10-Q
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, 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 October 16, 2015 — 26,082,147 shares
 


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EXHIBITS
 
 
 
 
 
 
 
 
 


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Table of Contents



1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited - Dollars in thousands)
 
September 30,
2015
 
December 31,
2014
ASSETS
 

 
 

Cash and due from banks
$
61,124

 
$
64,834

Federal funds sold and interest bearing deposits with other banks
3,065

 
1,356

Investment securities available-for-sale (amortized cost of $769,053 and $776,057 at September 30, 2015
and December 31, 2014, respectively)
784,585

 
791,118

Other investments
21,728

 
20,801

Trading account securities

 
205

Mortgages held for sale
9,187

 
13,604

Loans and leases, net of unearned discount:
 

 
 

Commercial and agricultural
750,780

 
710,758

Auto and light truck
423,147

 
397,902

Medium and heavy duty truck
264,784

 
247,153

Aircraft financing
794,129

 
727,665

Construction equipment financing
450,112

 
399,940

Commercial real estate
658,589

 
616,587

Residential real estate
463,824

 
445,759

Consumer
150,185

 
142,810

Total loans and leases
3,955,550

 
3,688,574

Reserve for loan and lease losses
(87,616
)
 
(85,068
)
Net loans and leases
3,867,934

 
3,603,506

Equipment owned under operating leases, net
95,785

 
74,143

Net premises and equipment
51,252

 
50,328

Goodwill and intangible assets
84,822

 
85,371

Accrued income and other assets
126,102

 
124,692

Total assets
$
5,105,584

 
$
4,829,958

 
 
 
 
LIABILITIES
 

 
 

Deposits:
 

 
 

Noninterest bearing
$
914,152

 
$
796,241

Interest bearing
3,105,004

 
3,006,619

Total deposits
4,019,156

 
3,802,860

Short-term borrowings:
 

 
 

Federal funds purchased and securities sold under agreements to repurchase
139,414

 
138,843

Other short-term borrowings
144,096

 
106,979

Total short-term borrowings
283,510

 
245,822

Long-term debt and mandatorily redeemable securities
57,577

 
56,232

Subordinated notes
58,764

 
58,764

Accrued expenses and other liabilities
47,356

 
51,807

Total liabilities
4,466,363

 
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 28,205,674 at September 30, 2015 and 28,206,076 at December 31, 2014*
436,538

 
346,535

Retained earnings
242,102

 
302,242

Cost of common stock in treasury (2,123,527 shares at September 30, 2015 and 1,957,386 shares at December 31, 2014)*
(49,120
)
 
(43,711
)
Accumulated other comprehensive income
9,701

 
9,407

Total shareholders’ equity
639,221

 
614,473

Total liabilities and shareholders’ equity
$
5,105,584

 
$
4,829,958

*December 31, 2014 share data gives retrospective recognition to a 10% stock dividend declared on July 22, 2015 and issued on August 14, 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 INCOME
(Unaudited - Dollars in thousands, except per share amounts) 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Interest income:
 

 
 

 
 

 
 

Loans and leases
$
42,560

 
$
41,118

 
$
124,747

 
$
120,434

Investment securities, taxable
3,277

 
2,962

 
8,929

 
9,708

Investment securities, tax-exempt
738

 
831

 
2,261

 
2,466

Other
246

 
241

 
730

 
750

Total interest income
46,821

 
45,152

 
136,667

 
133,358

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

 
 

Deposits
2,874

 
2,765

 
8,271

 
8,730

Short-term borrowings
147

 
134

 
381

 
440

Subordinated notes
1,055

 
1,055

 
3,165

 
3,165

Long-term debt and mandatorily redeemable securities
536

 
488

 
1,540

 
1,533

Total interest expense
4,612

 
4,442

 
13,357

 
13,868

 
 
 
 
 
 
 
 
Net interest income
42,209

 
40,710

 
123,310

 
119,490

Provision for loan and lease losses
992

 
1,206

 
2,160

 
4,553

Net interest income after provision for loan and lease losses
41,217

 
39,504

 
121,150

 
114,937

 
 
 
 
 
 
 
 
Noninterest income:
 

 
 

 
 

 
 

Trust fees
4,634

 
4,499

 
14,438

 
13,930

Service charges on deposit accounts
2,413

 
2,225

 
6,977

 
6,498

Debit card income
2,583

 
2,382

 
7,610

 
7,077

Mortgage banking income
969

 
1,446

 
3,459

 
3,961

Insurance commissions
1,460

 
1,317

 
4,147

 
4,168

Equipment rental income
5,881

 
4,361

 
16,302

 
12,541

Gains on investment securities available-for-sale

 

 
4

 
963

Other income
3,192

 
3,162

 
9,477

 
8,873

Total noninterest income
21,132

 
19,392

 
62,414

 
58,011

 
 
 
 
 
 
 
 
Noninterest expense:
 

 
 

 
 

 
 

Salaries and employee benefits
21,835

 
20,790

 
63,554

 
59,099

Net occupancy expense
2,496

 
2,252

 
7,302

 
6,924

Furniture and equipment expense
4,604

 
4,415

 
13,471

 
13,065

Depreciation - leased equipment
4,858

 
3,571

 
13,342

 
10,110

Professional fees
1,237

 
1,158

 
3,215

 
3,348

Supplies and communication
1,307

 
1,424

 
4,122

 
4,153

FDIC and other insurance
848

 
856

 
2,544

 
2,570

Business development and marketing expense
1,244

 
1,218

 
3,507

 
3,801

Loan and lease collection and repossession expense
416

 
652

 
485

 
140

Other expense
2,223

 
1,317

 
5,828

 
4,839

Total noninterest expense
41,068

 
37,653

 
117,370

 
108,049

 
 
 
 
 
 
 
 
Income before income taxes
21,281

 
21,243

 
66,194

 
64,899

Income tax expense
7,353

 
6,296

 
23,125

 
21,826

 
 
 
 
 
 
 
 
Net income
$
13,928

 
$
14,947

 
$
43,069

 
$
43,073

 
 
 
 
 
 
 
 
Per common share*:
 

 
 

 
 

 
 

Basic net income per common share
$
0.53

 
$
0.56

 
$
1.63

 
$
1.61

Diluted net income per common share
$
0.53

 
$
0.56

 
$
1.63

 
$
1.61

Cash dividends
$
0.164

 
$
0.164

 
$
0.491

 
$
0.482

Basic weighted average common shares outstanding*
26,164,646

 
26,262,864

 
26,211,630

 
26,497,500

Diluted weighted average common shares outstanding*
26,164,646

 
26,262,864

 
26,211,630

 
26,497,500

*The computation of per common share data and shares outstanding gives retrospective recognition to a 10% stock dividend declared on July 22, 2015 and issued on August 14, 2015.
The accompanying notes are a part of the consolidated financial statements.

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1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - Dollars in thousands)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income
$
13,928

 
$
14,947

 
$
43,069

 
$
43,073

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 

 
 

Change in unrealized appreciation (depreciation) of available-for-sale securities
2,256

 
(2,507
)
 
475

 
4,268

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

 

 
(4
)
 
(963
)
Income tax effect
(847
)
 
941

 
(177
)
 
(1,241
)
Other comprehensive income (loss), net of tax
1,409

 
(1,566
)
 
294

 
2,064

 
 
 
 
 
 
 
 
Comprehensive income
$
15,337

 
$
13,381

 
$
43,363

 
$
45,137

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

 

 
43,073

 

 

 
43,073

Other comprehensive income

 

 

 

 
2,064

 
2,064

Issuance of 91,464 common shares under stock based compensation awards, including related tax effects*

 

 
(244
)
 
1,990

 

 
1,746

Cost of 597,747 shares of common stock acquired for treasury*

 

 

 
(16,342
)
 

 
(16,342
)
Common stock cash dividend ($0.482 per share)*

 

 
(12,886
)
 

 

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

 
$
346,535

 
$
291,569

 
$
(43,716
)
 
$
8,645

 
$
603,033

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
$

 
$
346,535

 
$
302,242

 
$
(43,711
)
 
$
9,407

 
$
614,473

Net income

 

 
43,069

 

 

 
43,069

Other comprehensive income

 

 

 

 
294

 
294

Issuance of 117,122 common shares under stock based compensation awards, including related tax effects*

 

 
(252
)
 
2,799

 

 
2,547

Cost of 283,263 shares of common stock acquired for treasury*

 

 

 
(8,208
)
 

 
(8,208
)
Common stock cash dividend ($0.491 per share)*

 

 
(12,941
)
 

 

 
(12,941
)
10% common stock dividend
($13 cash paid in lieu of fractional shares)

 
90,003

 
(90,016
)
 

 

 
(13
)
Balance at September 30, 2015
$

 
$
436,538

 
$
242,102

 
$
(49,120
)
 
$
9,701

 
$
639,221

*Share and per share data gives retrospective recognition to a 10% stock dividend declared on July 22, 2015 and issued on August 14, 2015.
The accompanying notes are a part of the consolidated financial statements.


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1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Dollars in thousands)
 
Nine Months Ended September 30,
 
2015
 
2014
Operating activities:
 

 
 

Net income
$
43,069

 
$
43,073

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

 
 

Provision for loan and lease losses
2,160

 
4,553

Depreciation of premises and equipment
3,517

 
3,502

Depreciation of equipment owned and leased to others
13,342

 
10,110

Stock-based compensation
2,953

 
2,640

Amortization of investment securities premiums and accretion of discounts, net
3,433

 
3,411

Amortization of mortgage servicing rights
1,117

 
930

Deferred income taxes
(3,914
)
 
(1,629
)
Gains on investment securities available-for-sale
(4
)
 
(963
)
Originations of loans held for sale, net of principal collected
(90,381
)
 
(91,936
)
Proceeds from the sales of loans held for sale
97,402

 
87,518

Net gain on sale of loans held for sale
(2,604
)
 
(2,573
)
Net gain on sale of other real estate and repossessions
(818
)
 
(1,510
)
Change in trading account securities
205

 
(4
)
Change in interest receivable
(666
)
 
(945
)
Change in interest payable
312

 
(955
)
Change in other assets
(4,802
)
 
(3,008
)
Change in other liabilities
5,068

 
(1,218
)
Other
1,200

 
2,288

Net change in operating activities
70,589

 
53,284

Investing activities:
 

 
 

Proceeds from sales of investment securities
1,299

 
1,236

Proceeds from maturities of investment securities
78,033

 
138,316

Purchases of investment securities
(75,757
)
 
(119,700
)
Net change in other investments
(927
)
 
(617
)
Loans sold or participated to others
1,962

 
15,363

Net change in loans and leases
(276,108
)
 
(127,646
)
Net change in equipment owned under operating leases
(34,984
)
 
(15,156
)
Purchases of premises and equipment
(4,612
)
 
(4,254
)
Proceeds from sales of other real estate and repossessions
6,788

 
9,522

Net change in investing activities
(304,306
)
 
(102,936
)
Financing activities:
 

 
 

Net change in demand deposits and savings accounts
140,737

 
52,369

Net change in time deposits
75,559

 
129,953

Net change in short-term borrowings
37,688

 
(97,409
)
Proceeds from issuance of long-term debt

 
7,185

Payments on long-term debt
(924
)
 
(11,433
)
Stock issued under stock purchase plans
149

 
197

Acquisition of treasury stock
(8,208
)
 
(16,342
)
Cash dividends paid on common stock
(13,285
)
 
(13,209
)
Net change in financing activities
231,716

 
51,311

 
 
 
 
Net change in cash and cash equivalents
(2,001
)
 
1,659

Cash and cash equivalents, beginning of year
66,190

 
80,052

Cash and cash equivalents, end of period
$
64,189

 
$
81,711

Supplemental Information:
 

 
 

Non-cash transactions:
 

 
 

Loans transferred to other real estate and repossessed assets
$
7,558

 
$
6,528

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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1ST SOURCE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 
Note 1.       Accounting Policies 
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.
Basis of Presentation – The accompanying unaudited consolidated financial statements reflect all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, the results of operations, changes in 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.
Use of Estimates in the Preparation of Financial Statements – Financial statements prepared in accordance with GAAP require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates.
Loans and Leases – Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs and net of unearned income. Interest income is accrued as earned based on unpaid principal balances. Origination fees and direct loan and lease origination costs are deferred and the net amount amortized to interest income over the estimated life of the related loan or lease. Loan commitment fees are deferred and amortized into other income over the commitment period.
Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, net of unamortized deferred lease origination fees and costs and unearned income. Interest income on direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment.
The accrual of interest on loans and leases is discontinued when a loan or lease becomes contractually delinquent for 90 days, or when an individual analysis of a borrower’s credit worthiness indicates a credit should be placed on nonperforming status, except for residential mortgage loans and consumer loans that are well secured and in the process of collection. Residential mortgage loans are placed on nonaccrual at the time the loan is placed in foreclosure. When interest accruals are discontinued, interest credited to income in the current year is reversed and interest accrued in the prior year is charged to the reserve for loan and lease losses. However, in some cases, the Company may elect to continue the accrual of interest when the net realizable value of collateral is sufficient to cover the principal and accrued interest. When a loan or lease is classified as nonaccrual and the future collectibility of the recorded loan or lease balance is doubtful, collections on interest and principal are applied as a reduction to principal outstanding. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured, which is typically evidenced by a sustained repayment performance of at least six months.
A loan or lease is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. Interest on impaired loans and leases, which are not classified as nonaccrual, is recognized on the accrual basis. The Company evaluates loans and leases exceeding $100,000 for impairment and establishes a specific reserve as a component of the reserve for loan and lease losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan or lease and the recorded investment in the loan or lease exceeds its fair value.
Loans and leases that have been modified and economic concessions have been granted to borrowers who have experienced financial difficulties are considered a troubled debt restructuring (TDR) and, by definition, are deemed an impaired loan. These concessions typically result from the Company’s loss mitigation activities and may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

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

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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.
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, 2015
 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
380,723

 
$
3,570

 
$
(217
)
 
$
384,076

U.S. States and political subdivisions securities
 
118,770

 
2,944

 
(122
)
 
121,592

Mortgage-backed securities — Federal agencies
 
232,568

 
4,681

 
(841
)
 
236,408

Corporate debt securities
 
34,299

 
324

 
(14
)
 
34,609

Foreign government and other securities
 
800

 
11

 

 
811

Total debt securities
 
767,160

 
11,530

 
(1,194
)
 
777,496

Marketable equity securities
 
1,893

 
5,357

 
(161
)
 
7,089

Total investment securities available-for-sale
 
$
769,053

 
$
16,887

 
$
(1,355
)
 
$
784,585

 
 
 
 
 
 
 
 
 
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 September 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).

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Table of Contents

The following table shows the contractual maturities of investments in securities available-for-sale at September 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
 
$
107,463

 
$
108,140

Due after one year through five years
 
409,967

 
415,432

Due after five years through ten years
 
17,162

 
17,516

Due after ten years
 

 

Mortgage-backed securities
 
232,568

 
236,408

Total debt securities available-for-sale
 
$
767,160

 
$
777,496

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.
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(Dollars in thousands)
 
2015
 
2014
 
2015
 
2014
Gross realized gains
 
$

 
$

 
$
4

 
$
963

Gross realized losses
 

 

 

 

Net realized gains (losses)
 
$

 
$

 
$
4

 
$
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
September 30, 2015
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
16,881

 
$
(8
)
 
$
74,746

 
$
(209
)
 
$
91,627

 
$
(217
)
U.S. States and political subdivisions securities
 
13,288

 
(91
)
 
2,325

 
(31
)
 
15,613

 
(122
)
Mortgage-backed securities - Federal agencies
 
31,223

 
(226
)
 
19,088

 
(615
)
 
50,311

 
(841
)
Corporate debt securities
 
1,741

 
(14
)
 

 

 
1,741

 
(14
)
Foreign government and other securities
 
100

 

 

 

 
100

 

Total debt securities
 
63,233

 
(339
)
 
96,159

 
(855
)
 
159,392

 
(1,194
)
Marketable equity securities
 
487

 
(159
)
 
3

 
(2
)
 
490

 
(161
)
Total investment securities available-for-sale
 
$
63,720

 
$
(498
)
 
$
96,162

 
$
(857
)
 
$
159,882

 
$
(1,355
)
 
 
 
 
 
 
 
 
 
 
 
 
 
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.

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Table of Contents

There were no OTTI write-downs in 2015 or 2014.
At September 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 September 30, 2015 and December 31, 2014, investment securities with carrying values of $218.75 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
September 30, 2015
 
 

 
 

 
 

Commercial and agricultural
 
$
735,249

 
$
15,531

 
$
750,780

Auto and light truck
 
412,083

 
11,064

 
423,147

Medium and heavy duty truck
 
261,691

 
3,093

 
264,784

Aircraft financing
 
765,908

 
28,221

 
794,129

Construction equipment financing
 
442,876

 
7,236

 
450,112

Commercial real estate
 
640,751

 
17,838

 
658,589

Total
 
$
3,258,558

 
$
82,983

 
$
3,341,541

 
 
 
 
 
 
 
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


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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
September 30, 2015
 
 

 
 

 
 

Residential real estate
 
$
461,156

 
$
2,668

 
$
463,824

Consumer
 
149,845

 
340

 
150,185

Total
 
$
611,001

 
$
3,008

 
$
614,009

 
 
 
 
 
 
 
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
September 30, 2015
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and agricultural
 
$
743,570

 
$
67

 
$

 
$

 
$
743,637

 
$
7,143

 
$
750,780

Auto and light truck
 
422,943

 
141

 
12

 

 
423,096

 
51

 
423,147

Medium and heavy duty truck
 
264,784

 

 

 

 
264,784

 

 
264,784

Aircraft financing
 
772,554

 
6,718

 
7,681

 

 
786,953

 
7,176

 
794,129

Construction equipment financing
 
448,996

 
461

 

 

 
449,457

 
655

 
450,112

Commercial real estate
 
657,102

 
124

 

 

 
657,226

 
1,363

 
658,589

Residential real estate
 
459,657

 
1,049

 
450

 
341

 
461,497

 
2,327

 
463,824

Consumer
 
148,876

 
834

 
135

 
70

 
149,915

 
270

 
150,185

Total
 
$
3,918,482

 
$
9,394

 
$
8,278

 
$
411

 
$
3,936,565

 
$
18,985

 
$
3,955,550

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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


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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, 2015
 
 

 
 

 
 

With no related reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 
$
752

 
$
752

 
$

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 
4,687

 
4,687

 

Construction equipment financing
 
655

 
655

 

Commercial real estate
 
8,264

 
8,264

 

Residential real estate
 

 

 

Consumer
 

 

 

Total with no related reserve recorded
 
14,358

 
14,358

 

With a reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 
5,919

 
5,919

 
2,710

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft financing
 
2,460

 
2,460

 
617

Construction equipment financing
 

 

 

Commercial real estate
 
751

 
751

 
22

Residential real estate
 
368

 
370

 
150

Consumer
 

 

 

Total with a reserve recorded
 
9,498

 
9,500

 
3,499

Total impaired loans
 
$
23,856

 
$
23,858

 
$
3,499

 
 
 
 
 
 
 
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 September 30,
 
Nine Months Ended September 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
 
$
3,882

 
$
11

 
$
22,095

 
$
9

 
$
5,275

 
$
27

 
$
16,203

 
$
34

Auto and light truck
 

 

 

 

 

 

 
542

 

Medium and heavy duty truck
 

 

 

 

 

 

 

 

Aircraft financing
 
7,422

 
1

 
1,157

 
3

 
7,945

 
6

 
3,212

 
16

Construction equipment financing
 
738

 

 
941

 

 
736

 

 
1,001

 

Commercial real estate
 
9,762

 
108

 
13,415

 
148

 
10,800

 
392

 
13,263

 
442

Residential real estate
 
369

 
4

 
375

 
4

 
371

 
12

 
377

 
12

Consumer
 

 

 

 

 

 

 

 

Total
 
$
22,173

 
$
124

 
$
37,983

 
$
164

 
$
25,127

 
$
437

 
$
34,598

 
$
504

 
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, 2015 and 2014, 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. 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 2015 and three modifications during 2014 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modifications was immaterial.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
(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
 
2

 
$
239

 
2

 
$
346

 
2

 
$
239

 
2

 
$
346

Auto and light truck
 

 

 

 

 

 

 

 

Medium and heavy duty truck
 

 

 

 

 

 

 

 

Aircraft financing
 

 

 
1

 
337

 

 

 
2

 
337

Construction equipment financing