XNAS:SRCE 1st Source Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNAS:SRCE (1st Source Corp): Fair Value Estimate
Premium
XNAS:SRCE (1st Source Corp): Consider Buying
Premium
XNAS:SRCE (1st Source Corp): Consider Selling
Premium
XNAS:SRCE (1st Source Corp): Fair Value Uncertainty
Premium
XNAS:SRCE (1st Source Corp): Economic Moat
Premium
XNAS:SRCE (1st Source Corp): Stewardship
Premium
 

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, 2012

 

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
incorporation or organization)

 

(I.R.S. Employer Identification
No.)

 

100 North Michigan Street

 

 

South Bend, IN

 

46614

(Address of principal executive
offices)

 

(Zip Code)

 

(574) 235-2000

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

Number of shares of common stock outstanding as of April 20, 2012 – 24,259,894 shares

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

Consolidated Statements of Financial Condition — March 31, 2012 and December 31, 2011

3

 

Consolidated Statements of Income — three months ended March 31, 2012 and 2011

4

 

Consolidated Statements of Comprehensive Income — three months ended March 31, 2012 and 2011

5

 

Consolidated Statements of Shareholders’ Equity — three months ended March 31, 2012 and 2011

5

 

Consolidated Statements of Cash Flows — three months ended March 31, 2012 and 2011

6

 

Notes to the Consolidated Financial Statements

7

Item 2.

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

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

Item 4.

Controls and Procedures

39

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

40

Item 1A.

Risk Factors

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 3.

Defaults Upon Senior Securities

40

Item 4.

Mine Safety Disclosures

40

Item 5.

Other Information

41

Item 6.

Exhibits

41

 

 

 

SIGNATURES

 

42

 

 

 

CERTIFICATIONS

 

 

Exhibit 31.1

50

 

Exhibit 31.2

51

 

Exhibit 32.1

52

 

Exhibit 32.2

53

 

2



Table of Contents

 

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited - Dollars in thousands)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

56,707

 

$

61,406

 

Federal funds sold and interest bearing deposits with other banks

 

901

 

52,921

 

Investment securities available-for-sale (amortized cost of $872,783 and $853,204 at March 31, 2012 and December 31, 2011, respectively)

 

901,817

 

883,000

 

Other investments

 

18,974

 

18,974

 

Trading account securities

 

144

 

132

 

Mortgages held for sale

 

18,114

 

12,644

 

Loans and leases - net of unearned discount

 

 

 

 

 

Commercial and agricultural loans

 

545,057

 

545,570

 

Auto, light truck and environmental equipment

 

455,873

 

435,965

 

Medium and heavy duty truck

 

175,471

 

159,796

 

Aircraft financing

 

621,500

 

620,782

 

Construction equipment financing

 

271,475

 

261,204

 

Commercial real estate

 

539,112

 

545,457

 

Residential real estate

 

439,562

 

423,606

 

Consumer loans

 

98,840

 

98,163

 

Total loans and leases

 

3,146,890

 

3,090,543

 

Reserve for loan and lease losses

 

(82,394

)

(81,644

)

Net loans and leases

 

3,064,496

 

3,008,899

 

Equipment owned under operating leases, net

 

58,840

 

69,551

 

Net premises and equipment

 

39,963

 

39,857

 

Goodwill and intangible assets

 

88,475

 

87,675

 

Accrued income and other assets

 

136,265

 

139,012

 

Total assets

 

$

4,384,696

 

$

4,374,071

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest bearing

 

$

587,324

 

$

580,101

 

Interest bearing

 

2,918,350

 

2,940,040

 

Total deposits

 

3,505,674

 

3,520,141

 

Short-term borrowings:

 

 

 

 

 

Federal funds purchased and securities sold under agreements to repurchase

 

125,010

 

106,991

 

Other short-term borrowings

 

18,761

 

18,243

 

Total short-term borrowings

 

143,771

 

125,234

 

Long-term debt and mandatorily redeemable securities

 

39,828

 

37,156

 

Subordinated notes

 

89,692

 

89,692

 

Accrued expenses and other liabilities

 

73,840

 

77,930

 

Total liabilities

 

3,852,805

 

3,850,153

 

 

 

 

 

 

 

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 25,643,506 at March 31, 2012 and December 31, 2011

 

346,535

 

346,535

 

Retained earnings

 

198,175

 

190,261

 

Cost of common stock in treasury (1,383,612 shares at March 31, 2012 and 1,429,484 shares at December 31, 2011)

 

(30,757

)

(31,389

)

Accumulated other comprehensive income

 

17,938

 

18,511

 

Total shareholders’ equity

 

531,891

 

523,918

 

Total liabilities and shareholders’ equity

 

$

4,384,696

 

$

4,374,071

 

 

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

 

 

 

March 31,

 

 

 

2012

 

2011

 

Interest income:

 

 

 

 

 

Loans and leases

 

$

39,896

 

$

41,299

 

Investment securities, taxable

 

4,327

 

4,482

 

Investment securities, tax-exempt

 

852

 

1,186

 

Other

 

226

 

243

 

Total interest income

 

45,301

 

47,210

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

Deposits

 

5,745

 

8,355

 

Short-term borrowings

 

53

 

89

 

Subordinated notes

 

1,647

 

1,647

 

Long-term debt and mandatorily redeemable securities

 

471

 

259

 

Total interest expense

 

7,916

 

10,350

 

 

 

 

 

 

 

Net interest income

 

37,385

 

36,860

 

Provision for loan and lease losses

 

2,254

 

2,198

 

Net interest income after provision for loan and lease losses

 

35,131

 

34,662

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

Trust fees

 

3,973

 

3,992

 

Service charges on deposit accounts

 

4,505

 

4,236

 

Mortgage banking income

 

1,942

 

444

 

Insurance commissions

 

1,357

 

1,142

 

Equipment rental income

 

5,350

 

6,038

 

Other income

 

3,001

 

2,971

 

Investment securities and other investment gains

 

395

 

130

 

Total noninterest income

 

20,523

 

18,953

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

Salaries and employee benefits

 

20,316

 

18,638

 

Net occupancy expense

 

2,160

 

2,320

 

Furniture and equipment expense

 

3,507

 

3,349

 

Depreciation - leased equipment

 

4,311

 

4,805

 

Professional fees

 

1,398

 

1,096

 

Supplies and communication

 

1,393

 

1,394

 

FDIC and other insurance

 

949

 

1,676

 

Business development and marketing expense

 

867

 

622

 

Loan and lease collection and repossession expense

 

1,501

 

1,324

 

Other expense

 

1,646

 

3,252

 

Total noninterest expense

 

38,048

 

38,476

 

 

 

 

 

 

 

Income before income taxes

 

17,606

 

15,139

 

Income tax expense

 

5,891

 

4,531

 

 

 

 

 

 

 

Net income

 

$

11,715

 

$

10,608

 

 

 

 

 

 

 

Per common share

 

 

 

 

 

Basic net income per common share

 

$

0.48

 

$

0.43

 

Diluted net income per common share

 

$

0.48

 

$

0.43

 

Dividends

 

$

0.16

 

$

0.16

 

Basic weighted average common shares outstanding

 

24,259,416

 

24,271,366

 

Diluted weighted average common shares outstanding

 

24,270,866

 

24,279,517

 

 

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

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net income

 

$

11,715

 

$

10,608

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

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

 

(402

)

(1,250

)

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

 

(171

)

(128

)

Other comprehensive (loss) income

 

(573

)

(1,378

)

 

 

 

 

 

 

Comprehensive income

 

$

11,142

 

$

9,230

 

 

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, 2011

 

$

486,383

 

$

 

$

350,282

 

$

157,875

 

$

(32,284

)

$

10,510

 

Net Income

 

10,608

 

 

 

10,608

 

 

 

Other Comprehensive Loss

 

(1,378

)

 

 

 

 

(1,378

)

Issuance of 139,736 common shares under stock based compensation awards, including related tax effects

 

2,666

 

 

 

(126

)

2,792

 

 

Cost of 8,900 shares of common stock acquired for treasury

 

(163

)

 

 

 

(163

)

 

Repurchase of common stock warrant

 

(3,750

)

 

(3,750

)

 

 

 

Common stock dividend ($0.16 per share)

 

(3,902

)

 

 

(3,902

)

 

 

Stock based compensation

 

3

 

 

3

 

 

 

 

Balance at March 31, 2011

 

$

490,467

 

$

 

$

346,535

 

$

164,455

 

$

(29,655

)

$

9,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2012

 

$

523,918

 

$

 

$

346,535

 

$

190,261

 

$

(31,389

)

$

18,511

 

Net Income

 

11,715

 

 

 

11,715

 

 

 

Other Comprehensive Loss

 

(573

)

 

 

 

 

(573

)

Issuance of 150,343 common shares under stock based compensation awards, including related tax effects

 

3,375

 

 

 

126

 

3,249

 

 

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

 

(2,617

)

 

 

 

(2,617

)

 

Common stock dividend ($0.16 per share)

 

(3,927

)

 

 

(3,927

)

 

 

Balance at March 31, 2012

 

$

531,891

 

$

 

$

346,535

 

$

198,175

 

$

(30,757

)

$

17,938

 

 

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)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Operating activities:

 

 

 

 

 

Net income

 

$

11,715

 

$

10,608

 

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

 

 

 

 

 

Provision for loan and lease losses

 

2,254

 

2,198

 

Depreciation of premises and equipment

 

1,032

 

873

 

Depreciation of equipment owned and leased to others

 

4,311

 

4,805

 

Amortization of investment security premiums and accretion of discounts, net

 

1,012

 

485

 

Amortization of mortgage servicing rights

 

692

 

734

 

Mortgage servicing asset (recovery) impairment

 

(234

)

5

 

Deferred income taxes

 

(1,080

)

(297

)

Investment securities and other investment gains

 

(395

)

(130

)

Originations of loans held for sale, net of principal collected

 

(35,772

)

(25,343

)

Proceeds from the sales of loans held for sale

 

31,574

 

52,560

 

Net gain on sale of loans held for sale

 

(1,272

)

(85

)

Change in trading account securities

 

(12

)

(8

)

Change in interest receivable

 

(665

)

(116

)

Change in interest payable

 

1,400

 

1,905

 

Change in other assets

 

3,311

 

6,701

 

Change in other liabilities

 

(1,596

)

(2,083

)

Other

 

346

 

1,696

 

Net change in operating activities

 

16,621

 

54,508

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Proceeds from sales of investment securities

 

40,236

 

66,989

 

Proceeds from maturities of investment securities

 

99,619

 

67,756

 

Purchases of investment securities

 

(160,052

)

(110,522

)

Net change in other investments

 

 

840

 

Loans sold or participated to others

 

6,312

 

4,010

 

Net change in loans and leases

 

(65,320

)

11,983

 

Net change in equipment owned under operating leases

 

6,399

 

(7,971

)

Purchases of premises and equipment

 

(1,161

)

(3,047

)

Net change in investing activities

 

(73,967

)

30,038

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Net change in demand deposits, NOW accounts and savings accounts

 

(17,501

)

(33,730

)

Net change in certificates of deposit

 

3,034

 

19,992

 

Net change in short-term borrowings

 

18,537

 

(23,836

)

Proceeds from issuance of long-term debt

 

 

417

 

Payments on long-term debt

 

(199

)

(114

)

Net proceeds from issuance of treasury stock

 

3,375

 

2,666

 

Acquisition of treasury stock

 

(2,617

)

(163

)

Repurchase of common stock warrant

 

 

(3,750

)

Cash dividends paid on common stock

 

(4,002

)

(3,968

)

Net change in financing activities

 

627

 

(42,486

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(56,719

)

42,060

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

114,327

 

96,872

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

57,608

 

$

138,932

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

Loans transferred to other real estate and repossessed assets

 

$

1,158

 

$

3,931

 

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

 

2,643

 

2,420

 

 

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 (2011 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements.  The balance sheet at December 31, 2011 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

 

Offsetting Assets and Liabilities:  In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 Company is assessing the impact of ASU 2011-11 on its disclosures.

 

Goodwill:  In September 2011, the FASB issued ASU No. 2011-08 “Intangibles — Goodwill and Other (Topic 350) - Testing Goodwill for Impairment.”  ASU 2011-08 allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of the reporting unit.  ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption was permitted.  The Company does not expect an impact on its financial condition or results of operations.

 

Comprehensive Income:  In June 2011, the FASB issued ASU No. 2011-05 “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.”  ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  In December 2011, FASB issued ASU No. 2011-12 which defers the effective date of the requirement in ASU 2011-05 to present items that are

 

7



Table of Contents

 

reclassified from accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income.  ASU 2011-05 was effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The effect of applying this standard is reflected in the Consolidated Statements of Comprehensive Income and Consolidated Statements of Shareholders’ Equity.

 

Fair Value Measurements:  In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU 2011-04 changed the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  Consequently, the amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs (International Financial Reporting Standards).   ASU 2011-04 was effective prospectively during interim and annual periods beginning on or after December 15, 2011.  Early application by public entities was not permitted.  The effect of applying this standard is reflected in Note 12 — Fair Value Measurements.

 

Transfers and Servicing:  In April 2011, the FASB issued ASU No. 2011-03 “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreement.”  ASU 2011-03 removed from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee.  ASU 2011-03 was effective for the first interim or annual period beginning on or after December 15, 2011.  The guidance should be applied prospectively to transactions or modifications of existing transactions that occured on or after the effective date.  Early adoption was not permitted.  ASU 2011-03 did not have an impact on the Company’s financial condition, results of operations, or disclosures.

 

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

 

March 31, 2012

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

388,248

 

$

9,795

 

$

(268

)

$

397,775

 

U.S. States and political subdivisions securities

 

103,951

 

6,124

 

(842

)

109,233

 

Mortgage-backed securities — Federal agencies

 

337,295

 

11,660

 

(124

)

348,831

 

Corporate debt securities

 

36,236

 

380

 

(319

)

36,297

 

Foreign government and other securities

 

4,686

 

42

 

(1

)

4,727

 

Total debt securities

 

870,416

 

28,001

 

(1,554

)

896,863

 

Marketable equity securities

 

2,367

 

2,743

 

(156

)

4,954

 

Total investment securities available-for-sale

 

$

872,783

 

$

30,744

 

$

(1,710

)

$

901,817

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

390,819

 

$

10,356

 

$

(50

)

$

401,125

 

U.S. States and political subdivisions securities

 

101,587

 

6,433

 

(660

)

107,360

 

Mortgage-backed securities — Federal agencies

 

317,392

 

11,565

 

(9

)

328,948

 

Corporate debt securities

 

36,349

 

325

 

(364

)

36,310

 

Foreign government and other securities

 

4,690

 

24

 

(1

)

4,713

 

Total debt securities

 

850,837

 

28,703

 

(1,084

)

878,456

 

Marketable equity securities

 

2,367

 

2,673

 

(496

)

4,544

 

Total investment securities available-for-sale

 

$

853,204

 

$

31,376

 

$

(1,580

)

$

883,000

 

 

At March 31, 2012 and December 31, 2011, 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 (or Government Sponsored Enterprise, GSEs).

 

8



Table of Contents

 

The contractual maturities of debt securities available-for-sale at March 31, 2012 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

 

$

27,743

 

$

28,152

 

Due after one year through five years

 

379,459

 

388,521

 

Due after five years through ten years

 

115,566

 

121,689

 

Due after ten years

 

10,353

 

9,670

 

Mortgage-backed securities

 

337,295

 

348,831

 

Total debt securities available-for-sale

 

$

870,416

 

$

896,863

 

 

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 2012 or 2011.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2012

 

2011

 

Gross realized gains

 

$

275

 

$

445

 

Gross realized losses

 

 

(238

)

Net realized gains (losses)

 

$

275

 

$

207

 

 

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

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

110,118

 

$

(268

)

$

 

$

 

$

110,118

 

$

(268

)

U.S. States and political subdivisions securities

 

8,828

 

(172

)

5,131

 

(670

)

13,959

 

(842

)

Mortgage-backed securities - Federal agencies

 

49,401

 

(90

)

17,002

 

(34

)

66,403

 

(124

)

Corporate debt securities

 

4,927

 

(73

)

8,513

 

(246

)

13,440

 

(319

)

Foreign government and other securities

 

199

 

(1

)

 

 

199

 

(1

)

Total debt securities

 

173,473

 

(604

)

30,646

 

(950

)

204,119

 

(1,554

)

Marketable equity securities

 

961

 

(153

)

4

 

(3

)

965

 

(156

)

Total investment securities available-for-sale

 

$

174,434

 

$

(757

)

$

30,650

 

$

(953

)

$

205,084

 

$

(1,710

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and Federal agencies securities

 

$

42,536

 

$

(50

)

$

 

$

 

$

42,536

 

$

(50

)

U.S. States and political subdivisions securities

 

423

 

(9

)

5,149

 

(651

)

5,572

 

(660

)

Mortgage-backed securities - Federal agencies

 

5,071

 

(1

)

13,099

 

(8

)

18,170

 

(9

)

Corporate debt securities

 

4,858

 

(142

)

8,579

 

(222

)

13,437

 

(364

)

Foreign government and other securities

 

1,011

 

(1

)

 

 

1,011

 

(1

)

Total debt securities

 

53,899

 

(203

)

26,827

 

(881

)

80,726

 

(1,084

)

Marketable equity securities

 

622

 

(492

)

4

 

(4

)

626

 

(496

)

Total investment securities available-for-sale

 

$

54,521

 

$

(695

)

$

26,831

 

$

(885

)

$

81,352

 

$

(1,580

)

 

9



Table of Contents

 

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 March 31, 2012, 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.  The unrealized losses on debt securities are due to increases in market interest rates over the yields available at the time the underlying securities were purchased and market illiquidity on auction rate securities which are reflected in U.S. States and Political subdivisions securities.  The fair value is expected to recover on all debt securities as they approach their maturity date or repricing 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 unrealized losses on marketable equity securities relate primarily to one common stock investment.  The Company evaluated the investments’ near term prospects in relation to the severity and duration of the impairment.  Based on the evaluation and the intent to hold the investment for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider the investment other-than-temporarily impaired at March 31, 2012.  Accordingly, as of March 31, 2012, the Company believes the impairments detailed in the table above are temporary and no impairment loss has been realized in its consolidated statements of income.

 

At March 31, 2012 and December 31, 2011, investment securities with carrying values of $230.86 million and $250.36 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

 

10



Table of Contents

 

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

 

March 31, 2012

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

514,269

 

$

30,788

 

$

545,057

 

Auto, light truck and environmental equipment

 

450,261

 

5,612

 

455,873

 

Medium and heavy duty truck

 

171,644

 

3,827

 

175,471

 

Aircraft financing

 

580,508

 

40,992

 

621,500

 

Construction equipment financing

 

246,552

 

24,923

 

271,475

 

Commercial real estate

 

485,803

 

53,309

 

539,112

 

Total

 

$

2,449,037

 

$

159,451

 

$

2,608,488

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

513,011

 

$

32,559

 

$

545,570

 

Auto, light truck and environmental equipment

 

432,288

 

3,677

 

435,965

 

Medium and heavy duty truck

 

154,261

 

5,535

 

159,796

 

Aircraft financing

 

580,004

 

40,778

 

620,782

 

Construction equipment financing

 

239,643

 

21,561

 

261,204

 

Commercial real estate

 

487,576

 

57,881

 

545,457

 

Total

 

$

2,406,783

 

$

161,991

 

$

2,568,774

 

 

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

 

March 31, 2012

 

 

 

 

 

 

 

Residential real estate

 

$

436,350

 

$

3,212

 

$

439,562

 

Consumer

 

97,200

 

1,640

 

98,840

 

Total

 

$

533,550

 

$

4,852

 

$

538,402

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

Residential real estate

 

$

418,810

 

$

4,796

 

$

423,606

 

Consumer

 

97,857

 

306

 

98,163

 

Total

 

$

516,667

 

$

5,102

 

$

521,769

 

 

11



Table of Contents

 

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

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

533,744

 

$

667

 

$

 

$

 

$

534,411

 

$

10,646

 

$

545,057

 

Auto, light truck and environmental equipment

 

450,550

 

777

 

45

 

 

451,372

 

4,501

 

455,873

 

Medium and heavy duty truck

 

174,240

 

 

 

 

174,240

 

1,231

 

175,471

 

Aircraft financing

 

607,038

 

2,265

 

 

 

609,303

 

12,197

 

621,500

 

Construction equipment financing

 

265,709

 

862

 

1,160

 

 

267,731

 

3,744

 

271,475

 

Commercial real estate

 

520,650

 

67

 

145

 

 

520,862

 

18,250

 

539,112

 

Residential real estate

 

433,414

 

2,123

 

813

 

177

 

436,527

 

3,035

 

439,562

 

Consumer

 

96,266

 

832

 

102

 

217

 

97,417

 

1,423

 

98,840

 

Total

 

$

3,081,611

 

$

7,593

 

$

2,265

 

$

394

 

$

3,091,863

 

$

55,027

 

$

3,146,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

534,053

 

$

550

 

$

1

 

$

 

$

534,604

 

$

10,966

 

$

545,570

 

Auto, light truck and environmental equipment

 

433,048

 

674

 

241

 

 

433,963

 

2,002

 

435,965

 

Medium and heavy duty truck

 

158,192

 

5

 

 

 

158,197

 

1,599

 

159,796

 

Aircraft financing

 

608,032

 

224

 

 

 

608,256

 

12,526

 

620,782

 

Construction equipment financing

 

256,691

 

376

 

 

 

257,067

 

4,137

 

261,204

 

Commercial real estate

 

522,883

 

2,005

 

 

 

524,888

 

20,569

 

545,457

 

Residential real estate

 

415,177

 

2,894

 

739

 

416

 

419,226

 

4,380

 

423,606

 

Consumer

 

96,824

 

762

 

271

 

45

 

97,902

 

261

 

98,163

 

Total

 

$

3,024,900

 

$

7,490

 

$

1,252

 

$

461

 

$

3,034,103

 

$

56,440

 

$

3,090,543

 

 

12



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

 

March 31, 2012

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

1,903

 

$

1,903

 

$

 

Auto, light truck and environmental equipment

 

381

 

381

 

 

Medium and heavy duty truck

 

1,227

 

1,227

 

 

Aircraft financing

 

10,936

 

10,936

 

 

Construction equipment financing

 

3,431

 

3,431

 

 

Commercial real estate

 

14,249

 

14,248

 

 

Residential real estate

 

108

 

108

 

 

Consumer loans

 

 

 

 

Total with no related allowance recorded

 

32,235

 

32,234

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

7,651

 

7,651

 

1,187

 

Auto, light truck and environmental equipment

 

3,148

 

3,148

 

1,200

 

Medium and heavy duty truck

 

 

 

 

Aircraft financing

 

1,086

 

1,086

 

557

 

Construction equipment financing

 

 

 

 

Commercial real estate

 

5,491

 

5,491

 

277

 

Residential real estate

 

 

 

 

Consumer loans

 

 

 

 

Total with an allowance recorded

 

17,376

 

17,376

 

3,221

 

Total impaired loans

 

$

49,611

 

$

49,610

 

$

3,221

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

$

2,002

 

$

2,002

 

$

 

Auto, light truck and environmental equipment

 

770

 

770

 

 

Medium and heavy duty truck

 

959

 

959

 

 

Aircraft financing

 

11,206

 

11,206

 

 

Construction equipment financing

 

3,949

 

3,949

 

 

Commercial real estate

 

17,088

 

17,091

 

 

Residential real estate

 

 

 

 

 

Consumer loans

 

211

 

210

 

 

 

Total with no related allowance recorded

 

36,185

 

36,187

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural loans

 

8,406

 

8,406

 

1,461

 

Auto, light truck and environmental equipment

 

113

 

113

 

35

 

Medium and heavy duty truck

 

645

 

645

 

165

 

Aircraft financing

 

1,118

 

1,118

 

534

 

Construction equipment financing

 

 

 

 

Commercial real estate

 

6,029

 

6,029

 

294

 

Residential real estate

 

 

 

 

Consumer loans

 

 

 

 

Total with an allowance recorded

 

16,311

 

16,311

 

2,489

 

Total impaired loans

 

$

52,496

 

$

52,498

 

$

2,489

 

 

13



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 March 31,

 

 

 

2012

 

2011

 

(Dollars in thousands) 

 

Average
Recorded
Investment

 

Interest
Income

 

Average
Recorded
Investment

 

Interest
Income

 

Commercial and agricultural loans

 

$

9,993

 

$

8

 

$

12,970

 

$

116

 

Auto, light truck and environmental equipment

 

1,591

 

7

 

2,237

 

1

 

Medium and heavy duty truck

 

1,375

 

1

 

4,810

 

1

 

Aircraft financing

 

12,268

 

 

16,277

 

9

 

Construction equipment financing

 

3,665

 

4

 

8,311

 

9

 

Commercial real estate

 

21,226

 

49

 

29,863

 

65

 

Residential real estate

 

36

 

1

 

 

 

Consumer

 

 

 

 

 

Total

 

$

50,154

 

$

70

 

$

74,468

 

$

201

 

 

Performing loans and leases classified as troubled debt restructuring (TDR) during the three months ended March 31, 2012, segregated by class, are shown in the table below.  Nonperforming TDRs are shown as nonperforming assets.  During 2012, modification programs focused on extending maturity dates or modifying payment patterns.  The modification did not result in the contractual forgiveness of principal or interest or interest rate reductions below market rates.  Consequently, the financial impact of the modification is immaterial.

 

 

 

Three Months Ended

 

 

 

March 31, 2012

 

 

 

Number of

 

Recorded

 

(Dollars in thousands)

 

Modifications

 

Investment

 

Commercial and agricultural loans

 

 

$

 

Auto, light truck and environmental equipment

 

 

 

Medium and heavy duty truck

 

 

 

Aircraft financing

 

 

 

Construction equipment financing

 

 

 

Commercial real estate

 

 

 

Residential real estate

 

1

 

108

 

Consumer

 

 

 

Total

 

1

 

$

108

 

 

There were no troubled debt restructured loans and leases which had payment defaults within twelve months following modification during the three months ended March 31, 2012.  Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.

 

As of March 31, 2012 and December 31, 2011, the Company had $2.20 million and $3.29 million, respectively of performing loans and leases classified as troubled debt restructurings.

 

14



Table of Contents

 

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, national and international economic volatility, global debt and capital markets and political stability or lack thereof.  Concentration risk is impacted primarily by geographic concentration in Northern Indiana and Southwestern Lower Michigan in the business banking and commercial real estate portfolios and by collateral concentration in the specialty finance portfolios and exposure to foreign markets by geographic risk.

 

The reserve for loan and lease losses is maintained at a level believed to be appropriate by management to absorb probable losses inherent in the loan and lease portfolio.  The determination of the reserve requires significant judgment reflecting management’s best estimate of probable loan and lease losses related to specifically identified 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 risks 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, percentage allocations for special attention loans and leases without specific reserves, 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.  Management’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.

 

15



Table of Contents

 

Changes in the reserve for loan and lease losses, segregated by class, for the three months ended March 31, 2012 and 2011 are shown below.

 

 

 

 

 

Auto, light truck

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

Commercial and

 

and environmental

 

Medium and

 

Aircraft

 

equipment

 

Commercial

 

Residential

 

Consumer

 

 

 

(Dollars in thousands)

 

agricultural loans

 

equipment

 

heavy duty truck

 

financing

 

financing

 

real estate

 

real estate

 

loans

 

Total

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for loan and lease losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

13,091

 

$

8,469

 

$

3,742

 

$

28,626

 

$

6,295

 

$

16,772

 

$

3,362

 

$

1,287

 

$

81,644

 

Charge-offs

 

146

 

2,033

 

 

139

 

119

 

33

 

41

 

256

 

2,767

 

Recoveries

 

96

 

783

 

21

 

125

 

34

 

34

 

32

 

138

 

1,263

 

Net charge-offs (recoveries)

 

50

 

1,250

 

(21

)

14

 

85

 

(1

)

9

 

118

 

1,504

 

Provision (recovery of provision)

 

(516

)

2,550

 

(96

)

(14

)

641

 

(447

)

25

 

111

 

2,254