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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐ 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
1st Source Corporation
(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)
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock - without par value | | SRCE | | The NASDAQ Stock Market LLC |
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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.
|
| | | | | | |
| Large accelerated filer | x | | Accelerated filer | ☐ | |
| | | | | | |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | |
| | | | | | |
| | | | Emerging growth company | ☐ | |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No
Number of shares of common stock outstanding as of October 11, 2019 — 25,508,756 shares
TABLE OF CONTENTS
1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited - Dollars in thousands)
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
ASSETS | |
| | |
|
Cash and due from banks | $ | 94,160 |
| | $ | 94,907 |
|
Federal funds sold and interest bearing deposits with other banks | 33,325 |
| | 4,172 |
|
Investment securities available-for-sale | 1,032,185 |
| | 990,129 |
|
Other investments | 28,404 |
| | 28,404 |
|
Mortgages held for sale | 28,654 |
| | 11,290 |
|
Loans and leases, net of unearned discount: | |
| | |
Commercial and agricultural | 1,175,936 |
| | 1,073,205 |
|
Auto and light truck | 612,921 |
| | 559,987 |
|
Medium and heavy duty truck | 289,925 |
| | 283,544 |
|
Aircraft | 805,568 |
| | 803,111 |
|
Construction equipment | 685,696 |
| | 645,239 |
|
Commercial real estate | 858,402 |
| | 809,886 |
|
Residential real estate and home equity | 531,630 |
| | 523,855 |
|
Consumer | 139,468 |
| | 136,637 |
|
Total loans and leases | 5,099,546 |
| | 4,835,464 |
|
Reserve for loan and lease losses | (108,941 | ) | | (100,469 | ) |
Net loans and leases | 4,990,605 |
| | 4,734,995 |
|
Equipment owned under operating leases, net | 119,171 |
| | 134,440 |
|
Net premises and equipment | 51,680 |
| | 52,139 |
|
Goodwill and intangible assets | 83,978 |
| | 83,998 |
|
Accrued income and other assets | 228,908 |
| | 159,271 |
|
Total assets | $ | 6,691,070 |
| | $ | 6,293,745 |
|
| | | |
LIABILITIES | |
| | |
|
Deposits: | |
| | |
|
Noninterest-bearing demand | $ | 1,246,063 |
| | $ | 1,217,120 |
|
Interest-bearing deposits: | | | |
Interest-bearing demand | 1,605,602 |
| | 1,614,959 |
|
Savings | 820,409 |
| | 822,477 |
|
Time | 1,719,605 |
| | 1,467,766 |
|
Total interest-bearing deposits | 4,145,616 |
| | 3,905,202 |
|
Total deposits | 5,391,679 |
| | 5,122,322 |
|
Short-term borrowings: | |
| | |
|
Federal funds purchased and securities sold under agreements to repurchase | 139,417 |
| | 113,627 |
|
Other short-term borrowings | 57,734 |
| | 85,717 |
|
Total short-term borrowings | 197,151 |
| | 199,344 |
|
Long-term debt and mandatorily redeemable securities | 71,520 |
| | 71,123 |
|
Subordinated notes | 58,764 |
| | 58,764 |
|
Accrued expenses and other liabilities | 138,914 |
| | 78,602 |
|
Total liabilities | 5,858,028 |
| | 5,530,155 |
|
| | | |
SHAREHOLDERS’ EQUITY | |
| | |
|
Preferred stock; no par value | |
| | |
|
Authorized 10,000,000 shares; none issued or outstanding | — |
| | — |
|
Common stock; no par value | |
| | |
Authorized 40,000,000 shares; issued 28,205,674 at September 30, 2019 and December 31, 2018 | 436,538 |
| | 436,538 |
|
Retained earnings | 448,715 |
| | 398,980 |
|
Cost of common stock in treasury (2,696,918 shares at September 30, 2019 and 2,421,946 shares at December 31, 2018) | (76,716 | ) | | (62,760 | ) |
Accumulated other comprehensive income (loss) | 4,630 |
| | (10,676 | ) |
Total shareholders’ equity | 813,167 |
| | 762,082 |
|
Noncontrolling interests | $ | 19,875 |
| | $ | 1,508 |
|
Total equity | $ | 833,042 |
| | $ | 763,590 |
|
Total liabilities and equity | $ | 6,691,070 |
| | $ | 6,293,745 |
|
The accompanying notes are a part of the consolidated financial statements.
1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Interest income: | |
| | |
| | |
| | |
|
Loans and leases | $ | 66,807 |
| | $ | 59,961 |
| | $ | 195,089 |
| | $ | 172,172 |
|
Investment securities, taxable | 5,056 |
| | 4,912 |
| | 15,757 |
| | 13,993 |
|
Investment securities, tax-exempt | 316 |
| | 432 |
| | 1,054 |
| | 1,438 |
|
Other | 497 |
| | 391 |
| | 1,434 |
| | 1,196 |
|
Total interest income | 72,676 |
| | 65,696 |
| | 213,334 |
| | 188,799 |
|
Interest expense: | |
| | |
| | |
| | |
|
Deposits | 13,524 |
| | 9,405 |
| | 37,972 |
| | 24,286 |
|
Short-term borrowings | 293 |
| | 518 |
| | 1,764 |
| | 2,120 |
|
Subordinated notes | 914 |
| | 918 |
| | 2,770 |
| | 2,709 |
|
Long-term debt and mandatorily redeemable securities | 750 |
| | 493 |
| | 2,258 |
| | 1,621 |
|
Total interest expense | 15,481 |
| | 11,334 |
| | 44,764 |
| | 30,736 |
|
Net interest income | 57,195 |
| | 54,362 |
| | 168,570 |
| | 158,063 |
|
Provision for loan and lease losses | 3,717 |
| | 6,157 |
| | 12,882 |
| | 14,760 |
|
Net interest income after provision for loan and lease losses | 53,478 |
| | 48,205 |
| | 155,688 |
| | 143,303 |
|
Noninterest income: | |
| | |
| | |
| | |
|
Trust and wealth advisory | 4,982 |
| | 5,109 |
| | 15,423 |
| | 16,097 |
|
Service charges on deposit accounts | 2,892 |
| | 2,567 |
| | 8,175 |
| | 7,676 |
|
Debit card | 3,727 |
| | 3,377 |
| | 10,616 |
| | 9,907 |
|
Mortgage banking | 1,362 |
| | 925 |
| | 3,297 |
| | 2,882 |
|
Insurance commissions | 1,603 |
| | 1,580 |
| | 5,295 |
| | 5,025 |
|
Equipment rental | 7,578 |
| | 7,977 |
| | 23,369 |
| | 23,836 |
|
Losses on investment securities available-for-sale | — |
| | — |
| | — |
| | (345 | ) |
Other | 3,621 |
| | 2,525 |
| | 9,378 |
| | 7,812 |
|
Total noninterest income | 25,765 |
| | 24,060 |
| | 75,553 |
| | 72,890 |
|
Noninterest expense: | |
| | |
| | |
| | |
|
Salaries and employee benefits | 24,434 |
| | 23,164 |
| | 71,716 |
| | 69,391 |
|
Net occupancy | 2,635 |
| | 2,523 |
| | 7,888 |
| | 7,504 |
|
Furniture and equipment | 6,027 |
| | 5,769 |
| | 18,340 |
| | 16,942 |
|
Depreciation – leased equipment | 6,198 |
| | 6,580 |
| | 19,122 |
| | 19,692 |
|
Professional fees | 1,603 |
| | 1,883 |
| | 4,907 |
| | 5,628 |
|
Supplies and communication | 1,643 |
| | 1,635 |
| | 4,744 |
| | 4,687 |
|
FDIC and other insurance | 260 |
| | 855 |
| | 1,513 |
| | 2,267 |
|
Business development and marketing | 1,844 |
| | 1,663 |
| | 4,471 |
| | 4,921 |
|
Loan and lease collection and repossession | 697 |
| | 1,563 |
| | 2,288 |
| | 3,079 |
|
Other | 1,765 |
| | 1,707 |
| | 4,674 |
| | 4,665 |
|
Total noninterest expense | 47,106 |
| | 47,342 |
| | 139,663 |
| | 138,776 |
|
Income before income taxes | 32,137 |
| | 24,923 |
| | 91,578 |
| | 77,417 |
|
Income tax expense | 7,689 |
| | 5,035 |
| | 21,517 |
| | 16,449 |
|
Net income | 24,448 |
| | 19,888 |
| | 70,061 |
| | 60,968 |
|
Net (income) loss attributable to noncontrolling interests | (10 | ) | | — |
| | (42 | ) | | — |
|
Net income available to common shareholders | $ | 24,438 |
| | $ | 19,888 |
| | $ | 70,019 |
| | $ | 60,968 |
|
Per common share: | |
| | |
| | |
| | |
|
Basic net income per common share | $ | 0.95 |
| | $ | 0.76 |
| | $ | 2.72 |
| | $ | 2.33 |
|
Diluted net income per common share | $ | 0.95 |
| | $ | 0.76 |
| | $ | 2.72 |
| | $ | 2.33 |
|
Cash dividends | $ | 0.27 |
| | $ | 0.25 |
| | $ | 0.81 |
| | $ | 0.71 |
|
Basic weighted average common shares outstanding | 25,520,035 |
| | 25,965,694 |
| | 25,630,771 |
| | 25,958,125 |
|
Diluted weighted average common shares outstanding | 25,520,035 |
| | 25,965,694 |
| | 25,630,771 |
| | 25,958,125 |
|
The accompanying notes are a part of the consolidated financial statements.
1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - Dollars in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income | $ | 24,448 |
| | $ | 19,888 |
| | $ | 70,061 |
| | $ | 60,968 |
|
Other comprehensive income (loss): | |
| | |
| | |
| | |
|
Unrealized appreciation (depreciation) of available-for-sale securities | 2,920 |
| | (4,294 | ) | | 20,161 |
| | (15,657 | ) |
Reclassification adjustment for realized losses included in net income | — |
| | — |
| | — |
| | 345 |
|
Income tax effect | (703 | ) | | 1,034 |
| | (4,855 | ) | | 3,687 |
|
Other comprehensive income (loss), net of tax | 2,217 |
| | (3,260 | ) | | 15,306 |
| | (11,625 | ) |
Comprehensive income | 26,665 |
| | 16,628 |
| | $ | 85,367 |
| | $ | 49,343 |
|
Comprehensive (income) loss attributable to noncontrolling interests | (10 | ) | | — |
| | (42 | ) | | — |
|
Comprehensive income available to common shareholders | $ | 26,655 |
| | $ | 16,628 |
| | $ | 85,325 |
| | $ | 49,343 |
|
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)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| Preferred Stock | | Common Stock | | Retained Earnings | | Cost of Common Stock in Treasury | | Accumulated Other Comprehensive Income (Loss), Net | | Total Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
Balance at July 1, 2018 | $ | — |
| | $ | 436,538 |
| | $ | 370,521 |
| | $ | (54,367 | ) | | $ | (12,415 | ) | | $ | 740,277 |
| | $ | — |
| | $ | 740,277 |
|
Net income | — |
| | — |
| | 19,888 |
| | — |
| | — |
| | 19,888 |
| | — |
| | 19,888 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (3,260 | ) | | (3,260 | ) | | — |
| | (3,260 | ) |
Issuance of 1,214 common shares under stock based compensation awards | — |
| | — |
| | 39 |
| | 29 |
| | — |
| | 68 |
| | — |
| | 68 |
|
Cost of 545 shares of common stock acquired for treasury | — |
| | — |
| | — |
| | (31 | ) | | — |
| | (31 | ) | | — |
| | (31 | ) |
Common stock dividend ($0.25 per share) | — |
| | — |
| | (6,505 | ) | | — |
| | — |
| | (6,505 | ) | | — |
| | (6,505 | ) |
Balance at September 30, 2018 | $ | — |
| | $ | 436,538 |
| | $ | 383,943 |
| | $ | (54,369 | ) | | $ | (15,675 | ) | | $ | 750,437 |
| | $ | — |
| | 750,437 |
|
| | | | | | | | | | | | | | | |
Balance at July 1, 2019 | $ | — |
| | $ | 436,538 |
| | $ | 431,091 |
| | $ | (75,380 | ) | | $ | 2,413 |
| | $ | 794,662 |
| | $ | 10,024 |
| | $ | 804,686 |
|
Net income | — |
| | — |
| | 24,438 |
| | — |
| | — |
| | 24,438 |
| | 10 |
| | 24,448 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 2,217 |
| | 2,217 |
| | — |
| | 2,217 |
|
Issuance of 3,544 common shares under stock based compensation awards | — |
| | — |
| | 91 |
| | 70 |
| | — |
| | 161 |
| | — |
| | 161 |
|
Cost of 30,000 shares of common stock acquired for treasury | — |
| | — |
| | — |
| | (1,406 | ) | | — |
| | (1,406 | ) | | — |
| | (1,406 | ) |
Common stock dividend ($0.27 per share) | — |
| | — |
| | (6,905 | ) | | — |
| | — |
| | (6,905 | ) | | — |
| | (6,905 | ) |
Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9,879 |
| | 9,879 |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (38 | ) | | (38 | ) |
Balance at September 30, 2019 | $ | — |
| | $ | 436,538 |
| | $ | 448,715 |
| | $ | (76,716 | ) | | $ | 4,630 |
| | $ | 813,167 |
| | $ | 19,875 |
| | $ | 833,042 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| Preferred Stock | | Common Stock | | Retained Earnings | | Cost of Common Stock in Treasury | | Accumulated Other Comprehensive Income (Loss), Net | | Total Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
Balance at January 1, 2018 | $ | — |
| | $ | 436,538 |
| | $ | 339,959 |
| | $ | (54,628 | ) | | $ | (3,332 | ) | | $ | 718,537 |
| | $ | — |
| | $ | 718,537 |
|
Cumulative-effect adjustment | — |
| | — |
| | 718 |
| | — |
| | (718 | ) | | — |
| | — |
| | — |
|
Balance at January 1, 2018, adjusted | — |
| | 436,538 |
| | 340,677 |
| | (54,628 | ) | | (4,050 | ) | | 718,537 |
| | — |
| | 718,537 |
|
Net income | — |
| | — |
| | 60,968 |
| | — |
| | — |
| | 60,968 |
| | — |
| | 60,968 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (11,625 | ) | | (11,625 | ) | | — |
| | (11,625 | ) |
Issuance of 45,316 common shares under stock based compensation awards | — |
| | — |
| | 762 |
| | 1,076 |
| | — |
| | 1,838 |
| | — |
| | 1,838 |
|
Cost of 16,334 shares of common stock acquired for treasury | — |
| | — |
| | — |
| | (817 | ) | | — |
| | (817 | ) | | — |
| | (817 | ) |
Common stock dividend ($0.71 per share) | — |
| | — |
| | (18,464 | ) | | — |
| | — |
| | (18,464 | ) | | — |
| | (18,464 | ) |
Balance at September 30, 2018 | $ | — |
| | $ | 436,538 |
| | $ | 383,943 |
| | $ | (54,369 | ) | | $ | (15,675 | ) | | $ | 750,437 |
| | $ | — |
| | 750,437 |
|
| | | | | | | | | | | | | | | |
Balance at January 1, 2019 | $ | — |
| | $ | 436,538 |
| | $ | 398,980 |
| | $ | (62,760 | ) | | $ | (10,676 | ) | | $ | 762,082 |
| | $ | 1,508 |
| | $ | 763,590 |
|
Cumulative-effect adjustment | — |
| | — |
| | (301 | ) | | — |
| | — |
| | (301 | ) | | — |
| | (301 | ) |
Balance at January 1, 2019, adjusted | — |
| | 436,538 |
| | 398,679 |
| | (62,760 | ) | | (10,676 | ) | | 761,781 |
| | 1,508 |
| | 763,289 |
|
Net income | — |
| | — |
| | 70,019 |
| | — |
| | — |
| | 70,019 |
| | 42 |
| | 70,061 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 15,306 |
| | 15,306 |
| | — |
| | 15,306 |
|
Issuance of 50,815 common shares under stock based compensation awards | — |
| | — |
| | 841 |
| | 1,129 |
| | — |
| | 1,970 |
| | — |
| | 1,970 |
|
Cost of 325,787 shares of common stock acquired for treasury | — |
| | — |
| | — |
| | (15,085 | ) | | — |
| | (15,085 | ) | | — |
| | (15,085 | ) |
Common stock dividend ($0.81 per share) | — |
| | — |
| | (20,824 | ) | | — |
| | — |
| | (20,824 | ) | | — |
| | (20,824 | ) |
Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 18,363 |
| | 18,363 |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (38 | ) | | (38 | ) |
Balance at September 30, 2019 | $ | — |
| | $ | 436,538 |
| | $ | 448,715 |
| | $ | (76,716 | ) | | $ | 4,630 |
| | $ | 813,167 |
| | $ | 19,875 |
| | $ | 833,042 |
|
The accompanying notes are a part of the consolidated financial statements.
1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Dollars in thousands)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
Operating activities: | |
| | |
|
Net income | $ | 70,061 |
| | $ | 60,968 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Provision for loan and lease losses | 12,882 |
| | 14,760 |
|
Depreciation of premises and equipment | 4,412 |
| | 4,132 |
|
Depreciation of equipment owned and leased to others | 19,122 |
| | 19,692 |
|
Stock-based compensation | 2,069 |
| | 2,739 |
|
Amortization of investment securities premiums and accretion of discounts, net | 2,857 |
| | 2,863 |
|
Amortization of mortgage servicing rights | 879 |
| | 731 |
|
Deferred income taxes | (4,586 | ) | | (1,315 | ) |
Losses on investment securities available-for-sale | — |
| | 345 |
|
Originations of loans held for sale, net of principal collected | (100,903 | ) | | (55,814 | ) |
Proceeds from the sales of loans held for sale | 85,400 |
| | 59,246 |
|
Net gain on sale of loans held for sale | (1,861 | ) | | (1,458 | ) |
Net gain on sale of other real estate and repossessions | (473 | ) | | (85 | ) |
Net gain on sale of premises and equipment | (1,289 | ) | | (9 | ) |
Change in interest receivable | (1,717 | ) | | (3,326 | ) |
Change in interest payable | 5,885 |
| | 3,797 |
|
Change in other assets | (15,496 | ) | | (8,691 | ) |
Change in other liabilities | 4,648 |
| | (6,779 | ) |
Other | 1,348 |
| | 490 |
|
Net change in operating activities | 83,238 |
| | 92,286 |
|
Investing activities: | |
| | |
|
Proceeds from sales of investment securities available-for-sale | — |
| | 11,737 |
|
Proceeds from maturities and paydowns of investment securities available-for-sale | 128,257 |
| | 115,520 |
|
Purchases of investment securities available-for-sale | (153,310 | ) | | (213,916 | ) |
Proceeds from liquidation of partnership investment | 25 |
| | 1,868 |
|
Net change in other investments | — |
| | (2,206 | ) |
Loans sold or participated to others | 50,140 |
| | 14,310 |
|
Proceeds from principal payments on direct finance leases | 56,798 |
| | 46,028 |
|
Net change in loans and leases | (386,170 | ) | | (378,114 | ) |
Net change in equipment owned under operating leases | (3,975 | ) | | (17,603 | ) |
Purchases of premises and equipment | (6,091 | ) | | (2,938 | ) |
Proceeds from disposal of premises and equipment | 3,427 |
| | 70 |
|
Proceeds from sales of other real estate and repossessions | 9,522 |
| | 4,691 |
|
Net change in investing activities | (301,377 | ) | | (420,553 | ) |
Financing activities: | |
| | |
|
Net change in demand deposits and savings accounts | 17,518 |
| | 97,524 |
|
Net change in time deposits | 251,839 |
| | 211,723 |
|
Net change in short-term borrowings | (2,193 | ) | | 76,112 |
|
Payments on long-term debt | (2,499 | ) | | (1,559 | ) |
Stock issued under stock purchase plans | 49 |
| | 145 |
|
Acquisition of treasury stock | (15,085 | ) | | (817 | ) |
Net change in noncontrolling interests | 18,325 |
| | — |
|
Cash dividends paid on common stock | (21,409 | ) | | (19,018 | ) |
Net change in financing activities | 246,545 |
| | 364,110 |
|
| | | |
Net change in cash and cash equivalents | 28,406 |
| | 35,843 |
|
Cash and cash equivalents, beginning of year | 99,079 |
| | 78,033 |
|
Cash and cash equivalents, end of period | $ | 127,485 |
| | $ | 113,876 |
|
Supplemental Information: | |
| | |
|
Non-cash transactions: | |
| | |
|
Loans transferred to other real estate and repossessed assets | $ | 10,740 |
| | $ | 8,558 |
|
Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan | 300 |
| | 583 |
|
Right of use assets obtained in exchange for lease obligations | 16,006 |
| | — |
|
The accompanying notes are a part of the consolidated financial statements.
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 (2018 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, 2018 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 period 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. Effective January 1, 2019, as part of the new leasing standard, only those costs incurred as a direct result of closing a lease transaction can be capitalized. All existing deferrals will continue to be amortized over the estimated life of the lease while all new incremental direct costs will be expensed immediately.
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 collectability 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.
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.
Equipment Owned Under Operating Leases – As a lessor, the Company finances various types of construction equipment, medium and heavy duty trucks, automobiles and other equipment under leases classified as operating leases. The equipment underlying the operating leases is reported at cost, net of accumulated depreciation, in the Consolidated Statements of Financial Condition. These operating lease arrangements require the lessee to make a fixed monthly rental payment over a specified lease term generally ranging from three years to seven years. Revenue consists of the contractual lease payments and is recognized on a straight-line basis over the lease term and reported in Noninterest Income on the Consolidated Statements of Income. Leased assets are depreciated on a straight-line method over the lease term to the estimate of the equipment’s fair market value at lease termination, also referred to as “residual” value. The depreciation of these operating lease assets is reported in Noninterest Expense on the Consolidated Statements of Income. For automobile leases, fair value is based upon published industry market guides. For other equipment leases, fair value may be based upon observable market prices, third-party valuations, or prices received on sales of similar assets at the end of the lease term. These residual values are reviewed annually to ensure the recorded amount does not exceed the fair market value at the lease termination. At the end of the lease, the operating lease asset is either purchased by the lessee or returned to the Company. The Company is responsible for the payment of personal property taxes which is reported in Other Expense on the Consolidated Statements of Income. The lessee is responsible for reimbursing the Company for personal property taxes which is reported in Other Income on the Consolidated Statements of Income. The Company excludes sales taxes and other similar taxes from being reported as lease revenue with an associated expense.
Lease Commitments – The Company leases certain banking center locations, office space, land and billboards. In determining whether a contract contains a lease, the Company examines the contract to ensure an asset was specifically identified and that the Company has control of use over the asset. To determine whether a lease is classified as operating or finance, the Company performs an economic life test on all building leases with greater than a twenty years term. Further, the Company performs a fair value test to identify any leases that have a present value of future lease payments over the lease term that is greater than 90% of the fair value of the building. The Company only capitalizes leases with an initial lease liability of $2,000 or greater.
At lease inception, the Company determines the lease term by adding together the minimum lease term and all optional renewal periods that it is reasonably certain to renew. The Company determines this on each lease by considering all relevant contract-based, asset-based, market-based, and entity-based economic factors. Generally, the exercise of lease renewal options is at the Company’s sole discretion. The lease term is used to determine whether a lease is operating or finance and is used to calculate straight-line rent expense. Additionally, the depreciable life of leasehold improvements is limited by the expected lease term.
Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the date the Company takes possession of the property. Rent expense and variable lease costs are included in Net Occupancy Expense on the Company’s Consolidated Statements of Income. Included in variable lease costs are leases with rent escalations based on recent financial indices, such as the Consumer Price Index, where the Company estimates future rent increases and records the actual difference to variable costs. Certain leases require the Company to pay common area maintenance, real estate taxes, insurance and other operating expenses associated with the leases premises. These expenses are classified in Net Occupancy Expense, consistent with similar costs for owned locations. There are no residual value guarantees, restrictions or covenants imposed by leases.
The Company accounts for lease and nonlease components together as a single lease component by class of underlying asset. Operating lease obligations with an initial term longer than 12 months are recorded with a right of use asset and a lease liability in the Consolidated Statements of Financial Condition.
The discount rate used in determining the lease liability and related right of use asset is based upon what would be obtained by the Company for similar loans as an incremental rate as of the date of origination or renewal.
Revenue Recognition – The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company’s principal source of revenue is interest income from loans and leases and investment securities. The Company also earns noninterest income from various banking and financial services offered primarily through 1st Source Bank (Bank) and its subsidiaries.
Interest Income – The largest source of revenue for the Company is interest income which is primarily recognized on an accrual basis according to nondiscretionary formulas in written contracts, such as loan and lease agreements or investment securities contracts.
Noninterest Income – The Company earns noninterest income through a variety of financial and transaction services provided to corporate and consumer clients such as trust and wealth advisory, deposit account, debit card, mortgage banking, insurance, and equipment rental services. Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed. In certain circumstances, noninterest income is reported net of associated expenses.
Note 2 — Recent Accounting Pronouncements
Leases: In March 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-01 “Leases (Topic 842): Codification Improvements.” These amendments align the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance. The ASU also requires lessors within the scope of Topic 842, Financial Services-Depository Lending, to present all “principal payments received under leases” within investing activities on the Consolidated Statements of Cash Flows. Finally, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early application is permitted. An entity should apply the amendments as of the date that it first applied Topic 842, using the same transition methodology in accordance with paragraph 842-10-65-1(c). The Company adopted Topic 842 on January 1, 2019 and applied the amendments in ASU 2019-01 as of the same date and it did not have a material impact on its accounting and disclosures.
Intangibles - Internal-Use Software: In August 2018, the FASB issued ASU No. 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contact with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. The guidance is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company has assessed ASU 2018-15 and does not expect it to have a material impact on its accounting and disclosures.
Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” These amendments modify the disclosure requirements in Topic 820 as follows:
Removals: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements.
Modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.
Additions: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company has assessed ASU 2018-13 and does not expect it to have a material impact on its accounting and disclosures.
Premium Amortization: In March 2017, the FASB issued 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 adopted ASU 2017-08 on January 1, 2019 and recognized a cumulative-effect adjustment to retained earnings of $0.30 million.
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.
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. In May 2019, the FASB issued final amendments (ASU No. 2019-05) to provide entities that have certain instruments measured at amortized cost within the scope Topic 326 with an option to irrevocably elect the fair value option in Topic 825 on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities.
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 and 2019-05 are 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’s cross-functional team continues to work through its implementation plan including the assessment and documentation of processes, internal controls and data as well as model development. The Company implemented a third-party software solution to assist in the application of the new standard including portfolio segmentation according to shared risk characteristics and modeling methodologies. The Company is currently refining qualitative factors and forecast periods. The Company is also focused on running a parallel analysis to its current allowance for loan loss model prior to implementation. While a one-time cumulative-effect adjustment to retained earnings will be recorded as of the beginning of the first reporting period in which the guidance is effective, the impact of adopting ASU 2016-13 cannot be reasonably estimated at this point and could be significantly influenced by the composition, characteristics and quality of the loan and lease portfolio as well as the prevailing economic conditions and forecasts as of the adoption date.
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 |
September 30, 2019 | | |
| | |
| | |
| | |
|
U.S. Treasury and Federal agencies securities | | $ | 538,169 |
| | $ | 2,513 |
| | $ | (552 | ) | | $ | 540,130 |
|
U.S. States and political subdivisions securities | | 87,000 |
| | 1,043 |
| | (54 | ) | | 87,989 |
|
Mortgage-backed securities — Federal agencies | | 348,045 |
| | 3,502 |
| | (1,149 | ) | | 350,398 |
|
Corporate debt securities | | 52,173 |
| | 839 |
| | (43 | ) | | 52,969 |
|
Foreign government and other securities | | 700 |
| | — |
| | (1 | ) | | 699 |
|
Total debt securities available-for-sale | | $ | 1,026,087 |
| | $ | 7,897 |
| | $ | (1,799 | ) | | $ | 1,032,185 |
|
| | | | | | | | |
December 31, 2018 | | |
| | |
| | |
| | |
|
U.S. Treasury and Federal agencies securities | | $ | 537,913 |
| | $ | 196 |
| | $ | (6,886 | ) | | $ | 531,223 |
|
U.S. States and political subdivisions securities | | 95,346 |
| | 172 |
| | (936 | ) | | 94,582 |
|
Mortgage-backed securities — Federal agencies | | 324,390 |
| | 718 |
| | (6,875 | ) | | 318,233 |
|
Corporate debt securities | | 45,843 |
| | — |
| | (451 | ) | | 45,392 |
|
Foreign government and other securities | | 700 |
| | — |
| | (1 | ) | | 699 |
|
Total debt securities available-for-sale | | $ | 1,004,192 |
| | $ | 1,086 |
| | $ | (15,149 | ) | | $ | 990,129 |
|
At September 30, 2019 and December 31, 2018, 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 September 30, 2019. 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 | | $ | 216,692 |
| | $ | 216,911 |
|
Due after one year through five years | | 452,859 |
| | 456,231 |
|
Due after five years through ten years | | 8,491 |
| | 8,645 |
|
Due after ten years | | — |
| | — |
|
Mortgage-backed securities | | 348,045 |
| | 350,398 |
|
Total debt securities available-for-sale | | $ | 1,026,087 |
| | $ | 1,032,185 |
|
The following table summarizes gross unrealized losses and fair value by investment category and age. At September 30, 2019, the Company’s available-for-sale securities portfolio consisted of 619 securities, 157 of which were in an unrealized loss position.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 months or Longer | | Total |
(Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
September 30, 2019 | | |
| | |
| | |
| | |
| | |
| | |
|
U.S. Treasury and Federal agencies securities | | $ | 21,747 |
| | $ | (52 | ) | | $ | 127,219 |
| | $ | (500 | ) | | $ | 148,966 |
| | $ | (552 | ) |
U.S. States and political subdivisions securities | | 13,487 |
| | (49 | ) | | 1,038 |
| | (5 | ) | | 14,525 |
| | (54 | ) |
Mortgage-backed securities - Federal agencies | | 46,488 |
| | (198 | ) | | 78,269 |
| | (951 | ) | | 124,757 |
| | (1,149 | ) |
Corporate debt securities | | 1,503 |
| | — |
| | 8,085 |
| | (43 | ) | | 9,588 |
| | (43 | ) |
Foreign government and other securities | | 600 |
| | — |
| | 99 |
| | (1 | ) | | 699 |
| | (1 | ) |
Total debt securities available-for-sale | | $ | 83,825 |
| | $ | (299 | ) | | $ | 214,710 |
| | $ | (1,500 | ) | | $ | 298,535 |
| | $ | (1,799 | ) |
| | | | | | | | | | | | |
December 31, 2018 | | |
| | |
| | |
| | |
| | |
| | |
|
U.S. Treasury and Federal agencies securities | | $ | 55,491 |
| | $ | (177 | ) | | $ | 424,269 |
| | $ | (6,709 | ) | | $ | 479,760 |
| | $ | (6,886 | ) |
U.S. States and political subdivisions securities | | 21,059 |
| | (61 | ) | | 45,365 |
| | (875 | ) | | 66,424 |
| | (936 | ) |
Mortgage-backed securities - Federal agencies | | 65,554 |
| | (511 | ) | | 198,221 |
| | (6,364 | ) | | 263,775 |
| | (6,875 | ) |
Corporate debt securities | | 21,496 |
| | (143 | ) | | 23,896 |
| | (308 | ) | | 45,392 |
| | (451 | ) |
Foreign government and other securities | | 699 |
| | (1 | ) | | — |
| | — |
| | 699 |
| | (1 | ) |
Total debt securities available-for-sale | | $ | 164,299 |
| | $ | (893 | ) | | $ | 691,751 |
| | $ | (14,256 | ) | | $ | 856,050 |
| | $ | (15,149 | ) |
The initial indication of potential other-than-temporary-impairment (OTTI) for debt 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 debt securities available-for-sale 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 September 30, 2019, the Company does not have the intent to sell any of the debt securities available-for-sale 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 available-for-sale debt securities portfolio. Realized gains and losses of all securities are computed using the specific identification cost basis.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Gross realized gains | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2 |
|
Gross realized losses | | — |
| | — |
| | — |
| | (347 | ) |
OTTI losses | | — |
| | — |
| | — |
| | — |
|
Net realized gains (losses) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (345 | ) |
At September 30, 2019 and December 31, 2018, investment securities available-for-sale with carrying values of $305.63 million and $242.31 million, respectively, were pledged as collateral for security repurchase agreements and for other purposes.
Note 4 — Loan and Lease Financings
The Company evaluates loans and leases for credit quality at least annually but more frequently if certain circumstances occur (such as material new information which becomes available and indicates a potential change in credit risk). The Company uses two methods to assess credit risk: loan or lease credit quality grades and credit risk classifications. The purpose of the loan or lease credit quality grade is to document the degree of risk associated with individual credits as well as inform management of the degree of risk in the portfolio taken as a whole. Credit risk classifications are used to categorize loans by degree of risk and to designate individual or committee approval authorities for higher risk credits at the time of origination. Credit risk classifications include categories for: Acceptable, Marginal, Special Attention, Special Risk, Restricted by Policy, Regulated and Prohibited by Law.
All loans and leases, except residential real estate 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 |
September 30, 2019 | | |
| | |
| | |
|
Commercial and agricultural | | $ | 1,123,048 |
| | $ | 52,888 |
| | $ | 1,175,936 |
|
Auto and light truck | | 592,891 |
| | 20,030 |
| | 612,921 |
|
Medium and heavy duty truck | | 288,758 |
| | 1,167 |
| | 289,925 |
|
Aircraft | | 784,453 |
| | 21,115 |
| | 805,568 |
|
Construction equipment | | 658,320 |
| | 27,376 |
| | 685,696 |
|
Commercial real estate | | 843,243 |
| | 15,159 |
| | 858,402 |
|
Total | | $ | 4,290,713 |
| | $ | 137,735 |
| | $ | 4,428,448 |
|
| | | | | | |
December 31, 2018 | | |
| | |
| | |
|
Commercial and agricultural | | $ | 1,043,019 |
| | $ | 30,186 |
| | $ | 1,073,205 |
|
Auto and light truck | | 528,174 |
| | 31,813 |
| | 559,987 |
|
Medium and heavy duty truck | | 281,834 |
| | 1,710 |
| | 283,544 |
|
Aircraft | | 768,442 |
| | 34,669 |
| | 803,111 |
|
Construction equipment | | 625,579 |
| | 19,660 |
| | 645,239 |
|
Commercial real estate | | 787,376 |
| | 22,510 |
| | 809,886 |
|
Total | | $ | 4,034,424 |
| | $ | 140,548 |
| | $ | 4,174,972 |
|
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 |
September 30, 2019 | | |
| | |
| | |
|
Residential real estate and home equity | | $ | 529,405 |
| | $ | 2,225 |
| | $ | 531,630 |
|
Consumer | | 139,168 |
| | 300 |
| | 139,468 |
|
Total | | $ | 668,573 |
| | $ | 2,525 |
| | $ | 671,098 |
|
| | | | | | |
December 31, 2018 | | |
| | |
| | |
|
Residential real estate and home equity | | $ | 521,846 |
| | $ | 2,009 |
| | $ | 523,855 |
|
Consumer | | 136,423 |
| | 214 |
| | 136,637 |
|
Total | | $ | 658,269 |
| | $ | 2,223 |
| | $ | 660,492 |
|
The following table shows the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Current | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due and Accruing | | Total Accruing Loans | | Nonaccrual | | Total Financing Receivables |
September 30, 2019 | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Commercial and agricultural | | $ | 1,173,150 |
| | $ | 63 |
| | $ | 1,012 |
| | $ | — |
| | $ | 1,174,225 |
| | $ | 1,711 |
| | $ | 1,175,936 |
|
Auto and light truck | | 609,313 |
| | 1,279 |
| | 473 |
| | — |
| | 611,065 |
| | 1,856 |
| | 612,921 |
|
Medium and heavy duty truck | | 289,906 |
| | — |
| | — |
| | — |
| | 289,906 |
| | 19 |
| | 289,925 |
|
Aircraft | | 791,611 |
| | 9,825 |
| | 3,061 |
| | — |
| | 804,497 |
| | 1,071 |
| | 805,568 |
|
Construction equipment | | 678,017 |
| | 4,800 |
| | 1,114 |
| | — |
| | 683,931 |
| | 1,765 |
| | 685,696 |
|
Commercial real estate | | 856,848 |
| | — |
| | — |
| | — |
| | 856,848 |
| | 1,554 |
| | 858,402 |
|
Residential real estate and home equity | | 528,261 |
| | 1,086 |
| | 58 |
| | 303 |
| | 529,708 |
| | 1,922 |
| | 531,630 |
|
Consumer | | 138,509 |
| | 543 |
| | 116 |
| | 10 |
| | 139,178 |
| | 290 |
| | 139,468 |
|
Total | | $ | 5,065,615 |
| | $ | 17,596 |
| | $ | 5,834 |
| | $ | 313 |
| | $ | 5,089,358 |
| | $ | 10,188 |
| | $ | 5,099,546 |
|
| | | | | | | | | | | | | | |
December 31, 2018 | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Commercial and agricultural | | $ | 1,070,530 |
| | $ | 22 |
| | $ | — |
| | $ | — |
| | $ | 1,070,552 |
| | $ | 2,653 |
| | $ | 1,073,205 |
|
Auto and light truck | | 544,022 |
| | 3,154 |
| | 1,437 |
| | — |
| | 548,613 |
| | 11,374 |
| | 559,987 |
|
Medium and heavy duty truck | | 283,284 |
| | 154 |
| | — |
| | — |
| | 283,438 |
| | 106 |
| | 283,544 |
|
Aircraft | | 790,233 |
| | 4,149 |
| | 1,168 |
| | — |
| | 795,550 |
| | 7,561 |
| | 803,111 |
|
Construction equipment | | 641,270 |
| | 1,643 |
| | — |
| | — |
| | 642,913 |
| | 2,326 |
| | 645,239 |
|
Commercial real estate | | 807,793 |
| | 109 |
| | — |
| | — |
| | 807,902 |
| | 1,984 |
| | 809,886 |
|
Residential real estate and home equity | | 520,124 |
| | 1,267 |
| | 455 |
| | 295 |
| | 522,141 |
| | 1,714 |
| | 523,855 |
|
Consumer | | 135,591 |
| | 682 |
| | 150 |
| | 73 |
| | 136,496 |
| | 141 |
| | 136,637 |
|
Total | | $ | 4,792,847 |
| | $ | 11,180 |
| | $ | 3,210 |
| | $ | 368 |
| | $ | 4,807,605 |
| | $ | 27,859 |
| | $ | 4,835,464 |
|
The following table shows impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.
|
| | | | | | | | | | | | |
(Dollars in thousands) | | Recorded Investment | | Unpaid Principal Balance | | Related Reserve |
September 30, 2019 | | |
| | |
| | |
|
With no related reserve recorded: | | |
| | |
| | |
|
Commercial and agricultural | | $ | 995 |
| | $ | 995 |
| | $ | — |
|
Auto and light truck | | 1,333 |
| | 1,333 |
| | — |
|
Medium and heavy duty truck | | — |
| | — |
| | — |
|
Aircraft | | 1,070 |
| | 1,070 |
| | — |
|
Construction equipment | | 820 |
| | 820 |
| | — |
|
Commercial real estate | | 817 |
| | 817 |
| | — |
|
Residential real estate and home equity | | — |
| | — |
| | — |
|
Consumer | | — |
| | — |
| | — |
|
Total with no related reserve recorded | | 5,035 |
| | 5,035 |
| | — |
|
With a reserve recorded: | | |
| | |
| | |
|
Commercial and agricultural | | 12,583 |
| | 12,580 |
| | 1,679 |
|
Auto and light truck | | 400 |
| | 400 |
| | 256 |
|
Medium and heavy duty truck | | — |
| | — |
| | — |
|
Aircraft | | — |
| | — |
| | — |
|
Construction equipment | | 938 |
| | 938 |
| | 84 |
|
Commercial real estate | | 664 |
| | 664 |
| | 6 |
|
Residential real estate and home equity | | 339 |
| | 340 |
| | 121 |
|
Consumer | | — |
| | — |
| | — |
|
Total with a reserve recorded | | 14,924 |
| | 14,922 |
| | 2,146 |
|
Total impaired loans | | $ | 19,959 |
| | $ | 19,957 |
| | $ | 2,146 |
|
| | | | | | |
December 31, 2018 | | |
| | |
| | |
|
With no related reserve recorded: | | |
| | |
| | |
|
Commercial and agricultural | | $ | 2,471 |
| | $ | 2,471 |
| | $ | — |
|
Auto and light truck | | 7,504 |
| | 7,504 |
| | — |
|
Medium and heavy duty truck | | 106 |
| | 106 |
| | — |
|
Aircraft | | 556 |
| | 556 |
| | — |
|
Construction equipment | | 905 |
| | 905 |
| | — |
|
Commercial real estate | | 1,131 |
| | 1,131 |
| | — |
|
Residential real estate and home equity | | — |
| | — |
| | — |
|
Consumer | | — |
| | — |
| | — |
|
Total with no related reserve recorded | | 12,673 |
| | 12,673 |
| | — |
|
With a reserve recorded: | | |
| | |
| | |
|
Commercial and agricultural | | — |
| | — |
| | — |
|
Auto and light truck | | 3,840 |
| | 3,840 |
| | 372 |
|
Medium and heavy duty truck | | — |
| | — |
| | — |
|
Aircraft | | 7,004 |
| | 7,004 |
| | 1,255 |
|
Construction equipment | | 1,340 |
| | 1,340 |
| | 279 |
|
Commercial real estate | | 759 |
| | 759 |
| | 51 |
|
Residential real estate and home equity | | 344 |
| | 346 |
| | 126 |
|
Consumer | | — |
| | — |
| | — |
|
Total with a reserve recorded | | 13,287 |
| | 13,289 |
| | 2,083 |
|
Total impaired loans | | $ | 25,960 |
| | $ | 25,962 |
| | $ | 2,083 |
|
The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by class.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
(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 | | $ | 5,177 |
| | $ | 68 |
| | $ | 2,798 |
| | $ | — |
| | $ | 4,026 |
| | $ | 81 |
| | $ | 2,880 |
| | $ | — |
|
Auto and light truck | | 1,793 |
| | — |
| | 8,972 |
| | — |
| | 3,196 |
| | — |
| | 7,955 |
| | — |
|
Medium and heavy duty truck | | — |
| | — |
| | 195 |
| | — |
| | 205 |
| | — |
| | 287 |
| | — |
|
Aircraft | | 593 |
| | — |
| | 18,438 |
| | — |
| | 2,542 |
| | — |
| | 10,211 |
| | 20 |
|
Construction equipment | | 1,838 |
| | — |
| | 2,157 |
| | — |
| | 1,728 |
| | — |
| | 1,476 |
| | — |
|
Commercial real estate | | 1,595 |
| | — |
| | 1,534 |
| | — |
| | 1,763 |
| | — |
| | 2,496 |
| | — |
|
Residential real estate and home equity | | 340 |
| | 4 |
| | 347 |
| | 3 |
| | 341 |
| | 14 |
| | 349 |
| | 11 |
|
Consumer | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | | $ | 11,336 |
| | $ | 72 |
| | $ | 34,441 |
| | $ | 3 |
| | $ | 13,801 |
| | $ | 95 |
| | $ | 25,654 |
| | $ | 31 |
|
There was one performing loan and lease modification classified as a troubled debt restructuring (TDR) during the three months ended September 30, 2019 and two (one performing and one nonperforming) loan and lease modifications classified as TDR during the nine months ended September 30, 2019. There were no loan or lease modifications classified as TDR during the three and nine months ended September 30, 2018. 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 was one modification during the three and nine months ended September 30, 2019 and no modifications during the three and nine months ended September 30, 2018 that resulted in an interest rate below market rate. Consequently, the financial impact of the modification was immaterial.
There were no TDRs which had payment defaults within the twelve months following modification during the three months ended September 30, 2019 and one TDR which had a payment default within the twelve months following modification during the nine months ended September 30, 2019. There were no TDRs which had payment defaults within the twelve months following modification during the three and nine months ended September 30, 2018. 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 September 30, 2019 and December 31, 2018.
|
| | | | | | | | |
(Dollars in thousands) | | September 30, 2019 | | December 31, 2018 |
Performing TDRs | | $ | 12,449 |
| | $ | 344 |
|
Nonperforming TDRs | | 497 |
| | 316 |
|
Total TDRs | | $ | 12,946 |
| | $ | 660 |
|
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.
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 September 30, 2019 and 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial and agricultural | | Auto and light truck | | Medium and heavy duty truck | | Aircraft | | Construction equipment | | Commercial real estate | | Residential real estate and home equity | | Consumer | | Total |
September 30, 2019 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Balance, beginning of period | | $ | 19,052 |
| | $ | 16,341 |
| | $ | 4,671 |
| | $ | 31,918 |
| | $ | 12,284 |
| | $ | 15,757 |
| | $ | 3,518 |
| | $ | 1,370 |
| | $ | 104,911 |
|
Charge-offs | | 83 |
| | 61 |
| | — |
| | 65 |
| | 19 |
| | — |
| | 4 |
| | 705 |
| | 937 |
|
Recoveries | | 438 |
| | 57 |
| | — |
| | 614 |
| | 17 |
| | 6 |
| | 40 |
| | 78 |
| | 1,250 |
|
Net charge-offs (recoveries) | | (355 | ) | | 4 |
| | — |
| | (549 | ) | | 2 |
| | (6 | ) | | (36 | ) | | 627 |
| | (313 | ) |
Provision (recovery of provision) | | 2,823 |
| | (610 | ) | | (87 | ) | | (429 | ) | | 370 |
| | 970 |
| | 12 |
| | 668 |
| | 3,717 |
|
Balance, end of period | | $ | 22,230 |
| | $ | 15,727 |
| | $ | 4,584 |
| | $ | 32,038 |
| | $ | 12,652 |
| | $ | 16,733 |
| | $ | 3,566 |
| | $ | 1,411 |
| | $ | 108,941 |
|
| | | | | | | | | | | | | | | | | | |
September 30, 2018 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Balance, beginning of period | | $ | 18,631 |
| | $ | 12,076 |
| | $ | 4,342 |
| | $ | 36,772 |
| | $ | 11,136 |
| | $ | 15,140 |
| | $ | 3,564 |
| | $ | 1,346 |
| | $ | 103,007 |
|
Charge-offs | | 5 |
| | 418 |
| | — |
| | 10,409 |
| | — |
| | — |
| | 35 |
| | 259 |
| | 11,126 |
|
Recoveries | | 98 |
| | 34 |
| | — |
| | 6 |
| | 32 |
| | 20 |
| | 3 |
| | 69 |
| | 262 |
|
Net charge-offs (recoveries) | | (93 | ) | | 384 |
| | — |
| | 10,403 |
| | (32 | ) | | (20 | ) | | 32 |
| | 190 |
| | 10,864 |
|
Provision (recovery of provision) | | (1,065 | ) | | (204 | ) | | (183 | ) | | 7,477 |
| | 187 |
| | (102 | ) | | (82 | ) | | 129 |
| | 6,157 |
|
Balance, end of period | | $ | 17,659 |
| | $ | 11,488 |
| | $ | 4,159 |
| | $ | 33,846 |
| | $ | 11,355 |
| | $ | 15,058 |
| | $ | 3,450 |
| | $ | 1,285 |
| | $ | 98,300 |
|
The following table shows the changes in the reserve for loan and lease losses, segregated by class, for the nine months ended September 30, 2019 and 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 |
September 30, 2019 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Balance, beginning of period | | $ | 17,063 |
| | $ | 14,689 |
| | $ | 4,303 |
| | $ | 33,047 |
| | $ | 10,922 |
| | $ | 15,705 |
| | $ | 3,425 |
| | $ | 1,315 |
| | $ | 100,469 |
|
Charge-offs | | 171 |
| | 527 |
| | 1,132 |
| | 3,066 |
| | 215 |
| | — |
| | 25 |
| | 1,268 |
| | 6,404 |
|
Recoveries | | 500 |
| | 86 |
| | — |
| | 916 |
| | 136 |
| | 66 |
| | 46 |
| | 244 |
| | 1,994 |
|
Net charge-offs (recoveries) | | (329 | ) | | 441 |
| | 1,132 |
| | 2,150 |
| | 79 |
| | (66 | ) | | (21 | ) | | 1,024 |
| | 4,410 |
|
Provision (recovery of provision) | | 4,838 |
| | 1,479 |
| | 1,413 |
| | 1,141 |
| | 1,809 |
| | 962 |
| | 120 |
| | 1,120 |
| | 12,882 |
|
Balance, end of period | | $ | 22,230 |
| | $ | 15,727 |
| | $ | 4,584 |
| | $ | 32,038 |
| | $ | 12,652 |
| | $ | 16,733 |
| | $ | 3,566 |
| | $ | 1,411 |
| | $ | 108,941 |
|
| | | | | | | | | | | | | | | | | | |
September 30, 2018 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Balance, beginning of period | | $ | 16,228 |
| | $ | 10,103 |
| | $ | 4,844 |
| | $ | 34,619 |
| | $ | 9,343 |
| | $ | 14,792 |
| | $ | 3,666 |
| | $ | 1,288 |
| | $ | 94,883 |
|
Charge-offs | | 30 |
| | 818 |
| | — |
| | 10,438 |
| | 5 |
| | 7 |
| | 46 |
| | 643 |
| | 11,987 |
|
Recoveries | | 188 |
| | 53 |
| | — |
| | 55 |
| | 77 |
| | 45 |
| | 16 |
| | 210 |
| | 644 |
|
Net charge-offs (recoveries) | | (158 | ) | | 765 |
| | — |
| | 10,383 |
| | (72 | ) | | (38 | ) | | 30 |
| | 433 |
| | 11,343 |
|
Provision (recovery of provision) | | 1,273 |
| | 2,150 |
| | (685 | ) | | 9,610 |
| | 1,940 |
| | 228 |
| | (186 | ) | | 430 |
| | 14,760 |
|
Balance, end of period | | $ | 17,659 |
| | $ | 11,488 |
| | $ | 4,159 |
| | $ | 33,846 |
| | $ | 11,355 |
| | $ | 15,058 |
| | $ | 3,450 |
| | $ | 1,285 |
| | $ | 98,300 |
|
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 September 30, 2019 and December 31, 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 |
September 30, 2019 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Reserve for loan and lease losses | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Ending balance, individually evaluated for impairment | | $ | 1,679 |
| | $ | 256 |
| | $ | — |
| | $ | — |
| | $ | 84 |
| | $ | 6 |
| | $ | 121 |
| | $ | — |
| | $ | 2,146 |
|
Ending balance, collectively evaluated for impairment | | 20,551 |
| | 15,471 |
| | 4,584 |
| | 32,038 |
| | 12,568 |
| | 16,727 |
| | 3,445 |
| | 1,411 |
| | 106,795 |
|
Total reserve for loan and lease losses | | $ | 22,230 |
| | $ | 15,727 |
| | $ | 4,584 |
| | $ | 32,038 |
| | $ | 12,652 |
| | $ | 16,733 |
| | $ | 3,566 |
| | $ | 1,411 |
| | $ | 108,941 |
|
| | | | | | | | | | | | | | | | | | |
Recorded investment in loans | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Ending balance, individually evaluated for impairment | | $ | 13,578 |
| | $ | 1,733 |
| | $ | — |
| | $ | 1,070 |
| | $ | 1,758 |
| | $ | 1,481 |
| | $ | 339 |
| | $ | — |
| | $ | 19,959 |
|
Ending balance, collectively evaluated for impairment | | 1,162,358 |
| | 611,188 |
| | 289,925 |
| | 804,498 |
| | 683,938 |
| | 856,921 |
| | 531,291 |
| | 139,468 |
| | 5,079,587 |
|
Total recorded investment in loans | | $ | 1,175,936 |
| | $ | 612,921 |
| | $ | 289,925 |
| | $ | 805,568 |
| | $ | 685,696 |
| | $ | 858,402 |
| | $ | 531,630 |
| | $ | 139,468 |
| | $ | 5,099,546 |
|
| | | | | | | | | | | | | | | | | | |
December 31, 2018 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Reserve for loan and lease losses | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Ending balance, individually evaluated for impairment | | $ | — |
| | $ | 372 |
| | $ | — |
| | $ | 1,255 |
| | $ | 279 |
| | $ | 51 |
| | $ | 126 |
| | $ | — |
| | $ | 2,083 |
|
Ending balance, collectively evaluated for impairment | | 17,063 |
| | 14,317 |
| | 4,303 |
| | 31,792 |
| | 10,643 |
| | 15,654 |
| | 3,299 |
| | 1,315 |
| | 98,386 |
|
Total reserve for loan and lease losses | | $ | 17,063 |
| | $ | 14,689 |
| | $ | 4,303 |
| | $ | 33,047 |
| | $ | 10,922 |
| | $ | 15,705 |
| | $ | 3,425 |
| | $ | 1,315 |
| | $ | 100,469 |
|
| | | | | | | | | | | | | | | | | | |
Recorded investment in loans | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Ending balance, individually evaluated for impairment | | $ | 2,471 |
| | $ | 11,344 |
| | $ | 106 |
| | $ | 7,560 |
| | $ | 2,245 |
| | $ | 1,890 |
| | $ | 344 |
| | $ | — |
| | $ | 25,960 |
|
Ending balance, collectively evaluated for impairment | | 1,070,734 |
| | 548,643 |
| | 283,438 |
| | 795,551 |
| | 642,994 |
| | 807,996 |
| | 523,511 |
| | 136,637 |
| | 4,809,504 |
|
Total recorded investment in loans | | $ | 1,073,205 |
| | $ | 559,987 |
| | $ | 283,544 |
| | $ | 803,111 |
| | $ | 645,239 |
| | $ | 809,886 |
| | $ | 523,855 |
| | $ | 136,637 |
| | $ | 4,835,464 |
|
Note 6 — Lease Investments
As a lessor, the Company’s loan and lease portfolio includes direct finance leases, which are included in commercial and agricultural, auto and light truck, medium and heavy duty truck, aircraft, and construction equipment on the Consolidated Statements of Financial Condition. The Company also finances various types of construction equipment, medium and heavy duty trucks, automobiles and other equipment under leases classified as operating leases, which are included in Equipment Owned Under Operating Leases, net, on the Consolidated Statements of Financial Condition.
The following table shows the components of the investment in direct finance and operating leases.
|
| | | | | | | | |
(Dollars in thousands) | | September 30, 2019 | | December 31, 2018 |
Direct finance leases: | | |
| | |
|
Minimum lease payments | | $ | 208,123 |
| | $ | 257,398 |
|
Estimated unguaranteed residual values | | 41 |
| | 41 |
|
Less: Unearned income | | (35,719 | ) | | (46,709 | ) |
Net investment in direct finance leases | | $ | 172,445 |
| | $ | 210,730 |
|
| | | | |
Operating leases: | | |
| | |
|
Gross investment in operating leases | | $ | 189,543 |
| | $ | 199,954 |
|
Accumulated depreciation | | (70,372 | ) | | (65,514 | ) |
Net investment in operating leases | | $ | 119,171 |
| | $ | 134,440 |
|
The following table shows future minimum lease payments due from clients on direct finance and operating leases at September 30, 2019.
|
| | | | | | | | |
(Dollars in thousands) | | Direct Finance Leases | | Operating Leases |
Remainder of 2019 | | $ | 12,682 |
| | $ | 7,798 |
|
2020 | | 42,746 |
| | 33,502 |
|
2021 | | 35,637 |
| | 20,243 |
|
2022 | | 34,037 |
| | 12,432 |
|
2023 | | 29,310 |
| | 6,767 |
|
Thereafter | | 53,711 |
| | 3,201 |
|
Total | | $ | 208,123 |
| | $ | 83,943 |
|
To mitigate the risk of loss, the Company seeks to diversify both the type of equipment leased and the industries in which the lessees participate. In addition, a portion of our leases are terminal rental adjustment clause or “TRAC” leases where the lessee effectively guarantees the full residual value through a rental adjustment at the end of term or those where partial value is guaranteed (“split-TRAC”), which has a limited residual risk. Under a split-TRAC structure, the limited residual risk would be satisfied first by the net sale proceeds of the leased asset. The lessee’s at-risk portion, or top risk, is satisfied last and is subject to repayment as additional rent, if the TRAC amount is not satisfied by the net sale proceeds. The carrying amount of residual assets covered by residual value guarantees was $75.00 million and $87.61 million at September 30, 2019 and December 31, 2018, respectively.
The following table shows interest income recognized from direct finance lease payments and operating lease equipment rental income and related depreciation expense.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Direct finance leases: | | | | | | | |
Interest income on lease receivable | $ | 2,280 |
| | $ | 3,020 |
| | $ | 8,699 |
| | $ | 9,689 |
|
| | | | | | | |
Operating leases: | | | | | | | |
Income related to lease payments | $ | 7,578 |
| | $ | 7,977 |
| | $ | 23,369 |
| | $ | 23,836 |
|
Depreciation expense | 6,198 |
| | 6,580 |
| | 19,122 |
| | 19,692 |
|
Income related to reimbursements from lessees for personal property tax on operating leased equipment for the three and nine months ended September 30, 2019 was $0.15 million and $0.50 million, respectively. Expense related to personal property tax payments on operating leased equipment for the three and nine months ended September 30, 2019 was $0.15 million and $0.50 million, respectively.
Note 7 — Mortgage Servicing Rights
The Company recognizes the rights to service residential mortgage loans for others as separate assets, whether the servicing rights are acquired through a separate purchase or through the sale of originated loans with servicing rights retained. The Company allocates a portion of the total proceeds of a mortgage loan to servicing rights based on the relative fair value. The unpaid principal balance of residential mortgage loans serviced for third parties was $734.92 million and $734.30 million at September 30, 2019 and December 31, 2018, respectively.
Mortgage servicing rights (MSRs) are evaluated for impairment at each reporting date. For purposes of impairment measurement, MSRs are stratified based on the predominant risk characteristics of the underlying servicing, principally by loan type. If temporary impairment exists within a tranche, a valuation allowance is established through a charge to income equal to the amount by which the carrying value exceeds the fair value. If it is later determined all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced through a recovery of income.
The following table shows changes in the carrying value of MSRs and the associated valuation allowance.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Mortgage servicing rights: | | |
| | |
| | |
| | |
|
Balance at beginning of period | | $ | 4,141 |
| | $ | 4,323 |
| | $ | 4,283 |
| | $ | 4,349 |
|
Additions | | 318 |
| | 213 |
| | 703 |
| | 658 |
|
Amortization | | (352 | ) | | (260 | ) | | (879 | ) | | (731 | ) |
Sales | | — |
| | — |
| | — |
| | — |
|
Carrying value before valuation allowance at end of period | | 4,107 |
| | 4,276 |
| | 4,107 |
| | 4,276 |
|
Valuation allowance: | | |
| | |
| | |
| | |
|
Balance at beginning of period | | — |
| | — |
| | — |
| | — |
|
Impairment recoveries | | — |
| | — |
| | — |
| | — |
|
Balance at end of period | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net carrying value of mortgage servicing rights at end of period | | $ | 4,107 |
| | $ | 4,276 |
| | $ | 4,107 |
| | $ | 4,276 |
|
Fair value of mortgage servicing rights at end of period | | $ | 5,722 |
| | $ | 7,243 |
| | $ | 5,722 |
| | $ | 7,243 |
|
At September 30, 2019 and 2018, the fair value of MSRs exceeded the carrying value reported in the Consolidated Statements of Financial Condition by $1.62 million and $2.97 million, respectively. This difference represents increases in the fair value of certain MSRs that could not be recorded above cost basis.
Mortgage loan contractual servicing fees, including late fees and ancillary income, were $0.68 million and $0.65 million for the three months ended September 30, 2019 and 2018, respectively. Mortgage loan contractual servicing fees, including late fees and ancillary income, were $1.93 million and $1.95 million for the nine months ended September 30, 2019 and 2018, respectively. Mortgage loan contractual servicing fees are included in Mortgage Banking on the Consolidated Statements of Income.
Note 8 — Commitments and Financial Instruments with Off-Balance-Sheet Risk
Lease Commitments — The Company and its subsidiaries are obligated under operating leases for certain office premises and equipment.
The following table shows operating lease right of use assets and operating lease liabilities as of September 30, 2019.
|
| | | | |
(Dollars in thousands) | Statement of Financial Condition classification | September 30, 2019 |
Operating lease right of use assets | Accrued income and other assets | $ | 23,787 |
|
Operating lease liabilities | Accrued expenses and other liabilities | $ | 24,042 |
|
During the third quarter of 2019, the Company amended the lease agreement for its corporate office building by extending the lease term which resulted in an increase to its operating lease right of use assets of $14.65 million and an increase to its operating lease liabilities of $14.64 million.
The following table shows the components of operating leases expense for the three and nine months ended September 30, 2019.
|
| | | | | | | | |
(Dollars in thousands) | Statement of Income classification | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
Operating lease cost | Net occupancy expense | $ | 873 |
| | $ | 2,634 |
|
Short-term lease cost | Net occupancy expense | 16 |
| | 26 |
|
Variable lease cost | Net occupancy expense | — |
| | — |
|
Total operating lease cost | | $ | 889 |
| | $ | 2,660 |
|
Gross rental expense for the three and nine months ended September 30, 2018 was $0.92 million and $2.63 million, respectively.
The following table shows future minimum rental commitments for all noncancellable operating leases with an initial term longer than 12 months for the next five years and thereafter.
|
| | | | |
(Dollars in thousands) | | |
Remainder of 2019 | | $ | 626 |
|
2020 | | 3,657 |
|
2021 | | 3,623 |
|
2022 | | 3,532 |
|
2023 | | 2,493 |
|
Thereafter | | 13,570 |
|
Total lease payments | | 27,501 |
|
Less: imputed interest | | (3,459 | ) |
Present value of operating lease liabilities | | $ | 24,042 |
|
The following table shows the weighted average remaining operating lease term, the weighted average discount rate and supplemental Consolidated Statement of Cash Flows information for operating leases at September 30, 2019.
|
| | | |
(Dollars in thousands) | September 30, 2019 |
Weighted average remaining lease term | 11.18 years |
|
Weighted average discount rate | 2.86 | % |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 941 |
|
During the nine months ended September 30, 2019, the Company recognized a net gain on the sale of an office building in the amount of $1.32 million. The Company commenced an operating lease with the buyer of the building to lease a portion of it for office space resulting in a new right of use asset and operating lease liability.
There are no new significant leases that have not yet commenced as of September 30, 2019.
Financial Instruments with Off-Balance-Sheet Risk — 1st Source and its subsidiaries are parties to financial instruments with off-balance-sheet risk in the normal course of business. These off-balance-sheet financial instruments include commitments to originate and sell loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Statements of Financial Condition.
The following table shows financial instruments whose contract amounts represent credit risk.
|
| | | | | | | | |
(Dollars in thousands) | | September 30, 2019 | | December 31, 2018 |
Amounts of commitments: | | | | |
Loan commitments to extend credit | | $ | 1,045,769 |
| | $ | 1,095,053 |
|
Standby letters of credit | | $ | 29,126 |
| | $ | 31,133 |
|
Commercial and similar letters of credit | | $ | 1,752 |
| | $ | 2,500 |
|
The exposure to credit loss in the event of nonperformance by the other party to the financial instruments for loan commitments and standby letters of credit is represented by the dollar amount of those instruments. The Company uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on-balance-sheet instruments.
The Bank grants mortgage loan commitments to borrowers, subject to normal loan underwriting standards. The interest rate risk associated with these loan commitments is managed by entering into contracts for future deliveries of loans. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments that guarantee the performance of a client to a third party. The credit risk involved in and collateral obtained when issuing standby letters of credit is essentially the same as that involved in extending loan commitments to clients. Standby letters of credit generally have terms ranging from two months to one year.
Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party. Commercial letters of credit generally have terms ranging from two months to six months.
Note 9 — Derivative Financial Instruments
Commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments. See Note 8 for further information.
The Company has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Statements of Financial Condition and do not take into account the effects of master netting agreements. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Company agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Company’s results of operations.
The following table shows the amounts of non-hedging derivative financial instruments.
|
| | | | | | | | | | | | | | | | |
| | | | Asset derivatives | | Liability derivatives |
(Dollars in thousands) | | Notional or contractual amount | | Statement of Financial Condition classification | | Fair value | | Statement of Financial Condition classification | | Fair value |
September 30, 2019 | | |
| | | | |
| | | | |
|
Interest rate swap contracts | | $ | 1,024,739 |
| | Other assets | | $ | 28,930 |
| | Other liabilities | | $ | 29,434 |
|
Loan commitments | | 18,059 |
| | Mortgages held for sale | | 198 |
| | N/A | | — |
|
Forward contracts - mortgage loan | | 38,275 |
| | N/A | | — |
| | Mortgages held for sale | | 17 |
|
Total | | $ | 1,081,073 |
| | | | $ | 29,128 |
| | | | $ | 29,451 |
|
| | | | | | | | | | |
December 31, 2018 | | |
| | | | |
| | | | |
|
Interest rate swap contracts | | $ | 855,848 |
| | Other assets | | $ | 7,124 |
| | Other liabilities | | $ | 7,250 |
|
Loan commitments | | 5,871 |
| | Mortgages held for sale | | 112 |
| | N/A | | — |
|
Forward contracts - mortgage loan | | 14,087 |
| | N/A | | — |
| | Mortgages held for sale | | 135 |
|
Total | | $ | 875,806 |
| | | | $ | 7,236 |
| | | | $ | 7,385 |
|
The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments.
|
| | | | | | | | | | | | | | | | |
| | | | Gain (loss) |
| | | | Three Months Ended September 30, | Nine Months Ended September 30, |
(Dollars in thousands) | | Statement of Income classification | | 2019 | 2018 | 2019 | | 2018 |
Interest rate swap contracts | | Other expense | | $ | (129 | ) | $ | (15 | ) | $ | (378 | ) | | $ | (51 | ) |
Interest rate swap contracts | | Other income | | 272 |
| 105 |
| 1,056 |
| | 684 |
|
Loan commitments | | Mortgage banking | | (6 | ) | (5 | ) | 86 |
| | 52 |
|
Forward contracts - mortgage loan | | Mortgage banking | | 157 |
| 107 |
| 118 |
| | 70 |
|
Total | | | | $ | 294 |
| $ | 192 |
| $ | 882 |
| | $ | 755 |
|
The following table shows the offsetting of financial assets and derivative assets.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Statement of Financial Condition | | |
(Dollars in thousands) | | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Statement of Financial Condition | | Net Amounts of Assets Presented in the Statement of Financial Condition | | Financial Instruments | | Cash Collateral Received | | Net Amount |
September 30, 2019 | | |
| | |
| | |
| | |
| | |
| | |
|
Interest rate swaps | | $ | 28,930 |
| | $ | — |
| | $ | 28,930 |
| | $ | — |
| | $ | — |
| | $ | 28,930 |
|
| | | | | | | | | | | | |
December 31, 2018 | | |
| | |
| | |
| | |
| | |
| | |
|
Interest rate swaps | | $ | 7,128 |
| | $ | 4 |
| | $ | 7,124 |
| | $ | 177 |
| | $ | 610 |
| | $ | 6,337 |
|
The following table shows the offsetting of financial liabilities and derivative liabilities.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Statement of Financial Condition | | |
(Dollars in thousands) | | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Statement of Financial Condition | | Net Amounts of Liabilities Presented in the Statement of Financial Condition | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
September 30, 2019 | | |
| | |
| | |
| | |
| | |
| | |
|
Interest rate swaps | | $ | 29,434 |
| | $ | — |
| | $ | 29,434 |
| | $ | 29,277 |
| | $ | — |
| | $ | 157 |
|
Repurchase agreements | | 139,417 |
| | — |
| | 139,417 |
| | 139,417 |
| | — |
| | — |
|
Total | | $ | 168,851 |
| | $ | — |
| | $ | 168,851 |
| | $ | 168,694 |
| | $ | — |
| | $ | 157 |
|
| | | | | | | | | | | | |
December 31, 2018 | | |
| | |
| | |
| | |
| | |
| | |
|
Interest rate swaps | | $ | 7,254 |
| | $ | 4 |
| | $ | 7,250 |
| | $ | 1,700 |
| | $ | — |
| | $ | 5,550 |
|
Repurchase agreements | | 103,627 |
| | — |
| | 103,627 |
| | 103,627 |
| | — |
| | — |
|
Total | | $ | 110,881 |
| | $ | 4 |
| | $ | 110,877 |
| | $ | 105,327 |
| | $ | — |
| | $ | 5,550 |
|
If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions. At September 30, 2019 and December 31, 2018, repurchase agreements had a remaining contractual maturity of $137.17 million and $102.34 million in overnight, $2.24 million and $1.29 million in up to 30 days, and $0.01 million and $0.00 million in 30 to 90 days, respectively and were collateralized by U.S. Treasury and Federal agencies securities.
Note 10 — Variable Interest Entities
A variable interest entity (VIE) is a partnership, limited liability company, trust or other legal entity that meets any one of the following criteria:
| |
• | The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party. |
| |
• | The entity’s investors lack the power to direct the activities that most significantly affect the entity’s economic performance. |
| |
• | The entity’s at-risk holders do not have the obligation to absorb the losses or the right to receive residual returns. |
| |
• | The voting rights of some investors are not proportional to their economic interests in the entity, and substantially all of the entity’s activities involve, or are conducted on behalf of, investors with disproportionately few voting rights. |
The Company is involved in various entities that are considered to be VIEs. The Company’s investments in VIEs are primarily related to investments promoting affordable housing, community development and renewable energy sources. Some of these tax-advantaged investments support the Company’s regulatory compliance with the Community Reinvestment Act. The Company’s investments in these entities generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits are recognized as a reduction of tax expense or, for investments qualifying as investment tax credits, as a reduction to the related investment asset. The Company recognized federal income tax credits related to its affordable housing and community development tax-advantaged investments in tax expense of $0.35 million and $0.33 million for the three months ended September 30, 2019 and 2018, respectively and $1.05 million and $0.97 million for the nine months ended September 30, 2019 and 2018, respectively. The Company also recognized $3.53 million and $0.35 million of investment tax credits for the three months ended September 30, 2019 and 2018, respectively and $9.08 million and $8.29 million for the nine months ended September 30, 2019 and 2018, respectively.
The Company is not required to consolidate VIEs in which it has concluded it does not have a controlling financial interest, and thus is not the primary beneficiary. In such cases, the Company does not have both the power to direct the entities’ most significant activities and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs. As a limited partner in these operating partnerships, we are allocated credits and deductions associated with the underlying properties. The Company has determined that it is not the primary beneficiary of these investments because the general partners have the power to direct activities that most significantly influence the economic performance of their respective partnerships.
The Company’s investments in these unconsolidated VIEs are carried in Other Assets on the Consolidated Statements of Financial Condition. The Company’s unfunded capital and other commitments related to these unconsolidated VIEs are generally carried in Other Liabilities on the Consolidated Statements of Financial Condition. The Company’s maximum exposure to loss from these unconsolidated VIEs include the investment recorded on the Company’s Consolidated Statements of Financial Condition, net of unfunded capital commitments, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes potential losses from these investments are remote, the maximum exposure was determined by assuming a scenario where the community-based business, housing projects and renewable energy projects completely fail and do not meet certain taxing authority compliance requirements resulting in recapture of the related tax credits.
The following table provides a summary of investments in affordable housing, community development and renewable energy VIEs that the Company has not consolidated.
|
| | | | | | |
(Dollars in thousands) | September 30, 2019 | December 31, 2018 |
Investment carrying amount | $ | 13,196 |
| $ | 15,083 |
|
Unfunded capital and other commitments | 6,111 |
| 6,449 |
|
Maximum exposure to loss | 43,114 |
| 40,705 |
|
The Company is required to consolidate VIEs in which it has concluded it has significant involvement in and the ability to direct the activities that impact the entity’s economic performance. The Company is the managing general partner of entities to which it shares interest in tax-advantaged investments with third parties. At September 30, 2019 and December 31, 2018, approximately $41.35 million and $8.38 million of the Company’s assets and $19.31 million and $6.70 million of its liabilities included on the Consolidated Statements of Financial Condition were related to tax-advantaged investment VIEs which the Company has consolidated, respectively. The assets of the consolidated VIEs are reported in Other Assets, the liabilities are reported in Other Liabilities and the non-controlling interest is reported in Equity on the Consolidated Statements of Financial Condition. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIE do not have recourse to the general credit of the Company. The Company’s exposure to the consolidated VIE is generally limited to the carrying value of its variable interest plus any related tax credits previously recognized.
Additionally, the Company sponsors one trust, 1st Source Master Trust (Capital Trust) of which 100% of the common equity is owned by the Company. The Capital Trust was formed in 2007 for the purpose of issuing corporation-obligated mandatorily redeemable capital securities (the capital securities) to third-party investors and investing the proceeds from the sale of the capital securities solely in junior subordinated debenture securities of the Company (the subordinated notes). The subordinated notes held by the Capital Trust are the sole assets of the Capital Trust. The Capital Trust qualifies as a variable interest entity for which the Company is not the primary beneficiary and therefore reported in the financial statements as an unconsolidated subsidiary. The junior subordinated debentures are reflected as subordinated notes in the Statements of Financial Condition with the corresponding interest distributions reflected as Interest Expense in the Statements of Income. The common shares issued by the Capital Trust are included in Other Assets in the Statements of Financial Condition.
Distributions on the capital securities issued by the Capital Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Capital Trust on the subordinated notes held by the Capital Trust. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated notes. The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The capital securities held by the Capital Trust qualify as Tier 1 capital under Federal Reserve Board guidelines.
The following table shows subordinated notes at September 30, 2019.
|
| | | | | | | | | |
(Dollars in thousands) | | Amount of Subordinated Notes | | Interest Rate | | Maturity Date |
June 2007 issuance (1) | | $ | 41,238 |
| | 7.22 | % | | 6/15/2037 |
August 2007 issuance (2) | | 17,526 |
| | 3.60 | % | | 9/15/2037 |
Total | | $ | 58,764 |
| | |
| | |
(1) Fixed rate through life of debt.
(2) 3-Month LIBOR +1.48% through remaining life of debt.
Note 11 — Earnings Per Share
Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards. Non-vested restricted stock awards are considered participating securities to the extent the holders of these securities receive non-forfeitable dividends at the same rate as holders of common stock. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.
Stock options, where the exercise price was greater than the average market price of the common shares, were excluded from the computation of diluted earnings per common share because the result would have been antidilutive. There were no stock options outstanding as of September 30, 2019 and 2018.
The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands - except per share amounts) | | 2019 | | 2018 | | 2019 | | 2018 |
Distributed earnings allocated to common stock | | $ | 6,895 |
| | $ | 6,491 |
| | $ | 20,791 |
| | $ | 18,420 |
|
Undistributed earnings allocated to common stock | | 17,402 |
| | 13,272 |
| | 48,827 |
| | 42,141 |
|
Net earnings allocated to common stock | | 24,297 |
| | 19,763 |
| | 69,618 |
| | 60,561 |
|
Net earnings allocated to participating securities | | 141 |
| | 125 |
| | 401 |
| | 407 |
|
Net income allocated to common stock and participating securities | | $ | 24,438 |
| | $ | 19,888 |
| | $ | 70,019 |
| | $ | 60,968 |
|
| | | | | | | | |
Weighted average shares outstanding for basic earnings per common share | | 25,520,035 |
| | 25,965,694 |
| | 25,630,771 |
| | 25,958,125 |
|
Dilutive effect of stock compensation | | — |
| | — |
| | — |
| | — |
|
Weighted average shares outstanding for diluted earnings per common share | | 25,520,035 |
| | 25,965,694 |
| | 25,630,771 |
| | 25,958,125 |
|
| | | | | | | | |
Basic earnings per common share | | $ | 0.95 |
| | $ | 0.76 |
| | $ | 2.72 |
| | $ | 2.33 |
|
Diluted earnings per common share | | $ | 0.95 |
| | $ | 0.76 |
| | $ | 2.72 |
| | $ | 2.33 |
|
Note 12 — Stock Based Compensation
As of September 30, 2019, the Company had four active stock-based employee compensation plans, which are more fully described in Note 16 of the Consolidated Financial Statements in 1st Source’s Annual Report on Form 10-K for the year ended December 31, 2018. These plans include three executive stock award plans, the Executive Incentive Plan, the Restricted Stock Award Plan, the Strategic Deployment Incentive Plan; and the Employee Stock Purchase Plan. The 2011 Stock Option Plan was approved by the shareholders on April 21, 2011 but the Company had not made any grants through September 30, 2019.
Stock-based compensation expense for all stock-based compensation awards granted is based on the grant-date fair value. For all awards except stock option awards, the grant date fair value is either the fair market value per share or book value per share (corresponding to the type of stock awarded) as of the grant date. For stock option awards, the grant date fair value is estimated using the Black-Scholes option pricing model. For all awards the Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, for which the Company uses the related vesting term.
Total fair value of options vested and expensed was zero for the nine months ended September 30, 2019 and 2018. As of September 30, 2019 and 2018 there were no outstanding stock options. There were no stock options exercised during the nine months ended September 30, 2019 and 2018. All shares issued in connection with stock option exercises are issued from available treasury stock.
As of September 30, 2019, there was $5.50 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 3.04 years.
Note 13 — Accumulated Other Comprehensive Income (Loss)
The following table presents reclassifications out of accumulated other comprehensive income (loss) related to unrealized gains and losses on available-for-sale securities.
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Affected Line Item in the Statements of Income |
(Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | |
Realized losses included in net income | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (345 | ) | | Losses on investment securities available-for-sale |
| | — |
| | — |
| | — |
| | (345 | ) | | Income before income taxes |
Tax effect | | — |
| | — |
| | — |
| | 83 |
| | Income tax expense |
Net of tax | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (262 | ) | | Net income |
Note 14 — Income Taxes
The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was zero at September 30, 2019 and December 31, 2018. Interest and penalties are recognized through the income tax provision. For the three months ended September 30, 2019 and 2018, the Company recognized no interest and penalties. For the nine months ended September 30, 2019 and 2018, the Company recognized $0.00 million and $(0.09) million in interest or penalties, respectively. There were no accrued interest and penalties at September 30, 2019 and December 31, 2018.
Tax years that remain open and subject to audit include the federal 2016-2018 years and the Indiana 2015-2018 years. The Company does not anticipate a significant change in the amount of uncertain tax positions within the next 12 months.
Note 15 — Fair Value Measurements
The Company records certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are also utilized to determine the initial value of certain assets and liabilities, to perform impairment assessments, and for disclosure purposes. The Company uses quoted market prices and observable inputs to the maximum extent possible when measuring fair value. In the absence of quoted market prices, various valuation techniques are utilized to measure fair value. When possible, observable market data for identical or similar financial instruments is used in the valuation. When market data is not available, fair value is determined using valuation models that incorporate management’s estimates of the assumptions a market participant would use in pricing the asset or liability.
Fair value measurements are classified within one of three levels based on the observability of the inputs used to determine fair value, as follows:
| |
• | Level 1 — The valuation is based on quoted prices in active markets for identical instruments. |
| |
• | Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
| |
• | Level 3 — The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation. |
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The Company elected fair value accounting for mortgages held for sale. The Company believes the election for mortgages held for sale (which are economically hedged with free-standing derivatives) will reduce certain timing differences and better match changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. At September 30, 2019 and December 31, 2018, all mortgages held for sale were carried at fair value.
The following table shows the differences between the fair value carrying amount of mortgages held for sale measured at fair value and the aggregate unpaid principal amount the Company is contractually entitled to receive at maturity.
|
| | | | | | | | | | | | | | |
(Dollars in thousands) | | Fair value carrying amount | | Aggregate unpaid principal | | Excess of fair value carrying amount over (under) unpaid principal | | |
September 30, 2019 | | |
| | |
| | |
| | |
Mortgages held for sale reported at fair value | | $ | 28,654 |
| | $ | 28,176 |
| | $ | 478 |
| | (1) |
| | | | | | | | |
December 31, 2018 | | |
| | |
| | |
| | |
Mortgages held for sale reported at fair value | | $ | 11,290 |
| | $ | 11,076 |
| | $ | 214 |
| | (1) |
Financial Instruments on Recurring Basis:
The following is a description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis:
Investment securities available-for-sale are valued primarily by a third party pricing agent. Prices supplied by the independent pricing agent, as well as their pricing methodologies and assumptions, are reviewed by the Company for reasonableness and to ensure such prices are aligned with market levels. In general, the Company’s investment securities do not possess a complex structure that could introduce greater valuation risk. The portfolio mainly consists of traditional investments including U.S. Treasury and Federal agencies securities, Federal agency mortgage pass-through securities, and general obligation and revenue municipal bonds. Pricing for such instruments is fairly generic and is easily obtained. On a quarterly basis, prices supplied by the pricing agent are validated by comparison to prices obtained from other third party sources for a material portion of the portfolio.
The valuation policy and procedures for Level 3 fair value measurements of available-for-sale debt securities are decided through collaboration between management of the Corporate Accounting and Funds Management departments. The changes in fair value measurement for Level 3 securities are analyzed on a periodic basis under a collaborative framework with the aforementioned departments. The methodology and variables used for input are derived from the combination of observable and unobservable inputs. The unobservable inputs are determined through internal assumptions that may vary from period to period due to external factors, such as market movement and credit rating adjustments.
Both the market and income valuation approaches are implemented using the following types of inputs:
| |
• | U.S. treasuries are priced using the market approach and utilizing live data feeds from active market exchanges for identical securities. |
| |
• | Government-sponsored agency debt securities and corporate bonds are primarily priced using available market information through processes such as benchmark curves, market valuations of like securities, sector groupings and matrix pricing. |
| |
• | Other government-sponsored agency securities, mortgage-backed securities and some of the actively traded REMICs and CMOs, are primarily priced using available market information including benchmark yields, prepayment speeds, spreads and volatility of similar securities. |
| |
• | State and political subdivisions are largely grouped by characteristics, i.e., geographical data and source of revenue in trade dissemination systems. Since some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities. Local direct placement municipal securities, with very little market activity, are priced using an appropriate market yield curve, which includes a credit spread assumption. |
Mortgages held for sale and the related loan commitments and forward contracts (hedges) are valued using a market value approach and utilizing an appropriate current market yield and a loan commitment closing rate based on historical analysis.
Interest rate swap positions, both assets and liabilities, are valued by a third-party pricing agent using an income approach and utilizing models that use as their basis readily observable market parameters. This valuation process considers various factors including interest rate yield curves, time value and volatility factors. Validation of third party agent valuations is accomplished by comparing those values to the Company’s swap counterparty valuations. Management believes an adjustment is required to “mid-market” valuations for derivatives tied to its performing loan portfolio to recognize the imprecision and related exposure inherent in the process of estimating expected credit losses as well as velocity of deterioration evident with systemic risks embedded in these portfolios. Any change in the mid-market derivative valuation adjustment will be recognized immediately through the Consolidated Statements of Income.
The following table shows the balance of assets and liabilities measured at fair value on a recurring basis.
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
September 30, 2019 | | |
| | |
| | |
| | |
|
Assets: | | |
| | |
| | |
| | |
|
Investment securities available-for-sale: | | |
| | |
| | |
| | |
|
U.S. Treasury and Federal agencies securities | | $ | 44,569 |
| | $ | 495,561 |
| | $ | — |
| | $ | 540,130 |
|
U.S. States and political subdivisions securities | | — |
| | 83,020 |
| | 4,969 |
| | 87,989 |
|
Mortgage-backed securities — Federal agencies | | — |
| | 350,398 |
| | — |
| | 350,398 |
|
Corporate debt securities | | — |
| | 52,969 |
| | — |
| | 52,969 |
|
Foreign government and other securities | | — |
| | 699 |
| | — |
| | 699 |
|
Total debt securities available-for-sale | | 44,569 |
|
| 982,647 |
|
| 4,969 |
|
| 1,032,185 |
|
Mortgages held for sale | | — |
| | 28,654 |
| | — |
| | 28,654 |
|
Accrued income and other assets (interest rate swap agreements) | | — |
| | 28,930 |
| | — |
| | 28,930 |
|
Total | | $ | 44,569 |
| | $ | 1,040,231 |
| | $ | 4,969 |
| | $ | 1,089,769 |
|
| | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
|
Accrued expenses and other liabilities (interest rate swap agreements) | | $ | — |
| | $ | 29,434 |
| | $ | — |
| | $ | 29,434 |
|
Total | | $ | — |
| | $ | 29,434 |
| | $ | — |
| | $ | 29,434 |
|
| | | | | | | | |
December 31, 2018 | | |
| | |
| | |
| | |
|
Assets: | | |
| | |
| | |
| | |
|
Investment securities available-for-sale: | | |
| | |
| | |
| | |
|
U.S. Treasury and Federal agencies securities | | $ | 33,746 |
| | $ | 497,477 |
| | $ | — |
| | $ | 531,223 |
|
U.S. States and political subdivisions securities | | — |
| | 93,557 |
| | 1,025 |
| | 94,582 |
|
Mortgage-backed securities — Federal agencies | | — |
| | 318,233 |
| | — |
| | 318,233 |
|
Corporate debt securities | | — |
| | 45,392 |
| | — |
| | 45,392 |
|
Foreign government and other securities | | — |
| | 699 |
| | — |
| | 699 |
|
Total debt securities available-for-sale | | 33,746 |
|
| 955,358 |
|
| 1,025 |
|
| 990,129 |
|
Mortgages held for sale | | — |
| | 11,290 |
| | — |
| | 11,290 |
|
Accrued income and other assets (interest rate swap agreements) | | — |
| | 7,124 |
| | — |
| | 7,124 |
|
Total | | $ | 33,746 |
| | $ | 973,772 |
| | $ | 1,025 |
| | $ | 1,008,543 |
|
| | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
|
Accrued expenses and other liabilities (interest rate swap agreements) | | $ | — |
| | $ | 7,250 |
| | $ | — |
| | $ | 7,250 |
|
Total | | $ | — |
| | $ | 7,250 |
| | $ | — |
| | $ | 7,250 |
|
The following table shows changes in Level 3 assets measured at fair value on a recurring basis for the quarter ended September 30, 2019 and 2018.
|
| | | | | | | | | | | | |
(Dollars in thousands) | | U.S. States and political subdivisions securities | | Foreign government and other securities | | Investment securities available-for-sale |
Beginning balance July 1, 2019 | | $ | 5,061 |
| | $ | — |
| | $ | 5,061 |
|
Total gains or losses (realized/unrealized): | | |
| | | | |
Included in earnings | | — |
| | — |
| | — |
|
Included in other comprehensive income | | (12 | ) | | — |
| | (12 | ) |
Purchases | | — |
| | — |
| | — |
|
Issuances | | — |
| | — |
| | — |
|
Sales | | — |
| | — |
| | — |
|
Settlements | | — |
| | — |
| | — |
|
Maturities | | (80 | ) | | — |
| | (80 | ) |
Transfers into Level 3 | | — |
| | — |
| | — |
|
Transfers out of Level 3 | | — |
| | — |
| | — |
|
Ending balance September 30, 2019 | | $ | 4,969 |
| | $ | — |
| | $ | 4,969 |
|
| | | | | | |
Beginning balance July 1, 2018 | | $ | 1,641 |
| | $ | 707 |
| | $ | 2,348 |
|
Total gains or losses (realized/unrealized): | | |
| | | | |
Included in earnings | | — |
| | — |
| | — |
|
Included in other comprehensive income | | (2 | ) | | (1 | ) | | (3 | ) |
Purchases | | — |
| | 200 |
| | 200 |
|
Issuances | | — |
| | — |
| | — |
|
Sales | | — |
| | — |
| | — |
|
Settlements | | — |
| | — |
| | — |
|
Maturities | | (80 | ) | | (200 | ) | | (280 | ) |
Transfers into Level 3 | | — |
| | — |
| | — |
|
Transfers out of Level 3 | | — |
| | — |
| | — |
|
Ending balance September 30, 2018 | | $ | 1,559 |
| | $ | 706 |
| | $ | 2,265 |
|
There were no gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at September 30, 2019 or 2018. No transfers between levels occurred during the three months ended September 30, 2019 or 2018.
The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a recurring basis.
|
| | | | | | | | | | |
(Dollars in thousands) | | Fair Value | | Valuation Methodology | | Unobservable Inputs | | Range of Inputs |
September 30, 2019 | | |
| | | | | | |
Debt securities available-for sale | | |
| | | | | | |
Direct placement municipal securities | | $ | 4,969 |
| | Discounted cash flows | | Credit spread assumption | | 1.95% - 2.32% |
| | | | | | | | |
December 31, 2018 | | |
| | | | | | |
Debt securities available-for sale | | |
| | | | | | |
Direct placement municipal securities | | $ | 1,025 |
| | Discounted cash flows | | Credit spread assumption | | 0.17% - 3.02% |
The sensitivity to changes in the unobservable inputs and their impact on the fair value measurement can be significant. The significant unobservable input for direct placement municipal securities are the credit spread assumptions used to determine the fair value measure. An increase (decrease) in the estimated spread assumption of the market will decrease (increase) the fair value measure of the securities.
Financial Instruments on Non-recurring Basis:
The Company may be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or market accounting or impairment charges of individual assets.
The Credit Policy Committee (CPC), a management committee, is responsible for overseeing the valuation processes and procedures for Level 3 measurements of impaired loans, other real estate and repossessions. The CPC reviews these assets on a quarterly basis to determine the accuracy of the observable inputs, generally third party appraisals, auction values, values derived from trade publications and data submitted by the borrower, and the appropriateness of the unobservable inputs, generally discounts due to current market conditions and collection issues. The CPC establishes discounts based on asset type and valuation source; deviations from the standard are documented. The discounts are reviewed periodically, annually at a minimum, to determine they remain appropriate. Consideration is given to current trends in market values for the asset categories and gains and losses on sales of similar assets. The Loan and Funds Management Committee of the Board of Directors is responsible for overseeing the CPC.
Discounts vary depending on the nature of the assets and the source of value. Aircraft are generally valued using quarterly trade publications adjusted for engine time, condition, maintenance programs, discounted by 10%. Likewise, autos are valued using current auction values, discounted by 10%; medium and heavy duty trucks are valued using trade publications and auction values, discounted by 15%. Construction equipment is generally valued using trade publications and auction values, discounted by 20%. Real estate is valued based on appraisals or evaluations, discounted by 20% with higher discounts for property in poor condition or property with characteristics which may make it more difficult to market. Commercial loans subject to borrowing base certificates are generally discounted by 20% for receivables and 40% - 75% for inventory with higher discounts when monthly borrowing base certificates are not required or received.
Impaired loans and related write-downs are based on the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are reviewed quarterly and estimated using customized discounting criteria, appraisals and dealer and trade magazine quotes which are used in a market valuation approach. In accordance with fair value measurements, only impaired loans for which a reserve for loan loss has been established based on the fair value of collateral require classification in the fair value hierarchy. As a result, only a portion of the Company’s impaired loans are classified in the fair value hierarchy.
The Company has established MSRs valuation policies and procedures based on industry standards and to ensure valuation methodologies are consistent and verifiable. MSRs and related adjustments to fair value result from application of lower of cost or fair value accounting. For purposes of impairment, MSRs are stratified based on the predominant risk characteristics of the underlying servicing, principally by loan type. The fair value of each tranche of the servicing portfolio is estimated by calculating the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors. Prepayment rates and discount rates are derived through a third party pricing agent. Changes in the most significant inputs, including prepayment rates and discount rates, are compared to the changes in the fair value measurements and appropriate resolution is made. A fair value analysis is also obtained from an independent third party agent and compared to the internal valuation for reasonableness. MSRs do not trade in an active, open market with readily observable prices and though sales of MSRs do occur, precise terms and conditions typically are not readily available and the characteristics of the Company’s servicing portfolio may differ from those of any servicing portfolios that do trade.
Other real estate is based on the fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily using appraisals and reflect a market value approach. Fair values are reviewed quarterly, and new appraisals are obtained annually. Repossessions are similarly valued.
For assets measured at fair value on a nonrecurring basis the following represents impairment charges (recoveries) recognized on these assets during the quarter ended September 30, 2019: impaired loans - $0.50 million; mortgage servicing rights - $0.00 million; repossessions - $0.31 million; and other real estate - $0.00 million.
The following table shows the carrying value of assets measured at fair value on a non-recurring basis.
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
September 30, 2019 | | |
| | |
| | |
| | |
|
Impaired loans - collateral based | | $ | — |
| | $ | — |
| | $ | 12,118 |
| | $ | 12,118 |
|
Accrued income and other assets (mortgage servicing rights) | | — |
| | — |
| | 4,107 |
| | 4,107 |
|
Accrued income and other assets (repossessions) | | — |
| | — |
| | 6,610 |
| | 6,610 |
|
Accrued income and other assets (other real estate) | | — |
| | — |
| | 629 |
| | 629 |
|
Total | | $ | — |
| | $ | — |
| | $ | 23,464 |
| | $ | 23,464 |
|
| | | | | | | | |
December 31, 2018 | | |
| | |
| | |
| | |
|
Impaired loans - collateral based | | $ | — |
| | $ | — |
| | $ | 7,306 |
| | $ | 7,306 |
|
Accrued income and other assets (mortgage servicing rights) | | — |
| | — |
| | 4,283 |
| | 4,283 |
|
Accrued income and other assets (repossessions) | | — |
| | — |
| | 6,666 |
| | 6,666 |
|
Accrued income and other assets (other real estate) | | — |
| | — |
| | 299 |
| | 299 |
|
Total | | $ | — |
| | $ | — |
| | $ | 18,554 |
| | $ | 18,554 |
|
The following table below shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a non-recurring basis.
|
| | | | | | | | | | | | | | |
(Dollars in thousands) | | Carrying Value | | Fair Value | | Valuation Methodology | | Unobservable Inputs | | Range of Inputs |
September 30, 2019 | | |
| | |
| | | | | | |
Impaired loans | | $ | 12,118 |
| | $ | 12,118 |
| | Collateral based measurements including appraisals, trade publications, and auction values | | Discount for lack of marketability and current conditions | | 0% - 100% |
| | | | | | | | | | |
Mortgage servicing rights | | 4,107 |
| | 5,722 |
| | Discounted cash flows | | Constant prepayment rate (CPR) | | 11.5% - 23.6% |
| | |
| | |
| | | | Discount rate | | 9.1% - 12.0% |
| | | | | | | | | | |
Repossessions | | 6,610 |
| | 7,044 |
| | Appraisals, trade publications and auction values | | Discount for lack of marketability | | 2% - 18% |
| | | | | | | | | | |
Other real estate | | 629 |
| | 674 |
| | Appraisals | | Discount for lack of marketability | | 0% - 9% |
| | | | | | | | | | |
December 31, 2018 | | |
| | |
| | | | | | |
Impaired loans | | $ | 7,306 |
| | $ | 7,306 |
| | Collateral based measurements including appraisals, trade publications, and auction values | | Discount for lack of marketability and current conditions | | 20% - 35% |
| | | | | | | | | | |
Mortgage servicing rights | | 4,283 |
| | 7,238 |
| | Discounted cash flows | | Constant prepayment rate (CPR) | | 7.2% - 24.8% |
| | |
| | |
| | | | Discount rate | | 10.3 % - 13.1% |
| | | | | | | | | | |
Repossessions | | 6,666 |
| | 6,991 |
| | Appraisals, trade publications and auction values | | Discount for lack of marketability | | 4% - 6% |
| | | | | | | | | | |
Other real estate | | 299 |
| | 305 |
| | Appraisals | | Discount for lack of marketability | | 0% - 10% |
GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or non-recurring basis.
The following table shows the fair values of the Company’s financial instruments.
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Carrying or Contract Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
September 30, 2019 | | |
| | |
| | |
| | |
| | |
|
Assets: | | |
| | |
| | |
| | |
| | |
|
Cash and due from banks | | $ | 94,160 |
| | $ | 94,160 |
| | $ | 94,160 |
| | $ | — |
| | $ | — |
|
Federal funds sold and interest bearing deposits with other banks | | 33,325 |
| | 33,325 |
| | 33,325 |
| | — |
| | — |
|
Investment securities, available-for-sale | | 1,032,185 |
| | 1,032,185 |
| | 44,569 |
| | 982,647 |
| | 4,969 |
|
Other investments | | 28,404 |
| | 28,404 |
| | 28,404 |
| | — |
| | — |
|
Mortgages held for sale | | 28,654 |
| | 28,654 |
| | — |
| | 28,654 |
| | — |
|
Loans and leases, net of reserve for loan and lease losses | | 4,990,605 |
| | 5,017,099 |
| | — |
| | — |
| | 5,017,099 |
|
Mortgage servicing rights | | 4,107 |
| | 5,722 |
| | — |
| | — |
| | 5,722 |
|
Accrued interest receivable | | 20,597 |
| | 20,597 |
| | — |
| | 20,597 |
| | — |
|
Interest rate swaps | | 28,930 |
| | 28,930 |
| | — |
| | 28,930 |
| | — |
|
Liabilities: | | |
| | |
| | |
| | |
| | |
|
Deposits | | $ | 5,391,679 |
| | $ | 5,396,941 |
| | $ | 3,672,074 |
| | $ | 1,724,867 |
| | $ | — |
|
Short-term borrowings | | 197,151 |
| | 197,151 |
| | 138,506 |
| | 58,645 |
| | — |
|
Long-term debt and mandatorily redeemable securities | | 71,520 |
| | 70,955 |
| | — |
| | 70,955 |
| | — |
|
Subordinated notes | | 58,764 |
| | 59,182 |
| | — |
| | 59,182 |
| | — |
|
Accrued interest payable | | 14,835 |
| | 14,835 |
| | — |
| | 14,835 |
| | — |
|
Interest rate swaps | | 29,434 |
| | 29,434 |
| | — |
| | 29,434 |
| | — |
|
Off-balance-sheet instruments * | | — |
| | 300 |
| | — |
| | 300 |
| | — |
|
| | | | | | | | | | |
December 31, 2018 | | |
| | |
| | |
| | |
| | |
|
Assets: | | |
| | |
| | |
| | |
| | |
|
Cash and due from banks | | $ | 94,907 |
| | $ | 94,907 |
| | $ | 94,907 |
| | $ | — |
| | $ | — |
|
Federal funds sold and interest bearing deposits with other banks | | 4,172 |
| | 4,172 |
| | 4,172 |
| | — |
| | — |
|
Investment securities, available-for-sale | | 990,129 |
| | 990,129 |
| | 33,746 |
| | 955,358 |
| | 1,025 |
|
Other investments | | 28,404 |
| | 28,404 |
| | 28,404 |
| | — |
| | — |
|
Mortgages held for sale | | 11,290 |
| | 11,290 |
| | — |
| | 11,290 |
| | — |
|
Loans and leases, net of reserve for loan and lease losses | | 4,734,995 |
| | 4,689,267 |
| | — |
| | — |
| | 4,689,267 |
|
Mortgage servicing rights | | 4,283 |
| | 7,238 |
| | — |
| | — |
| | 7,238 |
|
Accrued interest receivable | | 18,880 |
| | 18,880 |
| | — |
| | 18,880 |
| | — |
|
Interest rate swaps | | 7,124 |
| | 7,124 |
| | — |
| | 7,124 |
| | — |
|
Liabilities: | | |
| | |
| | |
| | |
| | |
|
Deposits | | $ | 5,122,322 |
| | $ | 5,111,711 |
| | $ | 3,654,556 |
| | $ | 1,457,155 |
| | $ | — |
|
Short-term borrowings | | 199,344 |
| | 199,344 |
| | 113,734 |
| | 85,610 |
| | — |
|
Long-term debt and mandatorily redeemable securities | | 71,123 |
| | 68,751 |
| | — |
| | 68,751 |
| | — |
|
Subordinated notes | | 58,764 |
| | 45,874 |
| | — |
| | 45,874 |
| | — |
|
Accrued interest payable | | 8,950 |
| | 8,950 |
| | — |
| | 8,950 |
| | — |
|
Interest rate swaps | | 7,250 |
| | 7,250 |
| | — |
| | 7,250 |
| | — |
|
Off-balance-sheet instruments * | | — |
| | 259 |
| | — |
| | 259 |
| | — |
|
* Represents estimated cash outflows required to currently settle the obligations at current market rates.
These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. These estimates are subjective in nature and require considerable judgment to interpret market data. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange, nor are they intended to represent the fair value of the Company as a whole. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of the respective balance sheet date. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.
Other significant assets, such as premises and equipment, other assets, and liabilities not defined as financial instruments, are not included in the above disclosures. Also, the fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis is presented to provide information concerning 1st Source Corporation and its subsidiaries’ (collectively referred to as “the Company”, “we”, and “our”) financial condition as of September 30, 2019, as compared to December 31, 2018, and the results of operations for the three and nine months ended September 30, 2019 and 2018. This discussion and analysis should be read in conjunction with our consolidated financial statements and the financial and statistical data appearing elsewhere in this report and our 2018 Annual Report. Except for historical information contained herein, the matters discussed in this document express “forward-looking statements.” Generally, the words “believe,” “contemplate,” “seek,” “plan,” “possible,” “assume,” “expect,” “intend,” “targeted,” “continue,” “remain,” “estimate,” “anticipate,” “project,” “will,” “should,” “indicate,” “would,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Those statements, including statements, projections, estimates or assumptions concerning future events or performance, and other statements that are other than statements of historical fact, are subject to material risks and uncertainties. We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. We may make other written or oral forward-looking statements from time to time. Readers are advised that various important factors could cause our actual results or circumstances for future periods to differ materially from those anticipated or projected in such forward-looking statements. Such factors include, but are not limited to, changes in law, regulations or GAAP; our competitive position within the markets we serve; increasing consolidation within the banking industry; unforeseen changes in interest rates; unforeseen changes in loan prepayment assumptions; unforeseen downturns in or major events affecting the local, regional or national economies or the industries in which we have credit concentrations; and other matters discussed in our filings with the SEC, including our Annual Report on Form 10-K for 2018, which filings are available from the SEC. We undertake no obligation to publicly update or revise any forward-looking statements. FINANCIAL CONDITION
Our total assets at September 30, 2019 were $6.69 billion, an increase of $397.33 million or 6.31% from December 31, 2018. Total investment securities, available-for-sale were $1.03 billion, an increase of $42.06 million or 4.25% from December 31, 2018. Federal funds sold and interest bearing deposits with other banks were $33.33 million, an increase of $29.15 million or 698.78% from December 31, 2018.
Total loans and leases were $5.10 billion, an increase of $264.08 million or 5.46% from December 31, 2018. Our foreign loan and lease outstandings, all denominated in U.S. dollars were $198.81 million and $224.44 million as of September 30, 2019 and December 31, 2018, respectively. Foreign loans and leases are in aircraft financing. Loan and lease outstandings to borrowers in Brazil and Mexico were $75.35 million and $121.55 million as of September 30, 2019, respectively, compared to $83.90 million and $127.16 million as of December 31, 2018, respectively. As of September 30, 2019 and December 31, 2018 there was not a significant concentration in any other country. Solar loan and lease outstandings were $153.96 million as of September 30, 2019, an increase of $57.96 million or 60.37% from the $96.00 million at December 31, 2018. Solar loan and lease outstandings are included in commercial and agricultural loans. Equipment owned under operating leases was $119.17 million, a decrease of $15.27 million, or 11.36% compared to December 31, 2018.
Total deposits were $5.39 billion, an increase of $269.36 million or 5.26% from the end of 2018. Short-term borrowings were $197.15 million, a decrease of $2.19 million or 1.10% from December 31, 2018. Long-term debt and mandatorily redeemable securities were $71.52 million, an increase of $0.40 million or 0.56% from December 31, 2018.
The following table shows accrued income and other assets.
|
| | | | | | | | |
(Dollars in thousands) | | September 30, 2019 | | December 31, 2018 |
Accrued income and other assets: | | |
| | |
|
Bank owned life insurance cash surrender value | | $ | 68,830 |
| | $ | 67,434 |
|
Operating lease right of use assets | | 23,787 |
| | — |
|
Accrued interest receivable | | 20,597 |
| | 18,880 |
|
Mortgage servicing rights | | 4,107 |
| | 4,283 |
|
Other real estate | | 629 |
| | 299 |
|
Repossessions | | 6,610 |
| | 6,666 |
|
Partnership investments carrying amount | | 54,547 |
| | 23,460 |
|
All other assets | | 49,801 |
| | 38,249 |
|
Total accrued income and other assets | | $ | 228,908 |
| | $ | 159,271 |
|
CAPITAL
As of September 30, 2019, total shareholders’ equity was $813.17 million, up $51.09 million, or 6.70% from the $762.08 million at December 31, 2018. In addition to net income of $70.02 million, other significant changes in shareholders’ equity during the first nine months of 2019 included $15.09 million of common stock acquired for treasury and $20.82 million of dividends paid. The accumulated other comprehensive income (loss) component of shareholders’ equity totaled $4.63 million at September 30, 2019, compared to $(10.68) million at December 31, 2018. Our shareholders’ equity-to-assets ratio was 12.15% as of September 30, 2019, compared to 12.11% at December 31, 2018. Book value per common share rose to $31.88 at September 30, 2019, from $29.56 at December 31, 2018.
We declared and paid cash dividends per common share of $0.27 during the third quarter of 2019. The trailing four quarters dividend payout ratio, representing cash dividends per common share divided by diluted earnings per common share, was 29.94%. The dividend payout is continually reviewed by management and the Board of Directors subject to the Company’s capital and dividend policy.
The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1 or core capital as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations.
The actual capital amounts and ratios of 1st Source Corporation and 1st Source Bank as of September 30, 2019, are presented in the table below.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Capital Adequacy | | Minimum Capital Adequacy with Capital Buffer | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
(Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
Total Capital (to Risk-Weighted Assets): | | |
| | |
| | |
| | |
| | | | | | |
| | |
|
1st Source Corporation | | $ | 867,594 |
| | 14.59 | % | | $ | 475,720 |
| | 8.00 | % | | $ | 624,383 |
| | 10.50 | % | | $ | 594,650 |
| | 10.00 | % |
1st Source Bank | | 792,181 |
| | 13.35 |
| | 474,651 |
| | 8.00 |
| | 622,980 |
| | 10.50 |
| | 593,314 |
| | 10.00 |
|
Tier 1 Capital (to Risk-Weighted Assets): | | |
| | |
| | |
| | |
| | | | | | |
| | |
|
1st Source Corporation | | 792,796 |
| | 13.33 |
| | 356,790 |
| | 6.00 |
| | 505,453 |
| | 8.50 |
| | 475,720 |
| | 8.00 |
|
1st Source Bank | | 717,548 |
| | 12.09 |
| | 355,989 |
| | 6.00 |
| | 504,317 |
| | 8.50 |
| | 474,651 |
| | 8.00 |
|
Common Equity Tier 1 Capital (to Risk-Weighted Assets): | | | | | | | | | | | | | | | | |
1st Source Corporation | | 728,886 |
| | 12.26 |
| | 267,593 |
| | 4.50 |
| | 416,255 |
| | 7.00 |
| | 386,523 |
| | 6.50 |
|
1st Source Bank | | 710,638 |
| | 11.98 |
| | 266,991 |
| | 4.50 |
| | 415,320 |
| | 7.00 |
| | 385,654 |
| | 6.50 |
|
Tier 1 Capital (to Average Assets): | | |
| | |
| | |
| | |
| | | | | | |
| | |
|
1st Source Corporation | | 792,796 |
| | 12.11 |
| | 261,857 |
| | 4.00 |
| | N/A |
| | N/A |
| | 327,321 |
| | 5.00 |
|
1st Source Bank | | 717,548 |
| | 10.97 |
| | 261,711 |
| | 4.00 |
| | N/A |
| | N/A |
| | 327,138 |
| | 5.00 |
|
LIQUIDITY AND INTEREST RATE SENSITIVITY
Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as our operating cash needs are met. Funds are available from a number of sources, including the securities portfolio, the core deposit base, access to the national brokered certificates of deposit market, national listing service certificates of deposit, Federal Home Loan Bank (FHLB) borrowings, Federal Reserve Bank (FRB) borrowings, and the capability to package loans for sale.
We have borrowing sources available to supplement deposits and meet our funding needs. 1st Source Bank has established relationships with several banks to provide short term borrowings in the form of federal funds purchased. At September 30, 2019, we had no borrowings in the federal funds market. We could borrow $265.00 million in additional funds for a short time from these banks on a collective basis. As of September 30, 2019, we had $97.99 million outstanding in FHLB advances and could borrow an additional $481.00 million contingent on the FHLB activity-based stock ownership requirement. We also had no outstandings with the FRB and could borrow $720.67 million as of September 30, 2019.
Our loan to asset ratio was 76.21% at September 30, 2019 compared to 76.83% at December 31, 2018 and 76.68% at September 30, 2018. Cash and cash equivalents totaled $127.49 million at September 30, 2019 compared to $99.08 million at December 31, 2018 and $113.88 million at September 30, 2018. At September 30, 2019, the Statement of Financial Condition was rate sensitive by $410.80 million more assets than liabilities scheduled to reprice within one year, or approximately 1.14%. Management believes that the present funding sources provide adequate liquidity to meet our cash flow needs.
Under Indiana law governing the collateralization of public fund deposits, the Indiana Board of Depositories determines which financial institutions are required to pledge collateral based on the strength of their financial ratings. We have been informed that no collateral is required for our public fund deposits. However, the Board of Depositories could alter this requirement in the future and adversely impact our liquidity. Our potential liquidity exposure if we must pledge collateral is approximately $743 million.
RESULTS OF OPERATIONS
Net income available to common shareholders for the three and nine month periods ended September 30, 2019 was $24.44 million and $70.02 million, compared to $19.89 million and $60.97 million for the same periods in 2018. Diluted net income per common share was $0.95 and $2.72 for the three and nine month periods ended September 30, 2019, compared to $0.76 and $2.33 for the same periods in 2018. Return on average common shareholders’ equity was 11.83% for the nine months ended September 30, 2019, compared to 11.04% in 2018. The return on total average assets was 1.45% for the nine months ended September 30, 2019, compared to 1.33% in 2018.
Net income increased for the nine months ended September 30, 2019 compared to the first nine months of 2018. Net interest income and noninterest income increased and the provision for loan and lease losses decreased which was offset by an increase in noninterest expense. Details of the changes in the various components of net income are discussed further below.
NET INTEREST INCOME
The following tables provide an analysis of net interest income and illustrates the interest income earned and interest expense charged for each major component of interest earning assets and interest bearing liabilities. Yields/rates are computed on a tax-equivalent basis, using a 21% rate. Nonaccrual loans and leases are included in the average loan and lease balance outstanding.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | |
| September 30, 2019 | | June 30, 2019 | | September 30, 2018 |
(Dollars in thousands) | Average Balance | | Interest Income/Expense | | Yield/ Rate | | Average Balance | | Interest Income/Expense | | Yield/ Rate | | Average Balance | | Interest Income/Expense | | Yield/ Rate |
ASSETS | | | | | | | | | | | | | | | | | |
Investment securities available-for-sale: | | | | | | | | | | | | | | | | | |
Taxable | $ | 959,104 |
| | $ | 5,056 |
| | 2.09 | % | | $ | 929,264 |
| | $ | 5,186 |
| | 2.24 | % | | $ | 879,882 |
| | $ | 4,912 |
| | 2.21 | % |
Tax exempt(1) | 65,146 |
| | 388 |
| | 2.36 | % | | 71,878 |
| | 437 |
| | 2.44 | % | | 84,399 |
| | 533 |
| | 2.51 | % |
Mortgages held for sale | 19,888 |
| | 190 |
| | 3.79 | % | | 12,014 |
| | 127 |
| | 4.24 | % | | 9,016 |
| | 93 |
| | 4.09 | % |
Loans and leases, net of unearned discount(1) | 5,091,358 |
| | 66,712 |
| | 5.20 | % | | 5,001,392 |
| | 65,565 |
| | 5.26 | % | | 4,822,431 |
| | 59,964 |
| | 4.93 | % |
Other investments | 54,768 |
| | 497 |
| | 3.60 | % | | 53,323 |
| | 499 |
| | 3.75 | % | | 43,860 |
| | 391 |
| | 3.54 | % |
Total earning assets(1) | 6,190,264 |
| | 72,843 |
| | 4.67 | % | | 6,067,871 |
| | 71,814 |
| | 4.75 | % | | 5,839,588 |
| | 65,893 |
| | 4.48 | % |
Cash and due from banks | 66,046 |
| | | | | | 67,448 |
| | | | |
| | 64,622 |
| | |
| | |
|
Reserve for loan and lease losses | (106,559 | ) | | | | | | (102,787 | ) | | | | |
| | (102,790 | ) | | |
| | |
|
Other assets | 471,129 |
| | | | | | 455,212 |
| | | | |
| | 422,767 |
| | |
| | |
|
Total assets | $ | 6,620,880 |
| | | | | | $ | 6,487,744 |
| | | | |
| | $ | 6,224,187 |
| | |
| | |
|
| | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | |
| | | | |
| | |
| | |
| | |
|
Interest-bearing deposits | $ | 4,174,746 |
| | $ | 13,524 |
| | 1.29 | % | | $ | 4,137,118 |
| | $ | 12,978 |
| | 1.26 | % | | $ | 3,986,576 |
| | $ | 9,405 |
| | 0.94 | % |
Short-term borrowings | 188,562 |
| | 293 |
| | 0.62 | % | | 201,401 |
| | 540 |
| | 1.08 | % | | 207,225 |
| | 518 |
| | 0.99 | % |
Subordinated notes | 58,764 |
| | 914 |
| | 6.17 | % | | 58,764 |
| | 928 |
| | 6.33 | % | | 58,764 |
| | 918 |
| | 6.20 | % |
Long-term debt and mandatorily redeemable securities | 71,304 |
| | 750 |
| | 4.17 | % | | 71,308 |
| | 764 |
| | 4.30 | % | | 70,902 |
| | 493 |
| | 2.76 | % |
Total interest-bearing liabilities | 4,493,376 |
| | 15,481 |
| | 1.37 | % | | 4,468,591 |
| | 15,210 |
| | 1.37 | % | | 4,323,467 |
| | 11,334 |
| | 1.04 | % |
Noninterest-bearing deposits | 1,188,645 |
| | |
| | |
| | 1,127,794 |
| | |
| | |
| | 1,104,645 |
| | |
| | |
|
Other liabilities | 119,125 |
| | |
| | |
| | 98,475 |
| | |
| | |
| | 44,827 |
| | |
| | |
|
Shareholders’ equity | 809,279 |
| | |
| | |
| | 789,009 |
| | |
| | |
| | 751,248 |
| | |
| | |
|
Noncontrolling interests | 10,455 |
| | | | | | 3,875 |
| | | | | | — |
| | | | |
Total liabilities and equity | $ | 6,620,880 |
| | |
| | |
| | $ | 6,487,744 |
| | |
| | |
| | $ | 6,224,187 |
| | |
| | |
|
Less: Fully tax-equivalent adjustments | | | (167 | ) | | | | | | (177 | ) | | | | | | (197 | ) | | |
Net interest income/margin (GAAP-derived)(1) | |
| | $ | 57,195 |
| | 3.67 | % | | |
| | $ | 56,427 |
| | 3.73 | % | | |
| | $ | 54,362 |
| | 3.69 | % |
Fully tax-equivalent adjustments | | | 167 |
| | | | | | 177 |
| | | | | | 197 |
| | |
Net interest income/margin - FTE(1) | |
| | $ | 57,362 |
| | 3.68 | % | | |
| | $ | 56,604 |
| | 3.74 | % | | |
| | $ | 54,559 |
| | 3.71 | % |
| | | | | | | | | | | | | | | | | |
(1) See “Reconciliation of Non-GAAP Financial Measures” at the end of this section for additional information on this performance measure/ratio. |
Quarter Ended September 30, 2019 compared to the Quarter Ended September 30, 2018
The taxable-equivalent net interest income for the three months ended September 30, 2019 was $57.36 million, an increase of 5.14% over the same period in 2018. The net interest margin on a fully taxable-equivalent basis was 3.68% for the three months ended September 30, 2019, compared to 3.71% for the three months ended September 30, 2018.
During the three month period ended September 30, 2019, average earning assets increased $350.68 million, up 6.01% over the comparable period in 2018. Average interest-bearing liabilities increased $169.91 million or 3.93%. The yield on average earning assets increased 19 basis points to 4.67% from 4.48% primarily due to higher rates on loans and leases. Total cost of average interest-bearing liabilities increased 33 basis points to 1.37% from 1.04% as a result of the rising interest rate environment during 2018 and competitive pressure on deposit rates. The result to the net interest margin, or the ratio of net interest income to average earning assets, was a decrease of three basis points.
The largest contributor to the improved yield on average earning assets for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, was an increase in yields on net loans and leases of 27 basis points primarily due to market conditions as a result of 2018 Federal Reserve interest rate increases. The improved yield on net loans and leases was also positively impacted by four basis points due to net interest recoveries of $0.08 million in the third quarter of 2019 vs. net interest reversals of $0.31 million in the third quarter of 2018. Average net loans and leases increased $268.93 million or 5.58% with the largest increases occurring within the commercial and agricultural, auto and light truck, and commercial real estate portfolios as a result of market demand. Total average investment securities increased $59.97 million or 6.22%. Average mortgages held for sale increased $10.87 million or 120.59%. Average other investments, which include federal funds sold, time deposits with other banks, Federal Reserve Bank excess balances, Federal Reserve Bank and Federal Home Loan Bank (FHLB) stock and commercial paper increased $10.91 million or 24.87% from the third quarter of 2018.
Average interest-bearing deposits increased $188.17 million or 4.72% for the third quarter of 2019 over the same period in 2018 primarily due to organic customer growth and higher rates on certain deposit products to attract deposits in order to support increased loan and lease demand. The effective rate paid on average interest-bearing deposits grew 35 basis points to 1.29% from 0.94%. The increase in the average cost of interest-bearing deposits was primarily the result of higher rates, competitive pressure on rates, and a shift in the deposit mix from the third quarter of 2018.
Average short-term borrowings decreased $18.66 million or 9.01% for the third quarter of 2019 compared to the same period in 2018. Interest paid on short-term borrowings decreased 37 basis points. Interest paid on subordinated notes decreased three basis points during the third quarter of 2019 from the same period a year ago due to a variable rate on one traunche. Average long-term debt and mandatorily redeemable securities balances were relatively flat. Interest paid on long-term debt and mandatorily redeemable securities increased 141 basis points during the third quarter of 2019 from the same period in 2018 primarily due to higher rates on mandatorily redeemable securities.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2019 | | September 30, 2018 |
(Dollars in thousands) | Average Balance | | Interest Income/Expense | | Yield/ Rate | | Average Balance | | Interest Income/Expense | | Yield/ Rate |
ASSETS | | | | | | | | | | | |
Investment securities available-for-sale: | | | | | | | | | | | |
Taxable | $ | 932,779 |
| | $ | 15,757 |
| | 2.26 | % | | $ | 850,454 |
| | $ | 13,993 |
| | 2.20 | % |
Tax exempt(1) | 71,684 |
| | 1,297 |
| | 2.42 | % | | 92,918 |
| | 1,777 |
| | 2.56 | % |
Mortgages held for sale | 13,616 |
| | 418 |
| | 4.10 | % | | 7,911 |
| | 265 |
| | 4.48 | % |
Loans and leases, net of unearned discount(1) | 4,984,498 |
| | 194,954 |
| | 5.23 | % | | 4,728,047 |
| | 172,180 |
| | 4.87 | % |
Other investments | 50,109 |
| | 1,434 |
| | 3.83 | % | | 44,784 |
| | 1,196 |
| | 3.57 | % |
Total earning assets(1) | 6,052,686 |
| | 213,860 |
| | 4.72 | % | | 5,724,114 |
| | 189,411 |
| | 4.42 | % |
Cash and due from banks | 65,801 |
| | | | | | 63,983 |
| | |
| | |
|
Reserve for loan and lease losses | (103,699 | ) | | | | | | (99,284 | ) | | |
| | |
|
Other assets | 452,759 |
| | | | | | 422,489 |
| | |
| | |
|
Total assets | $ | 6,467,547 |
| | | | | | $ | 6,111,302 |
| | |
| | |
|
| | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | |
| | |
| | |
|
Interest-bearing deposits | $ | 4,083,140 |
| | $ | 37,972 |
| | 1.24 | % | | $ | 3,881,040 |
| | $ | 24,286 |
| | 0.84 | % |
Short-term borrowings | 213,551 |
| | 1,764 |
| | 1.10 | % | | 272,813 |
| | 2,120 |
| | 1.04 | % |
Subordinated notes | 58,764 |
| | 2,770 |
| | 6.30 | % | | 58,764 |
| | 2,709 |
| | 6.16 | % |
Long-term debt and mandatorily redeemable securities | 71,034 |
| | 2,258 |
| | 4.25 | % | | 70,794 |
| | 1,621 |
| | 3.06 | % |
Total interest-bearing liabilities | 4,426,489 |
| | 44,764 |
| | 1.35 | % | | 4,283,411 |
| | 30,736 |
| | 0.96 | % |
Noninterest-bearing deposits | 1,147,195 |
| | |
| | |
| | 1,040,740 |
| | |
| | |
|
Other liabilities | 97,096 |
| | |
| | |
| | 49,126 |
| | |
| | |
|
Shareholders’ equity | 791,438 |
| | |
| | |
| | 738,025 |
| | |
| | |
|
Noncontrolling interests | 5,329 |
| | | | | | — |
| | | | |
Total liabilities and equity | $ | 6,467,547 |
| | |
| | |
| | $ | 6,111,302 |
| | |
| | |
|
Less: Fully tax-equivalent adjustments | | | (526 | ) | | | | | | (612 | ) | | |
Net interest income/margin (GAAP-derived)(1) | |
| | $ | 168,570 |
| | 3.72 | % | | |
| | $ | 158,063 |
| | 3.69 | % |
Fully tax-equivalent adjustments | | | 526 |
| | | | | | 612 |
| | |
Net interest income/margin - FTE(1) | |
| | $ | 169,096 |
| | 3.74 | % | | |
| | $ | 158,675 |
| | 3.71 | % |
| | | | | | | | | | | |
(1) See “Reconciliation of Non-GAAP Financial Measures” at the end of this section for additional information on this performance measure/ratio. |
Nine Months Ended September 30, 2019 compared to the Nine Months Ended September 30, 2018
The taxable-equivalent net interest income for the nine months ended September 30, 2019 was $169.10 million, an increase of 6.57% over the comparable period in 2018. The net interest margin on a fully taxable-equivalent basis was 3.74% compared to a net interest margin of 3.71% for the same period in 2018.
During the nine month period ended September 30, 2019, average earning assets increased $328.57 million or 5.74% over the comparable period in 2018. Average interest-bearing liabilities increased $143.08 million or 3.34%. The yield on average earning assets increased 30 basis points to 4.72% from 4.42% primarily due to higher rates on loans and leases and taxable investment securities available-for-sale. The total cost of average interest-bearing liabilities increased 39 basis points to 1.35% from 0.96%. The result to the net interest margin, or the ratio of net interest income to average earning assets, was an increase of three basis points.
The largest contributor to the improved yield on average earning assets for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was an increase in yields on net loans and leases of 36 basis points primarily due to market conditions as a result of Federal Reserve interest rate increases in 2018. The yield on net loans and leases was also negatively impacted by one basis point due to net interest recoveries of $0.15 million in 2019 vs. $0.17 million in 2018. Average net loans and leases increased $256.45 million or 5.42% primarily in the commercial and agricultural, auto and light truck, and commercial real estate portfolios as a result of market demand. Total average investment securities increased $61.09 million or 6.48%. Average mortgages held for sale increased $5.71 million or 72.11%. Average other investments, which include federal funds sold, time deposits with other banks, Federal Reserve Bank excess balances, Federal Reserve Bank and FHLB stock and commercial paper, increased $5.33 million or 11.89%.
Average interest-bearing deposits increased $202.10 million or 5.21% for the first nine months of 2019 over the same period in 2018 largely due to organic customer growth and higher rates on certain deposit products to attract deposits in order to support increased loan and lease demand. The effective rate paid on average interest-bearing deposits grew 40 basis points to 1.24% compared to 0.84%. The increase in the average cost of interest-bearing deposits was primarily the result of higher rates, competitive pressure on rates, and a shift in the deposit mix.
Average short-term borrowings decreased $59.26 million or 21.72% for the first nine months of 2019 compared to the same period in 2018. Interest paid on short-term borrowings increased six basis points. The decrease in short-term borrowings was primarily the result of lower borrowings with the FHLB. Interest paid on subordinated notes increased 14 basis points due to a variable rate associated with one traunche. Average long-term debt and mandatorily redeemable securities were relatively stable. Interest paid on long-term debt and mandatorily redeemable securities increased 119 basis points due to higher rates on mandatorily redeemable securities.
Reconciliation of Non-GAAP Financial Measures
The accounting and reporting policies of 1st Source conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures are used by management to evaluate and measure the Company’s performance. These include taxable-equivalent net interest income (including its individual components) and net interest margin (including its individual components). Management believes that these measures provide users of the Company’s financial information a more meaningful view of the performance of the interest-earning assets and interest-bearing liabilities.
Management reviews yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries on a fully taxable-equivalent (“FTE”) basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources.
|
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(Dollars in thousands) | September 30, 2019 | June 30, 2019 | September 30, 2018 | | September 30, 2019 | September 30, 2018 |
Calculation of Net Interest Margin | | | | | | |
(A) | Interest income (GAAP) | $ | 72,676 |
| $ | 71,637 |
| $ | 65,696 |
| | $ | 213,334 |
| $ | 188,799 |
|
| Fully tax-equivalent adjustments: | | | | | | |
(B) | - Loans and leases | 95 |
| 93 |
| 96 |
| | 283 |
| 273 |
|
(C) | - Tax-exempt investment securities | 72 |
| 84 |
| 101 |
| | 243 |
| 339 |
|
(D) | Interest income - FTE (A+B+C) | 72,843 |
| 71,814 |
| 65,893 |
| | 213,860 |
| 189,411 |
|
(E) | Interest expense (GAAP) | 15,481 |
| 15,210 |
| 11,334 |
| | 44,764 |
| 30,736 |
|
(F) | Net interest income (GAAP) (A–E) | 57,195 |
| 56,427 |
| 54,362 |
| | 168,570 |
| 158,063 |
|
(G) | Net interest income - FTE (D–E) | 57,362 |
| 56,604 |
| 54,559 |
| | 169,096 |
| 158,675 |
|
(H) | Annualization factor | 3.967 |
| 4.011 |
| 3.967 |
| | 1.337 |
| 1.337 |
|
(I) | Total earning assets | $ | 6,190,264 |
| $ | 6,067,871 |
| $ | 5,839,588 |
| | $ | 6,052,686 |
| $ | 5,724,114 |
|
| Net interest margin (GAAP-derived) (F*H)/I | 3.67 | % | 3.73 | % | 3.69 | % | | 3.72 | % | 3.69 | % |
| Net interest margin - FTE (G*H)/I | 3.68 | % | 3.74 | % | 3.71 | % | | 3.74 | % | 3.71 | % |
PROVISION AND RESERVE FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses for the three and nine month periods ended September 30, 2019 was $3.72 million and $12.88 million compared to a provision for loan and lease losses in the three and nine month periods ended September 30, 2018 of $6.16 million and $14.76 million. Net recoveries of $0.31 million or 0.02% of average loans and leases were recorded for the third quarter 2019, compared to net charge-offs of $10.86 million or 0.89% of average loans and leases for the same quarter a year ago. Year-to-date net charge-offs of $4.41 million or 0.12% of average loans and leases have been recorded in 2019, compared to net charge-offs of $11.34 million or 0.32% of average loans and leases through September 30, 2018.
The provision for the three and nine month periods ended September 30, 2019 was principally driven by increases in special attention outstandings in the third quarter and a large charge-off in the aircraft portfolio during the first quarter, as well as to support strong loan growth during the first two quarters. Loan outstandings declined $9.79 million in the third quarter; loan growth during the nine month period ended September 30, 2019 was $264.08 million.
We continue to evaluate risks which may impact our loan portfolios. We believe geopolitical events have the potential to negatively impact the U.S. economy. Current concerns include slower growth projections for world economies and the sharp decline in global trade growth exacerbated by tariff disputes, particularly between China and the U.S. Political uncertainty continues in Latin America, with ongoing corruption scandals, fueling U.S. border concerns. Mexico’s economy is slowing and Brazil continues to require further structural reforms. Concerns continue to be heightened globally due to actual and potential terrorist attacks.
Another area of concern continues to be our aircraft portfolio where we have a collateral concentration and $199 million in foreign exposure. Currently, the U.S. economy remains strong, but the global economy is showing signs of weakness. The majority of our foreign exposure is in Mexico and Brazil. The Brazilian economy continues its path of gradual improvement, but remains weak and extreme poverty is the source of much of the violence and turmoil within the country. Mexico’s economy is currently stronger but is exhibiting weakness as demonstrated by the downward revision of their 2019 gross domestic product growth estimates. Tensions continue regarding threats of tariffs and border immigration issues. We continue to monitor individual customer performance and assess risks in the portfolio as a whole.
On September 30, 2019, 30 day and over loan and lease delinquencies as a percentage of loan and lease outstandings were 0.47%, compared to 0.42% on September 30, 2018. The reserve for loan and lease losses as a percentage of loans and leases outstanding at the end of the period was 2.14% compared to 2.04% one year ago. The increase in the reserve as a percent of loans and leases outstanding was primarily due to higher special attention loan outstanding balances. During the third quarter of 2019, we restructured a debt arrangement with a customer experiencing financial difficulties under a forbearance agreement which was determined to be a TDR. The restructured loans were evaluated for impairment and an impairment reserve was established; the impairment was recognized through the reserve for loan and lease losses. A summary of loan and lease loss experience during the three and nine months ended September 30, 2019 and 2018 is located in Note 5 of the Consolidated Financial Statements.
A loan or lease is considered impaired, based on current information and events, if it is probable that we 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. We evaluate loans and leases exceeding $100,000 for impairment and establish 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. A summary of impaired loans as of September 30, 2019 and December 31, 2018 is reflected in Note 4 of the Consolidated Financial Statements.
NONPERFORMING ASSETS
The following table shows nonperforming assets.
|
| | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2019 | | December 31, 2018 | | September 30, 2018 |
Loans and leases past due 90 days or more | | $ | 311 |
| | $ | 366 |
| | $ | 125 |
|
Nonaccrual loans and leases | | 10,188 |
| | 27,859 |
| | 36,028 |
|
Other real estate | | 629 |
| | 299 |
| | 432 |
|
Repossessions | | 6,610 |
| | 6,666 |
| | 13,041 |
|
Equipment owned under operating leases | | — |
| | 126 |
| | 48 |
|
Total nonperforming assets | | $ | 17,738 |
| | $ | 35,316 |
| | $ | 49,674 |
|
Nonperforming assets as a percentage of loans and leases were 0.34% at September 30, 2019, 0.71% at December 31, 2018, and 1.00% at September 30, 2018. Nonperforming assets totaled $17.74 million at September 30, 2019, a decrease of 49.77% from the $35.32 million reported at December 31, 2018, and a 64.29% decrease from the $49.67 million reported at September 30, 2018. The decrease in nonperforming assets during the first nine months of 2019 was related to lower nonaccrual loans and leases. The decrease in nonperforming assets at September 30, 2019 from September 30, 2018 occurred primarily in nonaccrual loans and leases and repossessions.
The decrease in nonaccrual loans and leases at September 30, 2019 from December 31, 2018 occurred primarily in the aircraft and auto and light truck portfolios. The decrease in nonaccrual loans and leases at September 30, 2019 from September 30, 2018 also occurred primarily in the aircraft, auto and light truck, and construction equipment portfolios. A summary of nonaccrual loans and leases and past due aging for the period ended September 30, 2019 and December 31, 2018 is located in Note 4 of the Consolidated Financial Statements.
Other real estate is the result of foreclosing on real estate in the local market for which we have a current appraisal and are well secured. Other real estate increased over the past year due to current foreclosures outpacing sales of existing properties.
Repossessions consisted mainly of aircraft and auto and light trucks. At the time of repossession, the recorded amount of the loan or lease is written down to the fair value of the equipment or vehicle by a charge to the reserve for loan and lease losses or other income, if a positive adjustment, unless the equipment is in the process of immediate sale. Any subsequent fair value write-downs or write-ups, to the extent of previous write-downs, are included in noninterest expense.
The following table shows a summary of other real estate and repossessions.
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| | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2019 | | December 31, 2018 | | September 30, 2018 |
Commercial and agricultural | | $ | — |
| | $ | — |
| | $ | 21 |
|
Auto and light truck | | 2,153 |
| | 440 |
| | 309 |
|
Medium and heavy duty truck | | — |
| | 15 |
| | — |
|
Aircraft | | 4,400 |
| | 6,209 |
| | 12,598 |
|
Construction equipment | | — |
| | — |
| | 80 |
|
Commercial real estate | | 303 |
| | — |
| | 26 |
|
Residential real estate and home equity | | 326 |
| | 299 |
| | 357 |
|
Consumer | | 57 |
| | 2 |
| | 82 |
|
Total | | $ | 7,239 |
| | $ | 6,965 |
| | $ | 13,473 |
|
For financial statement purposes, nonaccrual loans and leases are included in loan and lease outstandings, whereas repossessions and other real estate are included in other assets.
NONINTEREST INCOME
The following table shows the details of noninterest income.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
Noninterest income: | | |
| | |
| | | | | | |
| | |
| | | | |
Trust and wealth advisory | | $ | 4,982 |
| | $ | 5,109 |
| | (127 | ) | | (2.49 | )% | | $ | 15,423 |
| | $ | 16,097 |
| | (674 | ) | | (4.19 | )% |
Service charges on deposit accounts | | 2,892 |
| | 2,567 |
| | 325 |
| | 12.66 | % | | 8,175 |
| | 7,676 |
| | 499 |
| | 6.50 | % |
Debit card | | 3,727 |
| | 3,377 |
| | 350 |
| | 10.36 | % | | 10,616 |
| | 9,907 |
| | 709 |
| | 7.16 | % |
Mortgage banking | | 1,362 |
| | 925 |
| | 437 |
| | 47.24 | % | | 3,297 |
| | 2,882 |
| | 415 |
| | 14.40 | % |
Insurance commissions | | 1,603 |
| | 1,580 |
| | 23 |
| | 1.46 | % | | 5,295 |
| | 5,025 |
| | 270 |
| | 5.37 | % |
Equipment rental | | 7,578 |
| | 7,977 |
| | (399 | ) | | (5.00 | )% | | 23,369 |
| | 23,836 |
| | (467 | ) | | (1.96 | )% |
Losses on investment securities available-for-sale | | — |
| | — |
| | — |
| | — | % | | — |
| | (345 | ) | | 345 |
| | NM |
|
Other | | 3,621 |
| | 2,525 |
| | 1,096 |
| | 43.41 | % | | 9,378 |
| | 7,812 |
| | 1,566 |
| | 20.05 | % |
Total noninterest income | | $ | 25,765 |
| | $ | 24,060 |
| | 1,705 |
| | 7.09 | % | | $ | 75,553 |
| | $ | 72,890 |
| | 2,663 |
| | 3.65 | % |
NM = Not Meaningful
Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) decreased during the three and nine months ended September 30, 2019 compared with the same periods a year ago. Trust and wealth advisory fees are largely based on the number and size of client relationships and the market value of assets under management. The market value of trust assets under management at September 30, 2019, December 31, 2018, and September 30, 2018 was $4.24 billion, $3.94 billion, and $4.68 billion, respectively. The decrease in trust and wealth advisory fees compared to one year ago is primarily the result of a reduction in the market value of trust assets under management due to the stock market decline at the end of 2018 and the loss of a large employee benefit plan account.
Service charges on deposit accounts increased for the three and nine months ended September 30, 2019 over the comparable periods in 2018. The increase in service charges on deposit accounts primarily reflects a higher volume of nonsufficient fund transactions.
Debit card income improved in the three and nine months ended September 30, 2019 over the same periods a year ago. The majority of the improvement in debit card income was the result of an increased volume of debit card transactions in 2019.
Mortgage banking income increased in the three and nine months ended September 30, 2019 as compared to the same periods in 2018. The increase was primarily caused by increased gains on a higher volume of loan sales as a result of more loans originated for the secondary market during the first nine months of 2019 offset by reduced loan servicing fees.
Insurance commissions were higher during the three and nine months ended September 30, 2019 over the same periods a year ago. The increase in insurance commissions was primarily due to an increased book of business and higher contingent commissions received.
Equipment rental income decreased for the three and nine months ended September 30, 2019 over the comparable periods in 2018. The decrease was the result of reduced leasing volume primarily in the construction and medium and heavy duty truck portfolios offset by a slight increase in the solar financing portfolio resulting in the average equipment rental portfolio decreasing by 0.60% over the same period a year ago.
Losses on investment securities available-for-sale during the nine months ended September 30, 2018 was primarily from repositioning the portfolio during the first quarter of 2018 in response to tax reform.
Other income increased for the three and nine months ended September 30, 2019 over the comparable periods in 2018. The increase was primarily a result of higher customer swap fees, lease income on a repossessed asset and increased claim proceeds from bank owned life insurance. The increase was also helped by personal property tax reimbursements on leased equipment from lessees that are reported gross as required by the new leasing standard effective January 1, 2019. These personal property tax reimbursements were offset by a similar increase in other expense resulting from the payment of personal property taxes to the taxing jurisdictions.
NONINTEREST EXPENSE
The following table shows the details of noninterest expense.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
Noninterest expense: | | |
| | |
| | | | | | |
| | |
| | | | |
Salaries and employee benefits | | $ | 24,434 |
| | $ | 23,164 |
| | 1,270 |
| | 5.48 | % | | $ | 71,716 |
| | $ | 69,391 |
| | 2,325 |
| | 3.35 | % |
Net occupancy | | 2,635 |
| | 2,523 |
| | 112 |
| | 4.44 | % | | 7,888 |
| | 7,504 |
| | 384 |
| | 5.12 | % |
Furniture and equipment | | 6,027 |
| | 5,769 |
| | 258 |
| | 4.47 | % | | 18,340 |
| | 16,942 |
| | 1,398 |
| | 8.25 | % |
Depreciation – leased equipment | | 6,198 |
| | 6,580 |
| | (382 | ) | | (5.81 | )% | | 19,122 |
| | 19,692 |
| | (570 | ) | | (2.89 | )% |
Professional fees | | 1,603 |
| | 1,883 |
| | (280 | ) | | (14.87 | )% | | 4,907 |
| | 5,628 |
| | (721 | ) | | (12.81 | )% |
Supplies and communication | | 1,643 |
| | 1,635 |
| | 8 |
| | 0.49 | % | | 4,744 |
| | 4,687 |
| | 57 |
| | 1.22 | % |
FDIC and other insurance | | 260 |
| | 855 |
| | (595 | ) | | (69.59 | )% | | 1,513 |
| | 2,267 |
| | (754 | ) | | (33.26 | )% |
Business development and marketing | | 1,844 |
| | 1,663 |
| | 181 |
| | 10.88 | % | | 4,471 |
| | 4,921 |
| | (450 | ) | | (9.14 | )% |
Loan and lease collection and repossession | | 697 |
| | 1,563 |
| | (866 | ) | | (55.41 | )% | | 2,288 |
| | 3,079 |
| | (791 | ) | | (25.69 | )% |
Other | | 1,765 |
| | 1,707 |
| | 58 |
| | 3.40 | % | | 4,674 |
| | 4,665 |
| | 9 |
| | 0.19 | % |
Total noninterest expense | | $ | 47,106 |
| | $ | 47,342 |
| | (236 | ) | | (0.50 | )% | | $ | 139,663 |
| | $ | 138,776 |
| | 887 |
| | 0.64 | % |
Salaries and employee benefits increased during the three and nine months ended September 30, 2019 compared to the same periods in 2018. The increase was mainly due to higher base salaries as a result of normal merit increases and summer interns, increased company contributions to employee retirement accounts and a rise in group insurance claims offset by a decrease in incentive compensation due to fewer vestings of share-based compensation arrangements as compared to the same periods in 2018.
Net occupancy expense increased during the three and nine months ended September 30, 2019 compared to the same periods a year ago. The increase for 2019 was primarily attributable to higher rent expense as a result of the Company leasing office space in its former headquarters building which was sold during the first quarter of 2019 offset by reduced snow removal costs compared to 2018.
Furniture and equipment expense, including depreciation, increased during the three and nine months ended September 30, 2019 compared to the same periods a year ago. Furniture and equipment expense was higher in 2019 mainly due to software maintenance costs and increased equipment depreciation.
Depreciation on leased equipment decreased for the three and nine months ended September 30, 2019 compared to the same periods in 2018. Depreciation on leased equipment correlates with the decrease in equipment rental income.
Professional fees decreased during the third quarter and first nine months of 2019 compared to the same periods a year ago. The decrease was mainly due to reduced utilization of consulting services related to a customer relationship management project in 2018 and information technology projects during the first quarter of 2018 and decreased legal fees offset by an increase in board of director compensation.
Supplies and communication increased slightly during the third quarter and first nine months of 2019 compared to the same periods a year ago. The increase resulted primarily from higher printing costs offset by decreased telephone service and equipment costs.
FDIC and other insurance was lower during the three and nine months ended September 30, 2019 compared to the same periods in 2018. The decrease in 2019 was mainly due to lower assessments for FDIC insurance including FDIC assessment credits in the third quarter of 2019 offset slightly by increased general insurance costs.
Business development and marketing expense increased during the third quarter and was lower for the first nine months of 2019 compared to the same periods a year ago. The increase during the third quarter was due to higher marketing promotions compared to the third quarter of 2018. The reduction during the nine months ended September 30, 2019 was primarily the result of fewer business development activities compared to the nine months ended September 30, 2018.
Loan and lease collection and repossession expense decreased during the third quarter and first nine months of 2019 compared to the same periods in 2018. The decrease was mainly due to fewer valuation adjustments on repossessed assets, decreased general collection expenses and higher gains on the sale of repossessed assets.
Other expenses were relatively flat during the three and nine months ended September 30, 2019 compared to the same periods in 2018. During the first nine months of 2019, an increase in the provision for unfunded loan commitments was offset by higher gains of the sale of fixed assets. Additionally, other expense during 2019 included personal property taxes on leased equipment of $0.50 million that are reported gross as required by the new leasing standard effective January 1, 2019. These personal property taxes on leased equipment were offset by a similar increase in other income from the reimbursement of personal property taxes by lessees.
INCOME TAXES
The provision for income taxes for the three and nine month periods ended September 30, 2019 was $7.69 million and $21.52 million, compared to $5.04 million and $16.45 million for the same periods in 2018. The effective tax rate was 23.92% and 20.20% for the third quarter ended September 30, 2019 and 2018, respectively and 23.50% and 21.25% for the first nine months ended September 30, 2019 and 2018, respectively. The change in the effective tax rate was primarily due to a $0.80 million benefit from a state tax settlement recorded during the second quarter of 2018 and a $0.88 million benefit from finalization of the provisional amounts recorded at December 31, 2017 related to the impact of the federal tax rate change recognized in the third quarter of 2018. The impact of those items resulted in an effective tax rate decrease of 3.53% and 2.17% for the three and nine months ended September 30, 2018, respectively.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risks faced by 1st Source since December 31, 2018. For information regarding our market risk, refer to 1st Source’s Annual Report on Form 10-K for the year ended December 31, 2018. ITEM 4.
CONTROLS AND PROCEDURES
As of the end of the period covered by this report an evaluation was carried out, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, at September 30, 2019, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by 1st Source in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
In addition, there were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the third fiscal quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
1st Source and its subsidiaries are involved in various legal proceedings incidental to the conduct of our businesses. Management does not expect that the outcome of any such proceedings will have a material adverse effect on our consolidated financial position or results of operations.
ITEM 1A. Risk Factors.
There have been no material changes in risks faced by 1st Source since December 31, 2018. For information regarding our risk factors, refer to 1st Source’s Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
|
| | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs* | | Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plans or Programs |
July 01 - 31, 2019 | | — |
| | $ | — |
| | — |
| | 889,374 |
|
August 01 - 31, 2019 | | 30,000 |
| | 46.86 |
| | 30,000 |
| | 859,374 |
|
September 01 - 30, 2019 | | — |
| | — |
| | — |
| | 859,374 |
|
* 1st Source maintains a stock repurchase plan that was authorized by the Board of Directors on July 24, 2014. Under the terms of the plan, 1st Source may repurchase up to 2,000,000 shares of its common stock from time to time to mitigate the potential dilutive effects of stock-based incentive plans and other potential uses of common stock for corporate purposes. Since the inception of the plan, 1st Source has repurchased a total of 1,140,626 shares.
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Mine Safety Disclosures.
None
ITEM 5. Other Information.
None
ITEM 6. Exhibits
The following exhibits are filed with this report:
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101.INS | | XBRL Instance Document — The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | |
| | 1st Source Corporation |
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DATE | October 17, 2019 | | /s/ CHRISTOPHER J. MURPHY III |
| | Christopher J. Murphy III Chairman of the Board and CEO |
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DATE | October 17, 2019 | | /s/ ANDREA G. SHORT |
| | Andrea G. Short Treasurer and Chief Financial Officer Principal Accounting Officer |