Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

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
corplogo3a02a05.jpg
(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, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
 
 
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No
Number of shares of common stock outstanding as of April 14, 2017 — 25,923,640 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)
 
March 31,
2017
 
December 31,
2016
ASSETS
 

 
 

Cash and due from banks
$
58,429

 
$
58,578

Federal funds sold and interest bearing deposits with other banks
33,687

 
49,726

Investment securities available-for-sale
836,682

 
850,467

Other investments
22,458

 
22,458

Mortgages held for sale
8,409

 
15,849

Loans and leases, net of unearned discount:
 

 
 

Commercial and agricultural
843,757

 
812,264

Auto and light truck
430,489

 
411,764

Medium and heavy duty truck
290,167

 
294,790

Aircraft
783,523

 
802,414

Construction equipment
512,545

 
495,925

Commercial real estate
723,623

 
719,170

Residential real estate and home equity
522,772

 
521,931

Consumer
127,986

 
129,813

Total loans and leases
4,234,862

 
4,188,071

Reserve for loan and lease losses
(90,118
)
 
(88,543
)
Net loans and leases
4,144,744

 
4,099,528

Equipment owned under operating leases, net
127,323

 
118,793

Net premises and equipment
55,167

 
56,708

Goodwill and intangible assets
83,960

 
84,102

Accrued income and other assets
130,667

 
130,059

Total assets
$
5,501,526

 
$
5,486,268

 
 
 
 
LIABILITIES
 

 
 

Deposits:
 

 
 

Noninterest-bearing demand
$
966,903

 
$
991,256

Interest-bearing deposits:
 
 
 
Interest-bearing demand
1,418,395

 
1,471,526

Savings
839,257

 
814,326

Time
1,112,421

 
1,056,652

Total interest-bearing deposits
3,370,073

 
3,342,504

Total deposits
4,336,976

 
4,333,760

Short-term borrowings:
 

 
 

Federal funds purchased and securities sold under agreements to repurchase
176,079

 
162,913

Other short-term borrowings
103,666

 
129,030

Total short-term borrowings
279,745

 
291,943

Long-term debt and mandatorily redeemable securities
85,479

 
74,308

Subordinated notes
58,764

 
58,764

Accrued expenses and other liabilities
54,628

 
54,843

Total liabilities
4,815,592

 
4,813,618

 
 
 
 
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 March 31, 2017 and December 31, 2016
436,538

 
436,538

Retained earnings
303,009

 
290,824

Cost of common stock in treasury (2,282,044 shares at March 31, 2017 and 2,329,909 shares at December 31, 2016)
(54,940
)
 
(56,056
)
Accumulated other comprehensive income
1,327

 
1,344

Total shareholders’ equity
685,934

 
672,650

Total liabilities and shareholders’ equity
$
5,501,526

 
$
5,486,268

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

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1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Dollars in thousands, except per share amounts)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Interest income:
 

 
 

Loans and leases
$
44,884

 
$
42,736

Investment securities, taxable
3,514

 
3,080

Investment securities, tax-exempt
683

 
692

Other
291

 
291

Total interest income
49,372

 
46,799

Interest expense:
 

 
 

Deposits
3,734

 
3,771

Short-term borrowings
227

 
161

Subordinated notes
1,055

 
1,055

Long-term debt and mandatorily redeemable securities
629

 
523

Total interest expense
5,645

 
5,510

Net interest income
43,727

 
41,289

Provision for loan and lease losses
1,000

 
975

Net interest income after provision for loan and lease losses
42,727

 
40,314

Noninterest income:
 

 
 

Trust and wealth advisory
5,001

 
4,623

Service charges on deposit accounts
2,239

 
2,107

Debit card
2,750

 
2,599

Mortgage banking
947

 
1,046

Insurance commissions
1,767

 
1,563

Equipment rental
6,832

 
6,073

Gains on investment securities available-for-sale
1,285

 
10

Other
2,486

 
3,606

Total noninterest income
23,307

 
21,627

Noninterest expense:
 

 
 

Salaries and employee benefits
21,345

 
21,351

Net occupancy
2,594

 
2,501

Furniture and equipment
4,793

 
4,790

Depreciation – leased equipment
5,680

 
5,101

Professional fees
1,077

 
1,219

Supplies and communication
1,250

 
1,508

FDIC and other insurance
623

 
879

Business development and marketing
1,652

 
980

Loan and lease collection and repossession
636

 
427

Other
1,469

 
1,949

Total noninterest expense
41,119

 
40,705

Income before income taxes
24,915

 
21,236

Income tax expense
8,709

 
7,418

Net income
$
16,206

 
$
13,818

Per common share:
 

 
 

Basic net income per common share
$
0.62

 
$
0.53

Diluted net income per common share
$
0.62

 
$
0.53

Cash dividends
$
0.18

 
$
0.18

Basic weighted average common shares outstanding
25,903,397

 
25,923,530

Diluted weighted average common shares outstanding
25,903,397

 
25,923,530

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

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Table of Contents

1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - Dollars in thousands)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Net income
$
16,206

 
$
13,818

Other comprehensive (loss) income:
 

 
 

Change in unrealized appreciation of available-for-sale securities
1,258

 
4,403

Reclassification adjustment for realized gains included in net income
(1,285
)
 
(10
)
Income tax effect
10

 
(1,649
)
Other comprehensive (loss) income, net of tax
(17
)
 
2,744

Comprehensive income
$
16,189

 
$
16,562

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, 2016
$

 
$
436,538

 
$
251,812

 
$
(50,852
)
 
$
6,555

 
$
644,053

Net income

 

 
13,818

 

 

 
13,818

Other comprehensive income

 

 

 

 
2,744

 
2,744

Issuance of 91,340 common shares under stock based compensation awards, including related tax effects

 

 
(111
)
 
2,180

 

 
2,069

Cost of 269,667 shares of common stock acquired for treasury

 

 

 
(8,005
)
 

 
(8,005
)
Common stock cash dividend ($0.18 per share)

 

 
(4,706
)
 

 

 
(4,706
)
Balance at March 31, 2016
$

 
$
436,538

 
$
260,813

 
$
(56,677
)
 
$
9,299

 
$
649,973

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
$

 
$
436,538

 
$
290,824

 
$
(56,056
)
 
$
1,344

 
$
672,650

Cumulative-effect adjustment

 

 
(65
)
 

 

 
(65
)
Balance at January 1, 2017, adjusted

 
436,538

 
290,759

 
(56,056
)
 
1,344

 
672,585

Net income

 

 
16,206

 

 

 
16,206

Other comprehensive loss

 

 

 

 
(17
)
 
(17
)
Issuance of 48,765 common shares under stock based compensation awards, including related tax effects

 

 
721

 
1,157

 

 
1,878

Cost of 900 shares of common stock acquired for treasury

 

 

 
(41
)
 

 
(41
)
Common stock cash dividend ($0.18 per share)

 

 
(4,677
)
 

 

 
(4,677
)
Balance at March 31, 2017
$

 
$
436,538

 
$
303,009

 
$
(54,940
)
 
$
1,327

 
$
685,934

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)
 
Three Months Ended March 31,
 
2017
 
2016
Operating activities:
 

 
 

Net income
$
16,206

 
$
13,818

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

 
 

Provision for loan and lease losses
1,000

 
975

Depreciation of premises and equipment
1,380

 
1,283

Depreciation of equipment owned and leased to others
5,680

 
5,101

Stock-based compensation
694

 
784

Amortization of investment securities premiums and accretion of discounts, net
1,116

 
1,257

Amortization of mortgage servicing rights
263

 
332

Deferred income taxes
(504
)
 
611

Gains on investment securities available-for-sale
(1,285
)
 
(10
)
Originations of loans held for sale, net of principal collected
(12,926
)
 
(23,007
)
Proceeds from the sales of loans held for sale
20,871

 
21,502

Net gain on sale of loans held for sale
(505
)
 
(669
)
Net loss (gain) on sale of other real estate and repossessions
94

 
(140
)
Change in interest receivable
(251
)
 
(664
)
Change in interest payable
(225
)
 
273

Change in other assets
(1,398
)
 
(1,230
)
Change in other liabilities
2,890

 
6,029

Other
1,177

 
(517
)
Net change in operating activities
34,277

 
25,728

Investing activities:
 

 
 

Proceeds from sales of investment securities available-for-sale
1,004

 
511

Proceeds from maturities and paydowns of investment securities available-for-sale
42,617

 
44,416

Purchases of investment securities available-for-sale
(30,198
)
 
(52,003
)
Loans sold or participated to others
266

 

Net change in loans and leases
(47,385
)
 
(37,666
)
Net change in equipment owned under operating leases
(14,210
)
 
(5,142
)
Purchases of premises and equipment
(24
)
 
(2,298
)
Proceeds from sales of other real estate and repossessions
1,730

 
573

Net change in investing activities
(46,200
)
 
(51,609
)
Financing activities:
 

 
 

Net change in demand deposits and savings accounts
(52,553
)
 
18,491

Net change in time deposits
55,769

 
67,471

Net change in short-term borrowings
(12,198
)
 
(51,315
)
Proceeds from issuance of long-term debt
10,000

 
10,000

Payments on long-term debt
(401
)
 
(387
)
Acquisition of treasury stock
(41
)
 
(8,005
)
Cash dividends paid on common stock
(4,841
)
 
(4,868
)
Net change in financing activities
(4,265
)
 
31,387

 
 
 
 
Net change in cash and cash equivalents
(16,188
)
 
5,506

Cash and cash equivalents, beginning of year
108,304

 
79,721

Cash and cash equivalents, end of period
$
92,116

 
$
85,227

Supplemental Information:
 

 
 

Non-cash transactions:
 

 
 

Loans transferred to other real estate and repossessed assets
$
903

 
$
592

Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan
1,426

 
800

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 (2016 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, 2016 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
Premium Amortization: In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-08 “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is assessing the impact of ASU 2017-08 on its accounting and disclosures.
Sale of Nonfinancial Assets: In February 2017, the FASB issued ASU No. 2017-05 “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” 'The amendments clarify that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments also define the term in substance nonfinancial asset. The amendments clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. A contract that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets. The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The guidance is effective for public business entities for annual periods beginning after December 15, 2017 and interim periods therein. Entities may use either a full or modified approach to adopt the ASU. The Company is assessing ASU 2017-05 and does not expect it to have a material impact on its accounting and disclosures.
Simplifying the Test for Goodwill Impairment: In January 2017, the FASB issued ASU No. 2017-04 “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company has assessed ASU 2017-04 and does not expect it to have a material impact on its accounting and disclosures.
Business Combinations: In January 2017, the FASB issued ASU No. 2017-01 “Business Combinations (Topic 805) - Clarifying the Definition of a Business.” ASU 2017-01 provides amendments to clarify the definition of a business and affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied prospectively as of the beginning of the period of adoption. Early adoption is permitted under certain circumstances. The Company has assessed ASU 2017-01 and does not expect it to have a material impact on its accounting and disclosures.
Restricted Cash: In November 2016, the FASB issued ASU No. 2016-18 “Statement of Cash Flows (Topic 230) - Restricted Cash.” ASU 2016-18 provides amendments to cash flow statement classification and presentation to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied using a retrospective transition method to each period presented. Early adoption is permitted, including adoption in an interim period. The Company has assessed ASU 2016-18 and does not expect a material impact on its accounting and disclosures.

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Intra-Entity Transfers of Assets Other Than Inventory: In October 2016, the FASB issued ASU No. 2016-16 “Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory.” The amendments in ASU 2016-16 require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments do not include new disclosure requirements; however existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company has assessed ASU 2016-16 and does not expect a material impact on its accounting and disclosures.
Classification of Certain Cash Receipts and Cash Payments: In August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides cash flow statement classification guidance for certain transactions including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company has assessed ASU 2016-15 and does not expect a material impact on its accounting and disclosures.
Measurement of Credit Losses on Financial Instruments: In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” The provisions of ASU 2016-13 were issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the financial assets.
For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense.
Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security.
ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has an implementation team working through the provisions of ASU 2016-13 including assessing the impact on its accounting and disclosures.
Share Based Payment Accounting: In March 2016, the FASB issued ASU No. 2016-09 “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company adopted ASU 2016-09 on January 1, 2017 on a modified retrospective method through a cumulative adjustment to retained earnings related to the policy election to account for forfeitures as they occur. The adoption of ASU 2016-09 did not have a material impact on its accounting and disclosures.

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Table of Contents

Leases: In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company has an implementation team working through the provisions of ASU 2016-02 including reviewing all leases to assess the impact on its accounting and disclosures. The Company does not anticipate a significant increase in leasing activity between now and the date of adoption. It is expected that the Company will recognize discounted right of use assets and lease liabilities (estimated between $12 and $15 million).
Recognition and Measurement of Financial Instruments: In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 is intended to improve the recognition and measurement of financial instruments by requiring equity investments to be measured at fair value with changes in fair value recognized in net income; requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured and amortized at cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. ASU 2016-01 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The Company is continuing to assess the impact of ASU 2016-01 on its accounting for equity investments, fair value disclosures and other disclosure requirements.
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. Early application is permitted but not before the original public entity effective date, i.e., annual periods beginning after December 15, 2016. In March 2016, the FASB issued final amendments (ASU No. 2016-08 and ASU No. 2016-10) to clarify the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting for licenses of intellectual property. 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. In May 2016, the FASB issued final amendments (ASU No. 2016-12 and ASU 2016-11) to address narrow-scope improvements to the guidance on collectibility, non-cash consideration, completed contracts at transition and to provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. Additionally, the amendments included a rescission of SEC guidance because of ASU 2014-09 related to revenue and expense recognition for freight services in process, accounting for shipping and handling fees and costs, and accounting for consideration given by a vendor to a customer. In December 2016, the FASB issued final guidance (ASU 2016-20) that allows entities not to make quantitative disclosures about performance obligations in certain cases and requires entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. It also makes 12 additional technical corrections and improvements to the new revenue standard. These amendments are effective upon the adoption of ASU 2014-09. The Company’s revenue is comprised of net interest income, which is explicitly excluded from the scope of ASU 2014-09, and noninterest income. ASU 2014-09 may require the Company to change how it recognizes certain recurring revenue streams related to noninterest income; however it is not expected to have a material impact on its accounting and disclosures. The Company continues to follow the guidance from the FASB and the Transition Resource Group for Revenue Recognition in determining the impact of ASU 2014-09 on other areas of noninterest income and expects to adopt ASU 2014-09 on January 1, 2018.

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Note 3.       Investment Securities Available-For-Sale
The following table shows investment securities available-for-sale.
(Dollars in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
March 31, 2017
 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
417,139

 
$
793

 
$
(3,478
)
 
$
414,454

U.S. States and political subdivisions securities
 
129,791

 
1,314

 
(953
)
 
130,152

Mortgage-backed securities — Federal agencies
 
249,084

 
2,086

 
(2,408
)
 
248,762

Corporate debt securities
 
36,699

 
121

 
(224
)
 
36,596

Foreign government and other securities
 
800

 
4

 

 
804

Total debt securities
 
833,513

 
4,318

 
(7,063
)
 
830,768

Marketable equity securities
 
1,044

 
4,956

 
(86
)
 
5,914

Total investment securities available-for-sale
 
$
834,557

 
$
9,274

 
$
(7,149
)
 
$
836,682

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
424,495

 
$
809

 
$
(4,471
)
 
$
420,833

U.S. States and political subdivisions securities
 
133,509

 
1,036

 
(1,570
)
 
132,975

Mortgage-backed securities — Federal agencies
 
252,981

 
2,175

 
(2,582
)
 
252,574

Corporate debt securities
 
35,266

 
111

 
(301
)
 
35,076

Foreign government and other securities
 
800

 
7

 

 
807

Total debt securities
 
847,051

 
4,138

 
(8,924
)
 
842,265

Marketable equity securities
 
1,265

 
7,007

 
(70
)
 
8,202

Total investment securities available-for-sale
 
$
848,316

 
$
11,145

 
$
(8,994
)
 
$
850,467

At March 31, 2017 and December 31, 2016, 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 debt securities available-for-sale at March 31, 2017. 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
 
$
122,531

 
$
123,025

Due after one year through five years
 
381,961

 
380,229

Due after five years through ten years
 
79,937

 
78,752

Due after ten years
 

 

Mortgage-backed securities
 
249,084

 
248,762

Total debt securities available-for-sale
 
$
833,513

 
$
830,768


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The following table summarizes gross unrealized losses and fair value by investment category and age.
 
 
Less than 12 Months
 
12 months or Longer
 
Total
(Dollars in thousands) 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
March 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
259,811

 
$
(3,478
)
 
$

 
$

 
$
259,811

 
$
(3,478
)
U.S. States and political subdivisions securities
 
47,439

 
(844
)
 
6,211

 
(109
)
 
53,650

 
(953
)
Mortgage-backed securities - Federal agencies
 
144,658

 
(2,166
)
 
8,891

 
(242
)
 
153,549

 
(2,408
)
Corporate debt securities
 
13,377

 
(224
)
 

 

 
13,377

 
(224
)
Foreign government and other securities
 

 

 

 

 

 

Total debt securities
 
465,285

 
(6,712
)
 
15,102

 
(351
)
 
480,387

 
(7,063
)
Marketable equity securities
 
266

 
(85
)
 
3

 
(1
)
 
269

 
(86
)
Total investment securities available-for-sale
 
$
465,551

 
$
(6,797
)
 
$
15,105

 
$
(352
)
 
$
480,656

 
$
(7,149
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
263,680

 
$
(4,471
)
 
$

 
$

 
$
263,680

 
$
(4,471
)
U.S. States and political subdivisions securities
 
74,129

 
(1,515
)
 
3,337

 
(55
)
 
77,466

 
(1,570
)
Mortgage-backed securities - Federal agencies
 
168,554

 
(2,341
)
 
5,102

 
(241
)
 
173,656

 
(2,582
)
Corporate debt securities
 
13,312

 
(301
)
 

 

 
13,312

 
(301
)
Foreign government and other securities
 

 

 

 

 

 

Total debt securities
 
519,675

 
(8,628
)
 
8,439

 
(296
)
 
528,114

 
(8,924
)
Marketable equity securities
 
280

 
(70
)
 
4

 

 
284

 
(70
)
Total investment securities available-for-sale
 
$
519,955

 
$
(8,698
)
 
$
8,443

 
$
(296
)
 
$
528,398

 
$
(8,994
)
The initial indication of potential 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 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.
At March 31, 2017, 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.
The following table shows the gross realized gains and losses from the securities available-for-sale portfolio, including marketable equity securities. Realized gains and losses of all securities are computed using the specific identification cost basis.
 
 
Three Months Ended 
 March 31,
(Dollars in thousands)
 
2017
 
2016
Gross realized gains
 
$
1,285

 
$
10

Gross realized losses
 

 

OTTI losses
 

 

Net realized gains (losses)
 
$
1,285

 
$
10

At March 31, 2017 and December 31, 2016, investment securities available-for-sale with carrying values of $300.20 million and $276.29 million, respectively, were pledged as collateral for security repurchase agreements and for other purposes.

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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 and home equity loans and consumer loans, are assigned credit quality grades on a scale from 1 to 12 with grade 1 representing superior credit quality. The criteria used to assign grades to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Company’s safety and soundness. Loans or leases graded 7 or weaker are considered “special attention” credits and, as such, relationships in excess of $100,000 are reviewed quarterly as part of management’s evaluation of the appropriateness of the reserve for loan and lease losses. Grade 7 credits are defined as “watch” and contain greater than average credit risk and are monitored to limit the exposure to increased risk; grade 8 credits are “special mention” and, following regulatory guidelines, are defined as having potential weaknesses that deserve management’s close attention. Credits that exhibit well-defined weaknesses and a distinct possibility of loss are considered “classified” and are graded 9 through 12 corresponding to the regulatory definitions of “substandard” (grades 9 and 10) and the more severe “doubtful” (grade 11) and “loss” (grade 12).
The following table shows the credit quality grades of the recorded investment in loans and leases, segregated by class.
 
 
Credit Quality Grades
(Dollars in thousands) 
 
1-6
 
7-12
 
Total
March 31, 2017
 
 

 
 

 
 

Commercial and agricultural
 
$
811,574

 
$
32,183

 
$
843,757

Auto and light truck
 
414,710

 
15,779

 
430,489

Medium and heavy duty truck
 
287,466

 
2,701

 
290,167

Aircraft
 
757,036

 
26,487

 
783,523

Construction equipment
 
499,272

 
13,273

 
512,545

Commercial real estate
 
714,699

 
8,924

 
723,623

Total
 
$
3,484,757

 
$
99,347

 
$
3,584,104

 
 
 
 
 
 
 
December 31, 2016
 
 

 
 

 
 

Commercial and agricultural
 
$
784,811

 
$
27,453

 
$
812,264

Auto and light truck
 
407,931

 
3,833

 
411,764

Medium and heavy duty truck
 
291,558

 
3,232

 
294,790

Aircraft
 
772,802

 
29,612

 
802,414

Construction equipment
 
486,923

 
9,002

 
495,925

Commercial real estate
 
707,252

 
11,918

 
719,170

Total
 
$
3,451,277

 
$
85,050

 
$
3,536,327

For residential real estate and home equity 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 home equity and consumer loans by performing or nonperforming status. Nonperforming loans are those loans which are on nonaccrual status or are 90 days or more past due.
(Dollars in thousands) 
 
Performing
 
Nonperforming
 
Total
March 31, 2017
 
 

 
 

 
 

Residential real estate and home equity
 
$
519,948

 
$
2,824

 
$
522,772

Consumer
 
127,770

 
216

 
127,986

Total
 
$
647,718

 
$
3,040

 
$
650,758

 
 
 
 
 
 
 
December 31, 2016
 
 

 
 

 
 

Residential real estate and home equity
 
$
518,896

 
$
3,035

 
$
521,931

Consumer
 
129,585

 
228

 
129,813

Total
 
$
648,481

 
$
3,263

 
$
651,744


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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
March 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and agricultural
 
$
841,087

 
$
32

 
$

 
$

 
$
841,119

 
$
2,638

 
$
843,757

Auto and light truck
 
429,784

 
376

 
44

 

 
430,204

 
285

 
430,489

Medium and heavy duty truck
 
289,282

 
612

 
273

 

 
290,167

 

 
290,167

Aircraft
 
771,105

 
4,096

 

 

 
775,201

 
8,322

 
783,523

Construction equipment
 
511,196

 
110

 

 

 
511,306

 
1,239

 
512,545

Commercial real estate
 
720,713

 

 

 

 
720,713

 
2,910

 
723,623

Residential real estate and home equity
 
519,096

 
628

 
224

 
310

 
520,258

 
2,514

 
522,772

Consumer
 
127,272

 
398

 
100

 
34

 
127,804

 
182

 
127,986

Total
 
$
4,209,535

 
$
6,252

 
$
641

 
$
344

 
$
4,216,772

 
$
18,090

 
$
4,234,862

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and agricultural
 
$
808,283

 
$

 
$

 
$

 
$
808,283

 
$
3,981

 
$
812,264

Auto and light truck
 
411,300

 
298

 

 

 
411,598

 
166

 
411,764

Medium and heavy duty truck
 
294,790

 

 

 

 
294,790

 

 
294,790

Aircraft
 
791,559

 
1,429

 
3,316

 

 
796,304

 
6,110

 
802,414

Construction equipment
 
493,131

 
1,546

 

 

 
494,677

 
1,248

 
495,925

Commercial real estate
 
713,482

 
133

 

 

 
713,615

 
5,555

 
719,170

Residential real estate and home equity
 
517,212

 
1,310

 
374

 
394

 
519,290

 
2,641

 
521,931

Consumer
 
129,000

 
453

 
132

 
22

 
129,607

 
206

 
129,813

Total
 
$
4,158,757

 
$
5,169

 
$
3,822

 
$
416

 
$
4,168,164

 
$
19,907

 
$
4,188,071


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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
March 31, 2017
 
 

 
 

 
 

With no related reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 
$
373

 
$
373

 
$

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft
 
7,482

 
7,482

 

Construction equipment
 
605

 
605

 

Commercial real estate
 
623

 
623

 

Residential real estate and home equity
 

 

 

Consumer
 

 

 

Total with no related reserve recorded
 
9,083

 
9,083

 

With a reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 
1,871

 
1,871

 
272

Auto and light truck
 
251

 
251

 
25

Medium and heavy duty truck
 

 

 

Aircraft
 
840

 
840

 
55

Construction equipment
 
557

 
557

 
27

Commercial real estate
 
2,168

 
2,168

 
276

Residential real estate and home equity
 
357

 
359

 
139

Consumer
 

 

 

Total with a reserve recorded
 
6,044

 
6,046

 
794

Total impaired loans
 
$
15,127

 
$
15,129

 
$
794

 
 
 
 
 
 
 
December 31, 2016
 
 

 
 

 
 

With no related reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 
$
1,700

 
$
1,700

 
$

Auto and light truck
 
115

 
115

 

Medium and heavy duty truck
 

 

 

Aircraft
 
2,918

 
2,918

 

Construction equipment
 
605

 
605

 

Commercial real estate
 
2,607

 
2,607

 

Residential real estate and home equity
 

 

 

Consumer
 

 

 

Total with no related reserve recorded
 
7,945

 
7,945

 

With a reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 
1,890

 
1,890

 
297

Auto and light truck
 

 

 

Medium and heavy duty truck
 

 

 

Aircraft
 
3,192

 
3,192

 
1,076

Construction equipment
 
562

 
562

 
35

Commercial real estate
 
2,765

 
2,765

 
322

Residential real estate and home equity
 
674

 
676

 
148

Consumer
 

 

 

Total with a reserve recorded
 
9,083

 
9,085

 
1,878

Total impaired loans
 
$
17,028

 
$
17,030

 
$
1,878


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Table of Contents

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by class.
 
 
Three Months Ended March 31,
 
 
2017
 
2016
(Dollars in thousands) 
 
Average
Recorded
Investment
 
Interest
Income
 
Average
Recorded
Investment
 
Interest
Income
Commercial and agricultural
 
$
2,704

 
$
1

 
$
3,709

 
$
4

Auto and light truck
 
84

 

 

 

Medium and heavy duty truck
 

 

 

 

Aircraft
 
8,795

 

 
4,028

 

Construction equipment
 
1,161

 

 
880

 

Commercial real estate
 
3,904

 

 
8,402

 
123

Residential real estate and home equity
 
358

 
4

 
365

 
4

Consumer
 

 

 

 

Total
 
$
17,006

 
$
5

 
$
17,384

 
$
131

 
There were no loan and lease modifications classified as troubled debt restructurings (TDRs) during the three months ended March 31, 2017 and 2016. 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. Modifications do not result in the contractual forgiveness of principal or interest.
There were no TDRs which had payment defaults within the twelve months following modification during the three months ended March 31, 2017 and 2016. 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 March 31, 2017 and December 31, 2016.
(Dollars in thousands)
 
March 31,
2017
 
December 31,
2016
Performing TDRs
 
$
357

 
$
360

Nonperforming TDRs
 
729

 
1,642

Total TDRs
 
$
1,086

 
$
2,002

 
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.

16

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 March 31, 2017 and 2016.
(Dollars in thousands)
 
Commercial and
agricultural loans
 
Auto and
light truck
 
Medium and
heavy duty truck
 
Aircraft
 
Construction
equipment
 
Commercial
real estate
 
Residential
real estate
and home
equity
 
Consumer
loans
 
Total
March 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of period
 
$
14,668

 
$
8,064

 
$
4,740

 
$
34,352

 
$
8,207

 
$
13,677

 
$
3,550

 
$
1,285

 
$
88,543

Charge-offs
 
208

 
21

 

 
1,103

 

 
2

 
4

 
220

 
1,558

Recoveries
 
595

 
1,127

 

 
183

 
22

 
50

 
71

 
85

 
2,133

Net charge-offs (recoveries)
 
(387
)
 
(1,106
)
 

 
920

 
(22
)
 
(48
)
 
(67
)
 
135

 
(575
)
Provision (recovery of provision)
 
934

 
602

 
(64
)
 
(1,424
)
 
703

 
143

 
(25
)
 
131

 
1,000

Balance, end of period
 
$
15,989

 
$
9,772

 
$
4,676

 
$
32,008

 
$
8,932

 
$
13,868

 
$
3,592

 
$
1,281

 
$
90,118

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of period
 
$
15,456

 
$
9,269

 
$
4,699

 
$
32,373

 
$
7,592

 
$
13,762

 
$
3,662

 
$
1,299

 
$
88,112

Charge-offs
 
200

 
3

 

 

 
92

 
1

 
54

 
214

 
564

Recoveries
 
91

 
62

 
8

 
138

 
78

 
305

 
4

 
87

 
773

Net charge-offs (recoveries)
 
109

 
(59
)
 
(8
)
 
(138
)
 
14

 
(304
)
 
50

 
127

 
(209
)
Provision (recovery of provision)
 
(612
)
 
254

 
(196
)
 
1,729

 
(116
)
 
(231
)
 
31

 
116

 
975

Balance, end of period
 
$
14,735

 
$
9,582

 
$
4,511

 
$
34,240

 
$
7,462

 
$
13,835

 
$
3,643

 
$
1,288

 
$
89,296


17

Table of Contents

The following table shows the reserve for loan and lease losses and recorded investment in loans and leases, segregated by class, separated between individually and collectively evaluated for impairment as of March 31, 2017 and December 31, 2016.
(Dollars in thousands)
 
Commercial and
agricultural loans
 
Auto and
light truck
 
Medium and
heavy duty truck
 
Aircraft
 
Construction
equipment
 
Commercial
real estate
 
Residential
real estate
and home
equity
 
Consumer
loans
 
Total
March 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Reserve for loan and lease losses
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance, individually evaluated for impairment