347

Net interest income after provision for loan and lease losses
40,854

 
37,619

 
79,933

 
75,433

 
 
 
 
 
 
 
 
Noninterest income:
 

 
 

 
 

 
 

Trust fees
5,247

 
4,955

 
9,804

 
9,431

Service charges on deposit accounts
2,367

 
2,207

 
4,564

 
4,273

Debit card income
2,628

 
2,463

 
5,027

 
4,695

Mortgage banking income
1,239

 
1,181

 
2,490

 
2,515

Insurance commissions
1,382

 
1,288

 
2,687

 
2,851

Equipment rental income
5,342

 
4,098

 
10,421

 
8,180

Gains on investment securities available-for-sale
4

 

 
4

 
963

Other income
3,322

 
3,029

 
6,285

 
5,711

Total noninterest income
21,531

 
19,221

 
41,282

 
38,619

 
 
 
 
 
 
 
 
Noninterest expense:
 

 
 

 
 

 
 

Salaries and employee benefits
20,794

 
18,827

 
41,719

 
38,309

Net occupancy expense
2,345

 
2,235

 
4,806

 
4,672

Furniture and equipment expense
4,531

 
4,413

 
8,867

 
8,650

Depreciation - leased equipment
4,396

 
3,290

 
8,484

 
6,539

Professional fees
1,108

 
1,062

 
1,978

 
2,190

Supplies and communication
1,409

 
1,337

 
2,815

 
2,729

FDIC and other insurance
847

 
850

 
1,696

 
1,714

Business development and marketing expense
1,214

 
899

 
2,263

 
2,583

Loan and lease collection and repossession expense
(294
)
 
(17
)
 
69

 
(512
)
Other expense
1,891

 
1,528

 
3,605

 
3,522

Total noninterest expense
38,241

 
34,424

 
76,302

 
70,396

 
 
 
 
 
 
 
 
Income before income taxes
24,144

 
22,416

 
44,913

 
43,656

Income tax expense
8,514

 
7,922

 
15,772

 
15,530

 
 
 
 
 
 
 
 
Net income
$
15,630

 
$
14,494

 
$
29,141

 
$
28,126

 
 
 
 
 
 
 
 
Per common share*:
 

 
 

 
 

 
 

Basic net income per common share
$
0.59

 
$
0.54

 
$
1.10

 
$
1.04

Diluted net income per common share
$
0.59

 
$
0.54

 
$
1.10

 
$
1.04

Dividends
$
0.164

 
$
0.164

 
$
0.327

 
$
0.318

Basic weighted average common shares outstanding*
26,212,999

 
26,485,789

 
26,235,511

 
26,616,762

Diluted weighted average common shares outstanding*
26,212,999

 
26,485,789

 
26,235,511

 
26,616,762

*The computation of per common share data and shares outstanding gives retrospective recognition to a 10% stock dividend declared on July 22, 2015.
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,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income
$
15,630

 
$
14,494

 
$
29,141

 
$
28,126

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 

 
 

Change in unrealized (depreciation) appreciation of available-for-sale securities
(4,727
)
 
2,759

 
(1,781
)
 
6,775

Reclassification adjustment for realized (gains) losses included in net income
(4
)
 

 
(4
)
 
(963
)
Income tax effect
1,776

 
(1,036
)
 
670

 
(2,182
)
Other comprehensive (loss) income, net of tax
(2,955
)
 
1,723

 
(1,115
)
 
3,630

 
 
 
 
 
 
 
 
Comprehensive income
$
12,675

 
$
16,217

 
$
28,026

 
$
31,756

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

 

 
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 ($0.318 per share)*

 

 
(8,559
)
 

 

 
(8,559
)
Balance at June 30, 2014
$

 
$
346,535

 
$
280,917

 
$
(43,445
)
 
$
10,211

 
$
594,218

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
$

 
$
346,535

 
$
302,242

 
$
(43,711
)
 
$
9,407

 
$
614,473

Net income

 

 
29,141

 

 

 
29,141

Other comprehensive loss

 

 

 

 
(1,115
)
 
(1,115
)
Issuance of 102,257 common shares under stock based compensation awards, including related tax effects

 

 
(237
)
 
2,683

 

 
2,446

Cost of 149,844 shares of common stock acquired for treasury

 

 

 
(4,678
)
 

 
(4,678
)
Common stock dividend ($0.327 per share)*

 

 
(8,636
)
 

 

 
(8,636
)
10% common stock dividend

 
90,003

 
(90,003
)
 

 

 

Balance at June 30, 2015
$

 
$
436,538

 
$
232,507

 
$
(45,706
)
 
$
8,292

 
$
631,631

*Per share data gives retrospective recognition to a 10% stock dividend declared on July 22, 2015.
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)
 
Six Months Ended June 30,
 
2015
 
2014
Operating activities:
 

 
 

Net income
$
29,141

 
$
28,126

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

 
 

Provision for loan and lease losses
1,168

 
3,347

Depreciation of premises and equipment
2,302

 
2,370

Depreciation of equipment owned and leased to others
8,484

 
6,539

Stock-based compensation
2,079

 
1,836

Amortization of investment securities premiums and accretion of discounts, net
2,597

 
2,093

Amortization of mortgage servicing rights
778

 
596

Deferred income taxes
(2,159
)
 
(3,335
)
Gains on investment securities available-for-sale
(4
)
 
(963
)
Originations of loans held for sale, net of principal collected
(66,312
)
 
(57,503
)
Proceeds from the sales of loans held for sale
67,143

 
46,154

Net gain on sale of loans held for sale
(2,009
)
 
(1,606
)
Net gain on sale of other real estate and repossessions
(772
)
 
(1,510
)
Change in trading account securities
(6
)
 
(6
)
Change in interest receivable
117

 
(479
)
Change in interest payable
289

 
(19
)
Change in other assets
987

 
(206
)
Change in other liabilities
(1,032
)
 
(4,505
)
Other
690

 
1,898

Net change in operating activities
43,481

 
22,827

Investing activities:
 

 
 

Proceeds from sales of investment securities
1,299

 
1,236

Proceeds from maturities of investment securities
47,314

 
106,541

Purchases of investment securities
(48,344
)
 
(85,452
)
Net change in other investments
58

 
(1,197
)
Loans sold or participated to others
1,962

 
7,805

Net change in loans and leases
(171,601
)
 
(186,436
)
Net change in equipment owned under operating leases
(28,216
)
 
(8,922
)
Purchases of premises and equipment
(2,934
)
 
(1,587
)
Proceeds from sales of other real estate and repossessions
6,536

 
9,395

Net change in investing activities
(193,926
)
 
(158,617
)
Financing activities:
 

 
 

Net change in demand deposits and savings accounts
104,266

 
70,848

Net change in time deposits
55,459

 
91,237

Net change in short-term borrowings
16,365

 
35,871

Proceeds from issuance of long-term debt

 
5,791

Payments on long-term debt
(743
)
 
(6,261
)
Stock issued under stock purchase plans
149

 
197

Acquisition of treasury stock
(4,678
)
 
(15,797
)
Cash dividends paid on common stock
(8,865
)
 
(8,770
)
Net change in financing activities
161,953

 
173,116

 
 
 
 
Net change in cash and cash equivalents
11,508

 
37,326

Cash and cash equivalents, beginning of year
66,190

 
80,052

Cash and cash equivalents, end of period
$
77,698

 
$
117,378

Supplemental Information:
 

 
 

Non-cash transactions:
 

 
 

Loans transferred to other real estate and repossessed assets
$
5,866

 
$
6,344

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
Short Duration Contracts: In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-09 “Financial Services - Insurance (Topic 944) - Disclosures about Short Duration Contracts.” ASU 2015-09 includes amendments that require insurance entities to disclose for annual reporting periods information about the liability for unpaid claims and claim adjustment expenses as well as significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses. In addition, the amendments require a roll-forward of the liability for unpaid claims and claim adjustment expenses on an annual and interim basis. The amendments are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016 and should be applied retrospectively. Early adoption is permitted. The Company is assessing the impact of ASU 2015-09 on its disclosures.
Consolidations: In February 2015, the FASB issued 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.

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Table of Contents

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 a material impact 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. On July 9, 2015, the FASB approved amendments deferring the effective date by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, 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 permitted but not before the original public entity effective date, i.e., annual periods beginning after December 15, 2016. 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.

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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, 2015
 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
383,369

 
$
3,443

 
$
(898
)
 
$
385,914

U.S. States and political subdivisions securities
 
121,353

 
2,629

 
(274
)
 
123,708

Mortgage-backed securities — Federal agencies
 
232,454

 
4,369

 
(1,573
)
 
235,250

Corporate debt securities
 
33,326

 
271

 
(20
)
 
33,577

Foreign government and other securities
 
800

 
7

 

 
807

Total debt securities
 
771,302

 
10,719

 
(2,765
)
 
779,256

Marketable equity securities
 
1,893

 
5,408

 
(86
)
 
7,215

Total investment securities available-for-sale
 
$
773,195

 
$
16,127

 
$
(2,851
)
 
$
786,471

 
 
 
 
 
 
 
 
 
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 June 30, 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).
The following table shows the contractual maturities of investments in securities available-for-sale at June 30, 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
 
$
83,048

 
$
83,639

Due after one year through five years
 
429,898

 
434,308

Due after five years through ten years
 
25,902

 
26,059

Due after ten years
 

 

Mortgage-backed securities
 
232,454

 
235,250

Total debt securities available-for-sale
 
$
771,302

 
$
779,256

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.
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Dollars in thousands)
 
2015
 
2014
 
2015
 
2014
Gross realized gains
 
$
4

 
$

 
$
4

 
$
963

Gross realized losses
 

 

 

 

Net realized gains (losses)
 
$
4

 
$

 
$
4

 
$
963

 

9

Table of Contents

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, 2015
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
24,563

 
$
(72
)
 
$
104,158

 
$
(826
)
 
$
128,721

 
$
(898
)
U.S. States and political subdivisions securities
 
31,585

 
(241
)
 
2,068

 
(33
)
 
33,653

 
(274
)
Mortgage-backed securities - Federal agencies
 
62,521

 
(639
)
 
18,952

 
(934
)
 
81,473

 
(1,573
)
Corporate debt securities
 
3,833

 
(19
)
 
999

 
(1
)
 
4,832

 
(20
)
Foreign government and other securities
 

 

 

 

 

 

Total debt securities
 
122,502

 
(971
)
 
126,177

 
(1,794
)
 
248,679

 
(2,765
)
Marketable equity securities
 
560

 
(85
)
 
3

 
(1
)
 
563

 
(86
)
Total investment securities available-for-sale
 
$
123,062

 
$
(1,056
)
 
$
126,180

 
$
(1,795
)
 
$
249,242

 
$
(2,851
)
 
 
 
 
 
 
 
 
 
 
 
 
 
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.
There were no OTTI write-downs in 2015 or 2014.
At June 30, 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 June 30, 2015 and December 31, 2014, investment securities with carrying values of $227.29 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.

10

Table of Contents

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, 2015
 
 

 
 

 
 

Commercial and agricultural
 
$
703,841

 
$
16,131

 
$
719,972

Auto and light truck
 
426,119

 
20,612

 
446,731

Medium and heavy duty truck
 
247,339

 
2,706

 
250,045

Aircraft financing
 
728,489

 
23,176

 
751,665

Construction equipment financing
 
438,594

 
6,885

 
445,479

Commercial real estate
 
621,689

 
19,516

 
641,205

Total
 
$
3,166,071

 
$
89,026

 
$
3,255,097

 
 
 
 
 
 
 
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

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, 2015
 
 

 
 

 
 

Residential real estate
 
$
452,182

 
$
2,548

 
$
454,730

Consumer
 
142,607

 
265

 
142,872

Total
 
$
594,789

 
$
2,813

 
$
597,602

 
 
 
 
 
 
 
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

 

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
June 30, 2015
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and agricultural
 
$
717,653

 
$
114

 
$
77

 
$

 
$
717,844

 
$
2,128

 
$
719,972

Auto and light truck
 
446,507

 
131

 
80

 

 
446,718

 
13

 
446,731

Medium and heavy duty truck
 
250,045

 

 

 

 
250,045

 

 
250,045

Aircraft financing
 
736,085

 
531

 
7,748

 

 
744,364

 
7,301

 
751,665

Construction equipment financing
 
444,001

 
562

 
184

 

 
444,747

 
732

 
445,479

Commercial real estate
 
638,832

 

 

 

 
638,832

 
2,373

 
641,205

Residential real estate
 
451,216

 
640

 
326

 
221

 
452,403

 
2,327

 
454,730

Consumer
 
141,713

 
679

 
215

 
57

 
142,664

 
208

 
142,872

Total
 
$
3,826,052

 
$
2,657

 
$
8,630

 
$
278

 
$
3,837,617

 
$
15,082

 
$
3,852,699

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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


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
June 30, 2015
 
 

 
 

 
 

With no related reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 
$
656

 
$
655

 
$

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 
4,714

 
4,714

 

Construction equipment financing
 
728

 
728

 

Commercial real estate
 
9,166

 
9,166

 

Residential real estate
 

 

 

Consumer
 

 

 

Total with no related reserve recorded
 
15,264

 
15,263

 

With a reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 
1,382

 
1,382

 
112

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 
2,460

 
2,460

 
501

Construction equipment financing
 

 

 

Commercial real estate
 
767

 
767

 
38

Residential real estate
 
369

 
372

 
152

Consumer
 

 

 

Total with a reserve recorded
 
4,978

 
4,981

 
803

Total impaired loans
 
$
20,242

 
$
20,244

 
$
803

 
 
 
 
 
 
 
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


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 June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
(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
 
$
2,134

 
$
6

 
$
15,261

 
$
9

 
$
5,971

 
$
16

 
$
13,258

 
$
24

Auto and light truck
 

 

 

 

 

 

 
814

 

Medium and heavy duty truck
 

 

 

 

 

 

 

 

Aircraft financing
 
7,269

 

 
1,573

 
4

 
8,207

 
6

 
4,274

 
14

Construction equipment financing
 
731

 

 
1,113

 

 
735

 

 
1,031

 

Commercial real estate
 
10,735

 
142

 
12,709

 
147

 
11,319

 
284

 
13,188

 
294

Residential real estate
 
371

 
4

 
377

 
4

 
372

 
8

 
377

 
8

Consumer
 

 

 

 

 

 

 

 

Total
 
$
21,240

 
$
152

 
$
31,033

 
$
164

 
$
26,604

 
$
314

 
$
32,942

 
$
340

 
There were no loan and lease modifications classified as troubled debt restructurings (TDR) during the three months ended June 30, 2015 and 2014. There were no loan and lease modifications classified as TDR during the six months ended June 30, 2015 and one performing loan modification classified as TDR during the six months ended June 30, 2014. The classification between nonperforming and performing is determined 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 modification did not result in the contractual forgiveness of principal or interest. There were no modifications during the six months ended June 30, 2015 and 2014 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modification was immaterial.
There were no TDRs which had payment defaults within the twelve months following modification during the three and six months ended June 30, 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.
The following table shows the recorded investment of loans and leases classified as troubled debt restructurings as of June 30, 2015 and December 31, 2014.
(Dollars in thousands)
 
June 30,
2015
 
December 31,
2014
Performing TDRs
 
$
8,344

 
$
9,118

Nonperforming TDRs
 
2,227

 
14,507

Total TDRs
 
$
10,571

 
$
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.

14

Table of Contents

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.
The following table shows the changes in the reserve for loan and lease losses, segregated by class, for the three months ended June 30, 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
June 30, 2015
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Reserve for loan and lease losses
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of period
 
$
11,620

 
$
10,793

 
$
4,364

 
$
31,301

 
$
7,740

 
$
13,186

 
$
4,115

 
$
1,979

 
$
85,098

Charge-offs
 
22