Loan and Lease Financings

12 Months Ended

Dec. 31, 2011

Loan and Lease Financings

Loan and Lease Financings

Note 4 — Loan and Lease Financings

Total loans and leases outstanding were recorded net of unearned income and deferred loan fees and costs at December 31, 2011 and 2010, and totaled $3.09 billion and $3.07 billion, respectively. At December 31, 2011 and 2010, net deferred loan and lease costs were $3.51 million and $2.96 million, respectively.

The loan and lease portfolio includes direct financing leases, which are included in auto, light truck and environmental equipment, medium and heavy duty truck, aircraft financing, and construction equipment financing on the consolidated Statements of Financial Condition.

A summary of the gross investment in lease financing and the components of the investment in lease financing at December 31, 2011 and 2010, follows:

(Dollars in thousands)	2011			2010
Direct finance leases:
Rentals receivable	$	216,322		$	200,640
Estimated residual value of leased assets	23,115			25,473
Gross investment in lease financing	239,437			226,113
Unearned income	(35,118		)	(33,384		)
Net investment in lease financing	$	204,319		$	192,729

At December 31, 2011, the minimum future lease payments receivable for each of the years 2012 through 2016 were $43.23 million, $36.22 million, $31.47 million, $26.60 million, and $21.14 million, respectively.

In the ordinary course of business, we have extended loans to certain directors, executive officers, and principal shareholders of equity securities of 1st Source and to their affiliates. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other parties and are consistent with sound banking practices and within applicable regulatory and lending limitations. The aggregate dollar amounts of these loans were $14.21 million and $9.97 million at December 31, 2011 and 2010, respectively. During 2011, $15.98 million of new loans and other additions were made and repayments and other reductions totaled $11.74 million.

We evaluate 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). We use two methods to assess credit risk: loan or lease credit quality grades and credit risk classifications. The purpose of the loan or lease credit quality grade is to document the degree of risk associated with individual credits as well as inform management of the degree of risk in the portfolio taken as a whole. Credit risk classifications are used to categorize loans by degree of risk and to designate individual or committee approval authorities for higher risk credits at the time of origination. Credit risk classifications include categories for: Acceptable, Marginal, Special Attention, Special Risk, Restricted by Policy, Regulated and Prohibited by Law.

All loans and leases, except residential real estate loans and consumer loans, are assigned credit quality grades on a scale from 1 to 12 with grade 1 representing superior credit quality. The criteria used to assign grades to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on our 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 our exposure to increased risk; grade 8 credits are “special mention” and, following regulatory guidelines, are defined as having potential weaknesses that deserve management’s close attention. Credits that exhibit well-defined weaknesses and a distinct possibility of loss are considered ‘‘classified’’ and are graded 9 through 12 corresponding to the regulatory definitions of “substandard” (grades 9 and 10) and the more severe ‘‘doubtful’’ (grade 11) and ‘‘loss’’ (grade 12).

The table below presents the credit quality grades of the recorded investment in loans and leases, segregated by class, as of December 31.

	Credit Quality Grades
(Dollars in thousands)	1-6		7-12		Total
December 31, 2011
Commercial and agricultural loans	$	513,011	$	32,559	$	545,570
Auto, light truck and environmental equipment	432,288		3,677		435,965
Medium and heavy duty truck	154,261		5,535		159,796
Aircraft financing	580,004		40,778		620,782
Construction equipment financing	239,643		21,561		261,204
Commercial real estate	487,576		57,881		545,457
Total	$	2,406,783	$	161,991	$	2,568,774
December 31, 2010
Commercial and agricultural loans	$	483,603	$	46,625	$	530,228
Auto, light truck, and environmental equipment	389,774		6,726		396,500
Medium and heavy duty truck	143,431		19,393		162,824
Aircraft financing	555,106		59,251		614,357
Construction equipment financing	246,644		38,990		285,634
Commercial real estate	532,581		62,148		594,729
Total	$	2,351,139	$	233,133	$	2,584,272

For residential real estate and consumer loans, credit quality is based on the aging status of the loan and by payment activity. The table below presents the recorded investment in residential real estate and consumer loans by performing or non-performing status as of December 31. Non-performing loans are those loans which are on nonaccrual status or are 90 days or more past due.

(Dollars in thousands)	Performing		Nonperforming		Total
December 31, 2011
Residential real estate	$	418,810	$	4,796	$	423,606
Consumer	97,857		306		98,163
Total	$	516,667	$	5,102	$	521,769
December 31, 2010
Residential real estate	$	385,729	$	5,222	$	390,951
Consumer	94,973		427		95,400
Total	$	480,702	$	5,649	$	486,351

The table below presents the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status as of December 31.

							90 Days or
							More Past		Total				Total
			30-59 Days		60-89 Days		Due and		Accruing				Financing
(Dollars in thousands)	Current		Past Due		Past Due		Accruing		Loans		Nonaccrual		Receivables
December 31, 2011
Commercial and agricultural loans	$	534,053	$	550	$	1	$	—	$	534,604	$	10,966	$	545,570
Auto, light truck and environmental equipment	433,048		674		241		—		433,963		2,002		435,965
Medium and heavy duty truck	158,192		5		—		—		158,197		1,599		159,796
Aircraft financing	608,032		224		—		—		608,256		12,526		620,782
Construction equipment financing	256,691		376		—		—		257,067		4,137		261,204
Commercial real estate	522,883		2,005		—		—		524,888		20,569		545,457
Residential real estate	415,177		2,894		739		416		419,226		4,380		423,606
Consumer	96,824		762		271		45		97,902		261		98,163
Total	$	3,024,900	$	7,490	$	1,252	$	461	$	3,034,103	$	56,440	$	3,090,543
December 31, 2010
Commercial and agricultural loans	$	521,363	$	760	$	22	$	—	$	522,145	$	8,083	$	530,228
Auto, light truck and environmental equipment	391,925		528		715		—		393,168		3,332		396,500
Medium and heavy duty truck	157,723		33		—		—		157,756		5,068		162,824
Aircraft financing	580,174		16,097		188		—		596,459		17,898		614,357
Construction equipment financing	275,204		1,254		601		—		277,059		8,575		285,634
Commercial real estate	567,254		759		94		—		568,107		26,622		594,729
Residential real estate	381,368		3,781		580		264		385,993		4,958		390,951
Consumer	93,290		1,152		531		98		95,071		329		95,400
Total	$	2,968,301	$	24,364	$	2,731	$	362	$	2,995,758	$	74,865	$	3,070,623

Interest income for the years ended December 31, 2011, 2010, and 2009, would have increased by approximately $3.90 million, $5.81 million, and $5.17 million, respectively, if the nonaccrual loans and leases had earned interest at their full contract rate.

The table below presents impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses as of December 31.

			Unpaid
	Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Allowance
December 31, 2011
With no related allowance recorded:
Commercial and agricultural loans	$	2,002	$	2,002	$	—
Auto, light truck and environmental equipment	770		770		—
Medium and heavy duty truck	959		959		—
Aircraft financing	11,206		11,206		—
Construction equipment financing	3,949		3,949		—
Commercial real estate	17,088		17,091		—
Residential real estate	—		—		—
Consumer	211		210		—
Total with no related allowance recorded	36,185		36,187		—
With an allowance recorded:
Commercial and agricultural loans	8,406		8,406		1,461
Auto, light truck and environmental equipment	113		113		35
Medium and heavy duty truck	645		645		165
Aircraft financing	1,118		1,118		534
Construction equipment financing	—		—		—
Commercial real estate	6,029		6,029		294
Residential real estate	—		—		—
Consumer	—		—		—
Total with an allowance recorded	16,311		16,311		2,489
Total impaired loans	$	52,496	$	52,498	$	2,489
December 31, 2010
With no related allowance recorded:
Commercial and agricultural loans	$	4,930	$	4,930	$	—
Auto, light truck and environmental equipment	1,596		1,597		—
Medium and heavy duty truck	1,748		1,748		—
Aircraft financing	4,509		4,509		—
Construction equipment financing	5,534		5,535		—
Commercial real estate	21,071		21,071		—
Residential real estate	—		—		—
Consumer	—		—		—
Total with no related allowance recorded	39,388		39,390		—
With an allowance recorded:
Commercial and agricultural loans	8,282		8,281		4,190
Auto, light truck and environmental equipment	1,136		1,136		377
Medium and heavy duty truck	3,347		3,347		1,049
Aircraft financing	13,913		13,913		2,050
Construction equipment financing	3,374		3,379		648
Commercial real estate	8,625		8,630		893
Residential real estate	—		—		—
Consumer	—		—		—
Total with an allowance recorded	38,677		38,686		9,207
Total impaired loans	$	78,065	$	78,076	$	9,207

Average recorded investment and interest income recognized on impaired loans and leases, segregated by class, is shown in the table below for years ending December 31, 2011, 2010 and 2009.

	2011				2010				2009
(Dollars in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Commercial and agricultural loans	$	11,256	$	340	$	16,058	$	563	$	9,417	$	106
Auto, light truck and environmental equipment	1,581		2		3,346		4		7,830		23
Medium and heavy duty truck	3,786		5		8,514		7		13,403		72
Aircraft financing	14,971		16		11,941		85		8,040		122
Construction equipment financing	5,634		36		10,591		222		4,226		13
Commercial real estate	27,172		186		29,791		170		23,452		161
Residential real estate	—		—		—		—		—		—
Consumer loans	88		5		—		—		—		—
Total	$	64,488	$	590	$	80,241	$	1,051	$	66,368	$	497

Performing loans and leases classified as troubled debt restructuring (TDR) during 2011, segregated by class, are shown in the table below. Nonperforming TDRs are shown as nonperforming assets. During 2011, our modification programs focused on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. The modifications did not result in the contractual forgiveness of principal or interest or interest rate reductions below market rates. Consequently, the financial impact of the modifications is immaterial.

	Number of	Recorded
(Dollars in thousands)	Modifications	Investment
December 31, 2011
Commercial and agricultural loans	9	$	831
Auto, light truck and environmental equipment	—	—
Medium and heavy duty truck	—	—
Aircraft financing	1	—
Construction equipment financing	1	218
Commercial real estate	5	421
Residential real estate	—	—
Consumer	2	211
Total	18	$	1,681

Troubled debt restructured loans and leases which had payment defaults within twelve months following modification during the year ended December 31, 2011, segregated by class, are shown in the table below. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.

	Number of	Recorded
(Dollars in thousands)	Defaults	Investment
December 31, 2011
Commercial and agricultural loans	4	$	6,625
Auto, light truck and environmental equipment	—	—
Medium and heavy duty truck	—	—
Aircraft financing	2	519
Construction equipment financing	—	—
Commercial real estate	2	84
Residential real estate	—	—
Consumer	—	—
Total	8	$	7,228

As of December 31, 2011 and 2010, we had $3.29 million and $7.31 million, respectively of performing loans and leases classified as troubled debt restructuring.