Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2013

 

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

 

GRAPHIC

(Exact name of registrant as specified in its charter)

 

INDIANA

 

35-1068133

(State or other jurisdiction of

 

(I.R.S. Employer Identification

incorporation or organization)

 

No.)

 

 

 

100 North Michigan Street

 

 

South Bend, IN

 

46601

(Address of principal executive

 

(Zip Code)

offices)

 

 

 

(574) 235-2000

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes   x   No

 

Number of shares of common stock outstanding as of July 12, 2013 — 24,375,595 shares

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

Consolidated Statements of Financial Condition — June 30, 2013 and December 31, 2012

3

 

Consolidated Statements of Income — three and six months ended June 30, 2013 and 2012

4

 

Consolidated Statements of Comprehensive Income — three and six months ended June 30, 2013 and 2012

5

 

Consolidated Statements of Shareholders’ Equity — six months ended June 30, 2013 and 2012

5

 

Consolidated Statements of Cash Flows — six months ended June 30, 2013 and 2012

6

 

Notes to the Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.

Controls and Procedures

41

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3.

Defaults Upon Senior Securities

42

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

42

 

 

 

SIGNATURES

 

43

 

 

 

CERTIFICATIONS

 

 

 

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32.1

 

 

Exhibit 32.2

 

 

2



Table of Contents

 

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited - Dollars in thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

64,850

 

$

83,232

 

Federal funds sold and interest bearing deposits with other banks

 

3,171

 

702

 

Investment securities available-for-sale (amortized cost of $815,626 and $849,139 at June 30, 2013 and December 31, 2012, respectively)

 

828,312

 

880,764

 

Other investments

 

22,409

 

22,609

 

Trading account securities

 

166

 

146

 

Mortgages held for sale

 

10,849

 

10,879

 

Loans and leases - net of unearned discount

 

 

 

 

 

Commercial and agricultural loans

 

660,380

 

639,069

 

Auto, light truck and environmental equipment

 

510,562

 

438,147

 

Medium and heavy duty truck

 

178,594

 

172,002

 

Aircraft financing

 

677,510

 

696,479

 

Construction equipment financing

 

311,135

 

278,974

 

Commercial real estate

 

576,810

 

554,968

 

Residential real estate

 

454,983

 

438,641

 

Consumer loans

 

123,411

 

109,273

 

Total loans and leases

 

3,493,385

 

3,327,553

 

Reserve for loan and lease losses

 

(85,690

)

(83,311

)

Net loans and leases

 

3,407,695

 

3,244,242

 

Equipment owned under operating leases, net

 

52,856

 

52,173

 

Net premises and equipment

 

46,027

 

45,016

 

Goodwill and intangible assets

 

86,915

 

87,502

 

Accrued income and other assets

 

115,561

 

123,428

 

Total assets

 

$

4,638,811

 

$

4,550,693

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest bearing

 

$

698,389

 

$

646,380

 

Interest bearing

 

3,002,410

 

2,977,967

 

Total deposits

 

3,700,799

 

3,624,347

 

Short-term borrowings:

 

 

 

 

 

Federal funds purchased and securities sold under agreements to repurchase

 

162,778

 

158,680

 

Other short-term borrowings

 

39,126

 

10,508

 

Total short-term borrowings

 

201,904

 

169,188

 

Long-term debt and mandatorily redeemable securities

 

58,216

 

71,021

 

Subordinated notes

 

58,764

 

58,764

 

Accrued expenses and other liabilities

 

51,375

 

68,718

 

Total liabilities

 

4,071,058

 

3,992,038

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock; no par value

 

 

 

 

 

Authorized 10,000,000 shares; none issued or outstanding

 

 

 

Common stock; no par value

 

 

 

 

 

Authorized 40,000,000 shares; issued 25,641,887 at June 30, 2013 and December 31, 2012

 

346,535

 

346,535

 

Retained earnings

 

241,401

 

223,715

 

Cost of common stock in treasury (1,269,292 shares at June 30, 2013 and 1,399,261 shares at December 31, 2012)

 

(28,021

)

(31,134

)

Accumulated other comprehensive income

 

7,838

 

19,539

 

Total shareholders’ equity

 

567,753

 

558,655

 

Total liabilities and shareholders’ equity

 

$

4,638,811

 

$

4,550,693

 

 

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

 

3



Table of Contents

 

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited - Dollars in thousands, except per share amounts)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

40,112

 

$

40,318

 

$

79,282

 

$

80,214

 

Investment securities, taxable

 

3,498

 

4,334

 

7,193

 

8,661

 

Investment securities, tax-exempt

 

760

 

848

 

1,531

 

1,700

 

Other

 

241

 

231

 

483

 

457

 

Total interest income

 

44,611

 

45,731

 

88,489

 

91,032

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

4,412

 

5,704

 

8,954

 

11,449

 

Short-term borrowings

 

45

 

47

 

77

 

100

 

Subordinated notes

 

1,055

 

1,648

 

2,110

 

3,295

 

Long-term debt and mandatorily redeemable securities

 

228

 

357

 

723

 

828

 

Total interest expense

 

5,740

 

7,756

 

11,864

 

15,672

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

38,871

 

37,975

 

76,625

 

75,360

 

Provision for loan and lease losses

 

1,293

 

2,055

 

2,050

 

4,309

 

Net interest income after provision for loan and lease losses

 

37,578

 

35,920

 

74,575

 

71,051

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Trust fees

 

4,439

 

4,379

 

8,540

 

8,352

 

Service charges on deposit accounts

 

2,325

 

2,621

 

4,564

 

5,059

 

Debit card income

 

2,344

 

2,194

 

4,409

 

4,261

 

Mortgage banking income

 

1,936

 

1,502

 

3,564

 

3,444

 

Insurance commissions

 

1,393

 

1,211

 

2,839

 

2,568

 

Equipment rental income

 

4,086

 

4,666

 

8,098

 

10,016

 

Investment securities and other investment gains

 

38

 

8

 

211

 

403

 

Other income

 

3,560

 

3,209

 

6,844

 

6,210

 

Total noninterest income

 

20,121

 

19,790

 

39,069

 

40,313

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

19,176

 

20,370

 

39,112

 

40,686

 

Net occupancy expense

 

2,147

 

1,848

 

4,354

 

4,008

 

Furniture and equipment expense

 

3,909

 

3,831

 

7,808

 

7,338

 

Depreciation - leased equipment

 

3,274

 

3,803

 

6,499

 

8,114

 

Professional fees

 

1,310

 

1,449

 

2,665

 

2,847

 

Supplies and communication

 

1,499

 

1,385

 

3,035

 

2,778

 

FDIC and other insurance

 

927

 

854

 

1,805

 

1,803

 

Business development and marketing expense

 

932

 

1,050

 

1,705

 

1,917

 

Loan and lease collection and repossession expense

 

1,095

 

979

 

1,852

 

2,480

 

Other expense

 

1,475

 

1,009

 

3,459

 

2,655

 

Total noninterest expense

 

35,744

 

36,578

 

72,294

 

74,626

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

21,955

 

19,132

 

41,350

 

36,738

 

Income tax expense

 

8,013

 

6,565

 

15,004

 

12,456

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,942

 

$

12,567

 

$

26,346

 

$

24,282

 

 

 

 

 

 

 

 

 

 

 

Per common share:

 

 

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.56

 

$

0.51

 

$

1.07

 

$

0.99

 

Diluted net income per common share

 

$

0.56

 

$

0.51

 

$

1.07

 

$

0.99

 

Dividends

 

$

0.17

 

$

0.16

 

$

0.34

 

$

0.32

 

Basic weighted average common shares outstanding

 

24,367,529

 

24,263,881

 

24,344,882

 

24,261,649

 

Diluted weighted average common shares outstanding

 

24,368,973

 

24,273,898

 

24,346,053

 

24,272,423

 

 

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

 

4



Table of Contents

 

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME      

(Unaudited - Dollars in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,942

 

$

12,567

 

$

26,346

 

$

24,282

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

Change in unrealized (depreciation) appreciation of available-for-sale securities, net of tax

 

(10,495

)

1,449

 

(11,701

)

1,047

 

Reclassification adjustment for gains included in net income, net of tax

 

 

 

 

(171

)

Other comprehensive (loss) income

 

(10,495

)

1,449

 

(11,701

)

876

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

3,447

 

$

14,016

 

$

14,645

 

$

25,158

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

Cost of

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common

 

Other

 

 

 

 

 

Preferred

 

Common

 

Retained

 

Stock

 

Comprehensive

 

 

 

Total

 

Stock

 

Stock

 

Earnings

 

in Treasury

 

Income (Loss), Net

 

Balance at January 1, 2012

 

$

523,918

 

$

 

$

346,535

 

$

190,261

 

$

(31,389

)

$

18,511

 

Net income

 

24,282

 

 

 

24,282

 

 

 

Other comprehensive income

 

876

 

 

 

 

 

876

 

Issuance of 165,460 common shares under stock based compensation awards, including related tax effects

 

3,644

 

 

 

85

 

3,559

 

 

Cost of 104,471 shares of common stock acquired for treasury

 

(2,617

)

 

 

 

(2,617

)

 

Common stock dividend ($0.32 per share)

 

(7,839

)

 

 

(7,839

)

 

 

Balance at June 30, 2012

 

$

542,264

 

$

 

$

346,535

 

$

206,789

 

$

(30,447

)

$

19,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2013

 

$

558,655

 

$

 

$

346,535

 

$

223,715

 

$

(31,134

)

$

19,539

 

Net income

 

26,346

 

 

 

26,346

 

 

 

Other comprehensive loss

 

(11,701

)

 

 

 

 

(11,701

)

Issuance of 157,032 common shares under stock based compensation awards, including related tax effects

 

3,419

 

 

 

(313

)

3,732

 

 

Cost of 27,063 shares of common stock acquired for treasury

 

(619

)

 

 

 

(619

)

 

Common stock dividend ($0.34 per share)

 

(8,347

)

 

 

(8,347

)

 

 

Balance at June 30, 2013

 

$

567,753

 

$

 

$

346,535

 

$

241,401

 

$

(28,021

)

$

7,838

 

 

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

 

5



Table of Contents

 

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited - Dollars in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

Operating activities:

 

 

 

 

 

Net income

 

$

26,346

 

$

24,282

 

Adjustments to reconcile net income to net cash provided (used) by operating activities:

 

 

 

 

 

Provision for loan and lease losses

 

2,050

 

4,309

 

Depreciation of premises and equipment

 

2,331

 

2,094

 

Depreciation of equipment owned and leased to others

 

6,499

 

8,114

 

Amortization of investment security premiums and accretion of discounts, net

 

1,929

 

1,999

 

Amortization of mortgage servicing rights

 

937

 

1,528

 

Mortgage servicing asset recoveries

 

 

(147

)

Deferred income taxes

 

(2,020

)

(3,996

)

Investment securities and other investment gains

 

(211

)

(403

)

Originations of loans held for sale, net of principal collected

 

(59,773

)

(96,948

)

Proceeds from the sales of loans held for sale

 

62,295

 

94,491

 

Net gain on sale of loans held for sale

 

(2,492

)

(2,736

)

Change in trading account securities

 

(20

)

(6

)

Change in interest receivable

 

(912

)

(312

)

Change in interest payable

 

1,041

 

1,702

 

Change in other assets

 

10,939

 

7,894

 

Change in other liabilities

 

(7,795

)

(4,542

)

Other

 

341

 

586

 

Net change in operating activities

 

41,485

 

37,909

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Proceeds from sales of investment securities

 

 

40,236

 

Proceeds from maturities of investment securities

 

112,836

 

159,553

 

Purchases of investment securities

 

(81,041

)

(169,504

)

Net change in other investments

 

200

 

(960

)

Loans sold or participated to others

 

19,819

 

15,494

 

Net change in loans and leases

 

(187,832

)

(199,988

)

Net change in equipment owned under operating leases

 

(7,182

)

3,173

 

Purchases of premises and equipment

 

(3,361

)

(3,082

)

Net change in investing activities

 

(146,561

)

(155,078

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Net change in demand deposits, NOW accounts and savings accounts

 

61,457

 

92,814

 

Net change in certificates of deposit

 

14,995

 

(26,938

)

Net change in short-term borrowings

 

32,716

 

8,694

 

Proceeds from issuance of long-term debt

 

12,035

 

25,600

 

Payments on long-term debt

 

(26,296

)

(268

)

Net proceeds from issuance of treasury stock

 

3,419

 

3,644

 

Acquisition of treasury stock

 

(619

)

(2,617

)

Cash dividends paid on common stock

 

(8,544

)

(8,007

)

Net change in financing activities

 

89,163

 

92,922

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(15,913

)

(24,247

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

83,934

 

114,327

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

68,021

 

$

90,080

 

 

 

 

 

 

 

Supplemental Information:

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

Loans transferred to other real estate and repossessed assets

 

$

2,510

 

$

1,791

 

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

 

2,801

 

2,643

 

 

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

 

6



Table of Contents

 

1ST SOURCE CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.                     Basis of Presentation

 

1st Source Corporation is a bank holding company headquartered in South Bend, Indiana that provides, through its subsidiaries (collectively referred to as “1st Source” or “the Company”), a broad array of financial products and services.  The accompanying unaudited consolidated financial statements reflect all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income, changes in shareholders’ equity, and cash flows for the periods presented.  These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been omitted.

 

The Notes to the Consolidated Financial Statements appearing in 1st Source Corporation’s Annual Report on Form 10-K (2012 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, 2012 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current year presentation.

 

Note 2.                     Recent Accounting Pronouncements

 

Comprehensive Income:  In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02 “Comprehensive Income (Topic 220) — Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  ASU 2013-02 is effective prospectively during interim and annual periods beginning after December 15, 2012.  The Company has adopted the standard as required, however the effect of applying this standard is not reflected in the June 30, 2013 Form 10Q as the Company did not have amounts reclassified out of Accumulated Other Comprehensive Income during the three or six months ended June 30, 2013.  Amounts in future periods, when they occur, will be reflected in the investment securities and other investment gains and the income tax expense line items in the Consolidated Statements of Income.

 

Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities:  In January 2013, the FASB issued ASU No. 2013-01 “Balance Sheet (Topic 210) — Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.”  ASU 2013-01 clarifies that ordinary trade receivables and receivables are not in the scope of ASU 2011-11.  ASU 2011-11 applies only to derivatives, repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria in the Accounting Standards Codification or subject to a master netting arrangement or similar agreement.  ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  Retrospective disclosure is required for all comparative periods presented.  The effect of applying this standard is reflected in Note 8 — Derivative Financial Instruments.

 

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Table of Contents

 

Offsetting Assets and Liabilities:  In December 2011, the FASB issued ASU No. 2011-11 “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities.”  ASU 2011-11 requires an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement.  ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  Retrospective disclosure is required for all comparative periods presented.  The effect of applying this standard is reflected in Note 8 — Derivative Financial Instruments.

 

Note 3.                     Investment Securities

 

Investment securities available-for-sale were as follows:

 

 

 

Amortized

 

Gross

 

Gross

 

 

 

(Dollars in thousands)

 

Cost

 

Unrealized Gains

 

Unrealized Losses

 

Fair Value

 

June 30, 2013

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

391,452

 

$

6,545

 

$

(5,357

)

$

392,640

 

U.S. States and political subdivisions securities

 

103,875

 

3,949

 

(1,186

)

106,638

 

Mortgage-backed securities — Federal agencies

 

287,099

 

6,749

 

(2,626

)

291,222

 

Corporate debt securities

 

28,133

 

216

 

(18

)

28,331

 

Foreign government and other securities

 

2,700

 

9

 

(1

)

2,708

 

Total debt securities

 

813,259

 

17,468

 

(9,188

)

821,539

 

Marketable equity securities

 

2,367

 

4,409

 

(3

)

6,773

 

Total investment securities available-for-sale

 

$

815,626

 

$

21,877

 

$

(9,191

)

$

828,312

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

410,983

 

$

11,353

 

$

(83

)

$

422,253

 

U.S. States and political subdivisions securities

 

100,055

 

5,864

 

(482

)

105,437

 

Mortgage-backed securities — Federal agencies

 

301,136

 

11,296

 

(25

)

312,407

 

Corporate debt securities

 

30,897

 

445

 

(94

)

31,248

 

Foreign government and other securities

 

3,700

 

26

 

 

3,726

 

Total debt securities

 

846,771

 

28,984

 

(684

)

875,071

 

Marketable equity securities

 

2,368

 

3,329

 

(4

)

5,693

 

Total investment securities available-for-sale

 

$

849,139

 

$

32,313

 

$

(688

)

$

880,764

 

 

At June 30, 2013 and December 31, 2012, 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 contractual maturities of investments in debt securities available-for-sale at June 30, 2013 are shown below.  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

 

$

123,887

 

$

123,155

 

Due after one year through five years

 

330,448

 

336,000

 

Due after five years through ten years

 

70,565

 

69,983

 

Due after ten years

 

1,260

 

1,179

 

Mortgage-backed securities

 

287,099

 

291,222

 

Total debt securities available-for-sale

 

$

813,259

 

$

821,539

 

 

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Table of Contents

 

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.  There were no other-than-temporary-impairment (OTTI) write-downs in 2013 or 2012.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(Dollars in thousands)

 

2013

 

2012

 

2013

 

2012

 

Gross realized gains

 

$

 

$

 

$

 

$

275

 

Gross realized losses

 

 

 

 

 

Net realized gains

 

$

 

$

 

$

 

$

275

 

 

The following table summarizes gross unrealized losses and fair value by investment category and age.

 

 

 

Less than 12 Months

 

12 months or Longer

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(Dollars in thousands) 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

186,172

 

$

(5,185

)

$

15,069

 

$

(172

)

$

201,241

 

$

(5,357

)

U.S. States and political subdivisions securities

 

29,755

 

(875

)

2,343

 

(311

)

32,098

 

(1,186

)

Mortgage-backed securities - Federal agencies

 

70,652

 

(2,625

)

52

 

(1

)

70,704

 

(2,626

)

Corporate debt securities

 

 

 

4,507

 

(18

)

4,507

 

(18

)

Foreign government and other securities

 

199

 

(1

)

 

 

199

 

(1

)

Total debt securities

 

286,778

 

(8,686

)

21,971

 

(502

)

308,749

 

(9,188

)

Marketable equity securities

 

 

 

5

 

(3

)

5

 

(3

)

Total investment securities available-for-sale

 

$

286,778

 

$

(8,686

)

$

21,976

 

$

(505

)

$

308,754

 

$

(9,191

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

37,316

 

$

(83

)

$

 

$

 

$

37,316

 

$

(83

)

U.S. States and political subdivisions securities

 

7,730

 

(46

)

3,364

 

(436

)

11,094

 

(482

)

Mortgage-backed securities - Federal agencies

 

6,264

 

(24

)

60

 

(1

)

6,324

 

(25

)

Corporate debt securities

 

 

 

4,431

 

(94

)

4,431

 

(94

)

Foreign government and other securities

 

100

 

 

 

 

100

 

 

Total debt securities

 

51,410

 

(153

)

7,855

 

(531

)

59,265

 

(684

)

Marketable equity securities

 

 

 

5

 

(4

)

5

 

(4

)

Total investment securities available-for-sale

 

$

51,410

 

$

(153

)

$

7,860

 

$

(535

)

$

59,270

 

$

(688

)

 

The initial indication of 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.

 

At June 30, 2013, 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 market volatility and market illiquidity on auction rate securities which are reflected in U.S. States and political subdivisions.  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.

 

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Table of Contents

 

At June 30, 2013 and December 31, 2012, investment securities with carrying values of $234.05 million and $216.34 million, respectively, were pledged as collateral to secure government deposits, 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 table below presents the credit quality grades of the recorded investment in loans and leases, segregated by class.

 

 

 

Credit Quality Grades

 

(Dollars in thousands) 

 

1-6

 

7-12

 

Total

 

June 30, 2013

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

632,373

 

$

28,007

 

$

660,380

 

Auto, light truck and environmental equipment

 

498,023

 

12,539

 

510,562

 

Medium and heavy duty truck

 

176,267

 

2,327

 

178,594

 

Aircraft financing

 

634,459

 

43,051

 

677,510

 

Construction equipment financing

 

296,960

 

14,175

 

311,135

 

Commercial real estate

 

542,186

 

34,624

 

576,810

 

Total

 

$

2,780,268

 

$

134,723

 

$

2,914,991

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

612,567

 

$

26,502

 

$

639,069

 

Auto, light truck and environmental equipment

 

428,582

 

9,565

 

438,147

 

Medium and heavy duty truck

 

170,116

 

1,886

 

172,002

 

Aircraft financing

 

648,316

 

48,163

 

696,479

 

Construction equipment financing

 

262,980

 

15,994

 

278,974

 

Commercial real estate

 

507,219

 

47,749

 

554,968

 

Total

 

$

2,629,780

 

$

149,859

 

$

2,779,639

 

 

10



Table of Contents

 

For residential real estate and consumer loans, credit quality is based on the aging status of the loan and by payment activity.  The table below presents 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

 

Juune 30, 2013

 

 

 

 

 

 

 

Residential real estate

 

$

452,262

 

$

2,721

 

$

454,983

 

Consumer

 

122,986

 

425

 

123,411

 

Total

 

$

575,248

 

$

3,146

 

$

578,394

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

Residential real estate

 

$

435,962

 

$

2,679

 

$

438,641

 

Consumer

 

108,814

 

459

 

109,273

 

Total

 

$

544,776

 

$

3,138

 

$

547,914

 

 

The table below presents the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.

 

 

 

 

 

 

 

 

 

90 Days

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

or More

 

 

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Past Due

 

Total

 

 

 

Total Financing

 

(Dollars in thousands) 

 

Current

 

Past Due

 

Past Due

 

and Accruing

 

Accruing Loans

 

Nonaccrual

 

Receivables

 

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

652,550

 

$

164

 

$

149

 

$

 

$

652,863

 

$

7,517

 

$

660,380

 

Auto, light truck and environmental equipment

 

509,899

 

264

 

53

 

 

510,216

 

346

 

510,562

 

Medium and heavy duty truck

 

177,878

 

 

 

 

177,878

 

716

 

178,594

 

Aircraft financing

 

667,269

 

5,746

 

 

 

673,015

 

4,495

 

677,510

 

Construction equipment financing

 

306,999

 

174

 

 

 

307,173

 

3,962

 

311,135

 

Commercial real estate

 

567,490

 

 

 

 

567,490

 

9,320

 

576,810

 

Residential real estate

 

450,728

 

878

 

656

 

145

 

452,407

 

2,576

 

454,983

 

Consumer

 

121,887

 

912

 

187

 

39

 

123,025

 

386

 

123,411

 

Total

 

$

3,454,700

 

$

8,138

 

$

1,045

 

$

184

 

$

3,464,067

 

$

29,318

 

$

3,493,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

629,035

 

$

807

 

$

48

 

$

 

$

629,890

 

$

9,179

 

$

639,069

 

Auto, light truck and environmental equipment

 

437,087

 

202

 

 

 

437,289

 

858

 

438,147

 

Medium and heavy duty truck

 

171,950

 

 

 

 

171,950

 

52

 

172,002

 

Aircraft financing

 

691,187

 

 

 

 

691,187

 

5,292

 

696,479

 

Construction equipment financing

 

272,817

 

598

 

274

 

 

273,689

 

5,285

 

278,974

 

Commercial real estate

 

541,811

 

102

 

 

 

541,913

 

13,055

 

554,968

 

Residential real estate

 

434,434

 

1,019

 

509

 

356

 

436,318

 

2,323

 

438,641

 

Consumer

 

107,630

 

816

 

368

 

86

 

108,900

 

373

 

109,273

 

Total

 

$

3,285,951

 

$

3,544

 

$

1,199

 

$

442

 

$

3,291,136

 

$

36,417

 

$

3,327,553

 

 

11



Table of Contents

 

The table below presents impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.

 

 

 

 

 

Unpaid

 

 

 

 

 

Recorded

 

Principal

 

Related

 

(Dollars in thousands) 

 

Investment

 

Balance

 

Allowance

 

June 30, 2013

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

6,973

 

$

6,972

 

$

 

Auto, light truck and environmental equipment

 

142

 

142

 

 

Medium and heavy duty truck

 

711

 

711

 

 

Aircraft financing

 

292

 

292

 

 

Construction equipment financing

 

3,895

 

3,893

 

 

Commercial real estate

 

17,293

 

17,293

 

 

Residential real estate

 

 

 

 

Consumer loans

 

 

 

 

Total with no related allowance recorded

 

29,306

 

29,303

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

5,235

 

5,235

 

222

 

Auto, light truck and environmental equipment

 

 

 

 

Medium and heavy duty truck

 

 

 

 

Aircraft financing

 

4,132

 

4,132

 

537

 

Construction equipment financing

 

 

 

 

Commercial real estate

 

 

 

 

Residential real estate

 

 

 

 

Consumer loans

 

 

 

 

Total with an allowance recorded

 

9,367

 

9,367

 

759

 

Total impaired loans

 

$

38,673

 

$

38,670

 

$

759

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

2,572

 

$

2,572

 

$

 

Auto, light truck and environmental equipment

 

474

 

474

 

 

Medium and heavy duty truck

 

 

 

 

Aircraft financing

 

3,115

 

3,115

 

 

Construction equipment financing

 

5,109

 

5,107

 

 

Commercial real estate

 

19,597

 

19,597

 

 

Residential real estate

 

101

 

101

 

 

Consumer loans

 

 

 

 

Total with no related allowance recorded

 

30,968

 

30,966

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

6,075

 

6,074

 

729

 

Auto, light truck and environmental equipment

 

 

 

 

Medium and heavy duty truck

 

 

 

 

Aircraft financing

 

2,086

 

2,086

 

852

 

Construction equipment financing

 

 

 

 

Commercial real estate

 

1,588

 

1,588

 

42

 

Residential real estate

 

 

 

 

Consumer loans

 

 

 

 

Total with an allowance recorded

 

9,749

 

9,748

 

1,623

 

Total impaired loans

 

$

40,717

 

$

40,714

 

$

1,623

 

 

12



Table of Contents

 

Average recorded investment and interest income recognized on impaired loans and leases, segregated by class, is shown in the table below.

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

(Dollars in thousands) 

 

Average
Recorded
Investment

 

Interest
Income

 

Average
Recorded
Investment

 

Interest
Income

 

Average

Recorded
Investment

 

Interest
Income

 

Average
Recorded
Investment

 

Interest
Income

 

Commercial and agricultural loans

 

$

8,850

 

$

32

 

$

9,219

 

$

2

 

$

8,585

 

$

35

 

$

9,606

 

$

10

 

Auto, light truck and environmental equipment

 

159

 

 

3,251

 

 

313

 

 

2,421

 

7

 

Medium and heavy duty truck

 

237

 

 

940

 

1

 

118

 

 

1,158

 

1

 

Aircraft financing

 

7,868

 

 

8,126

 

 

8,068

 

 

10,197

 

 

Construction equipment financing

 

3,975

 

1

 

5,019

 

1

 

4,340

 

3

 

4,342

 

5

 

Commercial real estate

 

18,446

 

152

 

23,006

 

115

 

19,495

 

304

 

22,116

 

164

 

Residential real estate

 

 

 

106

 

2

 

 

 

71

 

2

 

Consumer

 

 

 

 

 

 

 

 

 

Total

 

$

39,535

 

$

185

 

$

49,667

 

$

121

 

$

40,919

 

$

342

 

$

49,911

 

$

189

 

 

The number of loans and leases classified as troubled debt restructuring (TDR) during the three and six months ended June 30, 2013 and 2012, segregated by class, are shown in the table below as well as the recorded investment as of June 30. The classification between nonperforming and performing is shown at the time of modification.  During 2013 and 2012, modification programs focused on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions.  The modifications did not result in the contractual forgiveness of principal or interest or interest rate reductions below market rates.  Consequently, the financial impact of the modifications is immaterial.

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

(Dollars in thousands)

 

Number of
Modifications

 

Recorded
Investment

 

Number of
Modifications

 

Recorded
Investment

 

Number of
Modifications

 

Recorded
Investment

 

Number of
Modifications

 

Recorded Investment

 

Performing TDRs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and agricultural loans

 

1

 

$

750

 

 

$

 

1

 

$

750

 

 

$

 

Auto, light truck and environmental equipment

 

 

 

 

 

 

 

 

 

Medium and heavy duty truck

 

 

 

 

 

 

 

 

 

Aircraft financing

 

 

 

 

 

 

 

 

 

Construction equipment financing

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

1

 

7,014

 

 

 

1

 

7,014

 

Residential real estate

 

 

 

 

 

 

 

1

 

106

 

Consumer

 

 

 

 

 

 

 

 

 

Total performing TDR modifications

 

1

 

$

750

 

1