NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 1st Source Bank (“Bank”), its banking subsidiary, offers commercial and consumer banking services, trust and wealth advisory services, and insurance to individual and business clients in Indiana and Michigan. The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements.
Basis of Presentation
— The financial statements consolidate 1st Source and its subsidiaries (principally the Bank). All significant intercompany balances and transactions have been eliminated. For purposes of the parent company only financial information presented in Note 22, investments in subsidiaries are carried at equity in the underlying net assets.
Use of Estimates in the Preparation of Financial Statements
— Financial statements prepared in accordance with U.S. generally accepted accounting principles (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 expenses during the reporting period. Actual results could differ from those estimates.
Business Combinations
— Business combinations are accounted for under the purchase method of accounting. Under the purchase method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the date of acquisition.
Cash Flows
— For purposes of the consolidated and parent company only statements of cash flows, the Company considers cash and due from banks, federal funds sold and interest bearing deposits with other banks with original maturities of three months or less as cash and cash equivalents.
Securities
— Securities that the Company has the ability and positive intent to hold to maturity are classified as investment securities held-to-maturity. Held-to-maturity investment securities, when present, are carried at amortized cost. As of
December 31, 2017
and
2016
, the Company held
no
securities classified as held-to-maturity. Securities that may be sold in response to, or in anticipation of, changes in interest rates and resulting prepayment risk, or for other factors, are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on these securities are reported, net of applicable taxes, as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity.
The initial indication of potential other-than-temporary impairment (OTTI) for both debt and equity securities is a decline in fair value below amortized cost. Quarterly, any impaired securities are analyzed on a qualitative and quantitative basis in determining OTTI. Declines in the fair value of available-for-sale debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. In estimating OTTI impairment losses, the Company considers among other things, (i) the length of time and the extent to which fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether it is more likely than not that the Company will not have to sell any such securities before an anticipated recovery of cost.
Debt and equity securities that are purchased and held principally for the purpose of selling them in the near term are classified as trading account securities and are carried at fair value with unrealized gains and losses reported in earnings. Realized gains and losses on the sales of all securities are reported in earnings and computed using the specific identification cost basis.
Other investments consist of shares of Federal Home Loan Bank of Indianapolis (FHLBI) and Federal Reserve Bank stock. As restricted member stocks, these investments are carried at cost. Both cash and stock dividends received on the stocks are reported as income. Quarterly, the Company reviews its investment in FHLBI for impairment. Factors considered in determining impairment are: history of dividend payments; determination of cause for any net loss; adequacy of capital; and review of the most recent financial statements. As of
December 31, 2017
and
2016
, it was determined that the Company’s investment in FHLBI stock is appropriately valued at cost, which equates to par value. In addition, other investments include interest bearing deposits with other banks with original maturities of greater than three months. These investments are in denominations, including accrued interest, that are fully insured by the FDIC.
Loans and Leases
— Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs and net of unearned income. Interest income is accrued as earned based on unpaid principal balances. Origination fees and direct loan and lease origination costs are deferred and the net amount amortized to interest income over the estimated life of the related loan or lease. Loan commitment fees are deferred and amortized into other income over the commitment period.
Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, net of unamortized deferred lease origination fees and costs and unearned income. Interest income on direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment.
The accrual of interest on loans and leases is discontinued when a loan or lease becomes contractually delinquent for 90 days, or when an individual analysis of a borrower’s credit worthiness indicates a credit should be placed on nonperforming status, except for residential mortgage loans and consumer loans that are well secured and in the process of collection. Residential mortgage loans are placed on nonaccrual at the time the loan is placed in foreclosure. When interest accruals are discontinued, interest credited to income in the current year is reversed and interest accrued in the prior year is charged to the reserve for loan and lease losses. However, in some cases, the Company may elect to continue the accrual of interest when the net realizable value of collateral is sufficient to cover the principal and accrued interest. When a loan or lease is classified as nonaccrual and the future collectibility of the recorded loan or lease balance is doubtful, collections on interest and principal are applied as a reduction to principal outstanding. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured, which is typically evidenced by a sustained repayment performance of at least
six months
.
A loan or lease is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. Interest on impaired loans and leases, which are not classified as nonaccrual, is recognized on the accrual basis. The Company evaluates loans and leases exceeding
$100,000
for impairment and establishes a specific reserve as a component of the reserve for loan and lease losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan or lease and the recorded investment in the loan or lease exceeds its fair value.
Loans and leases that have been modified and economic concessions have been granted to borrowers who have experienced financial difficulties are considered a troubled debt restructuring (TDR) and, by definition, are deemed an impaired loan. These concessions typically result from the Company’s loss mitigation activities and may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.
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.
The Company sells mortgage loans to the Government National Mortgage Association (GNMA) in the normal course of business and retains the servicing rights. The GNMA programs under which the loans are sold allow the Company to repurchase individual delinquent loans that meet certain criteria from the securitized loan pool. At its option, and without GNMA’s prior authorization, the Company may repurchase a delinquent loan for an amount equal to
100%
of the remaining principal balance on the loan. Once the Company has the unconditional ability to repurchase a delinquent loan, the Company is deemed to have regained effective control over the loan and the Company is required to recognize the loan on its balance sheet and record an offsetting liability, regardless of its intent to repurchase the loan. At
December 31, 2017
and
2016
, residential real estate portfolio loans included
$2.65 million
and
$3.27 million
, respectively, of loans available for repurchase under the GNMA optional repurchase programs with the offsetting liability recorded within other short-term borrowings.
Mortgage Banking Activities
— Loans held for sale are composed of performing one-to-four family residential mortgage loans originated for resale. Mortgage loans originated with the intent to sell are carried at fair value.
The Company recognizes the rights to service 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. These assets are amortized as reductions of mortgage servicing fee income over the estimated servicing period in proportion to the estimated servicing income to be received. Gains and losses on the sale of MSRs are recognized in Noninterest Income on the Statements of Income in the period in which such rights are sold.
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.
MSRs are also reviewed for other-than-temporary impairment. Other-than-temporary impairment exists when recoverability of a recorded valuation allowance is determined to be remote considering historical and projected interest rates, prepayments, and loan pay-off activity. When this situation occurs, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the MSRs. Unlike a valuation allowance, a direct write-down permanently reduces the carrying value of the MSRs and the valuation allowance, precluding subsequent recoveries.
As part of mortgage banking operations, the Company enters into commitments to originate loans whereby the interest rate on these loans is determined prior to funding (“rate lock commitments”). Similar to loans held for sale, the fair value of rate lock commitments is subject to change primarily due to changes in interest rates. Under the Company’s risk management policy, these fair values are hedged primarily by selling forward contracts on agency securities. The rate lock commitments on mortgage loans intended to be sold and the related hedging instruments are recorded at fair value with changes in fair value recorded in current earnings.
Reserve for Loan and Lease Losses
— 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 homogenous 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.
Specific reserves are established for certain business and specialty finance credits based on a regular analysis of special attention loans and leases. This analysis is performed by the Credit Policy Committee (CPC), the Loan Review Department, Credit Administration, and the Loan Workout Departments. The specific reserves are based on an analysis of underlying collateral values, cash flow considerations and, if applicable, guarantor capacity. Sources for determining collateral values include appraisals, evaluations, auction values and industry guides. Generally, for loans secured by commercial real estate and dependent on cash flows from the underlying collateral to service the debt, a new appraisal is obtained at the time the credit is deemed to be impaired. For non-income producing commercial real estate, an appraisal or evaluation is ordered depending on an analysis of the underlying factors, including an assessment of the overall credit worthiness of the borrower, the value of non-real estate collateral supporting the transaction and the date of the most recent existing appraisal or evaluation. An evaluation may be performed in lieu of obtaining a new appraisal for less complex transactions secured by local market properties. Values based on evaluations are discounted more heavily than those determined by appraisals when calculating loan impairment. Appraisals, evaluations and industry guides are used to determine aircraft values. Appraisals, industry guides and auction values are used to determine construction equipment, truck and auto values.
The formula reserves determined for each business lending division portfolio are calculated quarterly by applying loss factors to outstanding loans and leases based upon a review of historical loss experience and qualitative factors, which include but are not limited to, economic trends, current market risk assessment by industry, recent loss experience in particular segments of the portfolios, movement in equipment values collateralizing specialized industry portfolios, concentrations of credit, delinquencies, trends in volume, experience and depth of relationship managers and division management, and the effects of changes in lending policies and practices, including changes in quality of the loan and lease origination, servicing and risk management processes. Special attention loans and leases without specific reserves receive a higher percentage allocation ratio than credits not considered special attention.
Pooled loans and leases are smaller credits and are homogenous in nature, such as consumer credits and residential mortgages. Pooled loan and lease loss reserves are based on historical net charge-offs, adjusted for delinquencies, the effects of lending practices and programs and current economic conditions, and current trends in the geographic markets which the Company serves.
A comprehensive analysis of the reserve is performed on a quarterly basis by reviewing all loans and leases over a fixed dollar amount (
$100,000
) where the internal credit quality grade is at or below a predetermined classification. Although the Company determines the amount of each element of the reserve separately and relies on this process as an important credit management tool, the entire reserve is available for the entire loan and lease portfolio. The actual amount of losses incurred can vary significantly from the estimated amounts both positively and negatively. The Company’s methodology includes several factors intended to minimize the difference between estimated and actual losses. These factors allow the Company to adjust its estimate of losses based on the most recent information available.
Impaired loans are reviewed quarterly to assess the probability of being able to collect the portion considered impaired. When a review and analysis of the underlying credit and collateral indicates ultimate collection is improbable, the deficiency is charged-off and deducted from the reserve. Loans and leases, which are deemed uncollectible or have a low likelihood of collection, are charged-off and deducted from the reserve, while recoveries of amounts previously charged-off are credited to the reserve. A (recovery of) provision for loan and lease losses is credited or charged to operations based on the Company’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.
Equipment Owned Under Operating Leases
— 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 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
to
seven years
. Revenue consists of the contractual lease payments and is recognized on a straight-line basis over the lease term and reported as noninterest income. Leased assets are being 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 as Noninterest Expense on the 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 periodically 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.
Other Real Estate
— Other real estate acquired through partial or total satisfaction of nonperforming loans is included in Other Assets and recorded at fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair value of the property less cost to sell, and the carrying value of the loan charged to the reserve for loan losses or other income, if a positive adjustment. Subsequent fair value write-downs or write-ups, to the extent of previous write-downs, property maintenance costs, and gains or losses recognized upon the sale of other real estate are recognized in Noninterest Expense on the Statements of Income. Gains or losses resulting from the sale of other real estate are recognized on the date of sale. As of
December 31, 2017
and
2016
, other real estate had carrying values of
$1.31 million
and
$0.70 million
, respectively, and is included in Other Assets in the Statements of Financial Condition.
Repossessed Assets
— Repossessed assets may include fixtures and equipment, inventory and receivables, aircraft, construction equipment, and vehicles acquired from business banking and specialty finance activities. Repossessed assets are included in Other Assets at fair value of the equipment or vehicle less estimated selling costs. 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. Subsequent fair value write-downs or write-ups, to the extent of previous write-downs, equipment maintenance costs, and gains or losses recognized upon the sale of repossessions are recognized in Noninterest Expense on the Statements of Income. Gains or losses resulting from the sale of repossessed assets are recognized on the date of sale. Repossessed assets totaled
$10.11 million
and
$9.37 million
, as of
December 31, 2017
and
2016
, respectively, and are included in Other Assets in the Statements of Financial Condition.
Premises and Equipment
— Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed by the straight-line method, primarily with useful lives ranging from
three
to
31.5 years
. Maintenance and repairs are charged to expense as incurred, while improvements, which extend the useful life, are capitalized and depreciated over the estimated remaining life.
Goodwill and Intangibles
— Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Goodwill is reviewed for impairment at least annually or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the carrying amount. Goodwill is allocated into
two
reporting units. Fair value for each reporting unit is estimated using stock price multiples or earnings before interest, tax, depreciation and amortization (EBITDA) multiples. Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to impairment testing. All of the Company’s other intangible assets have finite lives and are amortized on a straight-line basis over varying periods not exceeding
twenty-five years
. The Company performed the required annual impairment test of goodwill during the fourth quarter of
2017
and determined that no impairment exists.
Partnership Investments
— The Company accounts for its investments in partnerships for which it owns
three
percent or more of the partnership on the equity method. The partnerships in which the Company has investments account for their investments at fair value. As a result, the Company’s investments in these partnerships reflect the underlying fair value of the partnerships’ investments. The Company accounts for its investments in partnerships of which it owns less than three percent at the lower of cost or fair value. The Company uses the hypothetical liquidation book value (HLBV) method for equity investments when the liquidation rights and priorities as defined by an equity investment agreement differ from what is reflected by the underlying percentage ownership interests. The HLBV method is commonly applied to equity investments in the renewable energy industry, where cash percentages vary at different points in time and are not directly linked to an investor’s ownership percentage. A calculation is prepared at each balance sheet date to determine the amount that the Company would receive if an equity investment entity were to liquidate all of its assets (as valued in accordance with GAAP) and distribute that cash to the investors based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is 1st Source’s share of the earnings or losses from the equity investment for the period. Investments in partnerships are included in Other Assets in the Statements of Financial Condition. The balances as of
December 31, 2017
and
2016
were
$23.76 million
and
$12.17 million
, respectively.
Short-Term Borrowings
— Short-term borrowings consist of Federal funds purchased, securities sold under agreements to repurchase, commercial paper, Federal Home Loan Bank notes, and borrowings from non-affiliated banks. Federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings mature within
one
to
365 days
of the transaction date. Commercial paper matures within
seven
to
270 days
. Other short-term borrowings in the Statements of Financial Condition include the Company’s liability related to mortgage loans available for repurchase under GNMA optional repurchase programs.
Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third party is continually monitored and additional collateral obtained or requested to be returned to the Company as deemed appropriate.
Trust and Wealth Advisory
Fees
— Trust and wealth advisory fees are recognized on the accrual basis.
Income Taxes
— 1st Source and its subsidiaries file a consolidated Federal income tax return. The provision for incomes taxes is based upon income in the consolidated financial statements, rather than amounts reported on the income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, the Company believes it is more likely than not that all of the deferred tax assets will be realized.
The Company uses the deferral method of accounting on investments that generate investment tax credits. Under this method, the investment tax credits are recognized as a reduction to the related asset. The expense on certain qualified affordable housing investments is included in Tax Expense in the Statements of Income.
Positions taken in the tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than
50%
likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within Income Tax Expense in the Statements of Income.
Net Income Per Common Share
— Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding, plus the dilutive effect of outstanding stock options, stock warrants and nonvested stock-based compensation awards.
Stock-Based Employee Compensation
— The Company recognizes stock-based compensation as compensation cost in the Statements of Income based on their fair values on the measurement date, which, for its purposes, is the date of grant.
Segment Information
— 1st Source has one principal business segment, commercial banking. While our chief decision makers monitor the revenue streams of various products and services, the identifiable segments’ operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company’s financial service operations are considered to be aggregated in
one
reportable operating segment.
Derivative Financial Instruments
— The Company occasionally enters into derivative financial instruments as part of its interest rate risk management strategies. These derivative financial instruments consist primarily of interest rate swaps. All derivative instruments are recorded on the Statements of Financial Condition, as either an asset or liability, at their fair value. The accounting for the gain or loss resulting from the change in fair value depends on the intended use of the derivative. For a derivative used to hedge changes in fair value of a recognized asset or liability, or an unrecognized firm commitment, the gain or loss on the derivative will be recognized in earnings together with the offsetting loss or gain on the hedged item. This results in an earnings impact only to the extent that the hedge is ineffective in achieving offsetting changes in fair value. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in earnings. For a derivative used to hedge changes in cash flows associated with forecasted transactions, the gain or loss on the effective portion of the derivative will be deferred, and reported as accumulated other comprehensive income, a component of shareholders’ equity, until such time the hedged transaction affects earnings. For derivative instruments not accounted for as hedges, changes in fair value are recognized in noninterest income/expense. Deferred gains and losses from derivatives that are terminated and were in a cash flow hedge are amortized over the shorter of the original remaining term of the derivative or the remaining life of the underlying asset or liability.
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. Securities available for sale, mortgage loans held for sale, and derivative instruments are carried at fair value on a recurring basis. 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 are 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.
Reclassifications
— Certain amounts in the prior periods consolidated financial statements have been reclassified to conform with the current year presentation. These reclassifications had no effect on total assets, shareholders’ equity or net income as previously reported.
Note 2 — Recent Accounting Pronouncements
Share Based Payment Awards:
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-09 “
Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting.”
These amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments should be applied on a prospective basis to an award modified on or after the adoption date. The Company adopted ASU 2017-09 on January 1, 2018 and it did not have an 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 is continuing to assess the impact of ASU 2017-08 on its accounting and disclosures.
Sale of Nonfinancial Assets:
In February 2017, the FASB issued ASU No. 2017-05 “
Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.”
'The amendments clarify that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments also define the term in substance nonfinancial asset. The amendments clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. A contract that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets. The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The guidance is effective for public business entities for annual periods beginning after December 15, 2017 and interim periods therein. Entities may use either a full or modified approach to adopt the ASU. The Company adopted ASU 2017-05 on January 1, 2018 and it did not have an impact on its accounting and disclosures.
Simplifying the Test for Goodwill Impairment:
In January 2017, the FASB issued ASU No. 2017-04 “
Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.”
These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company has assessed ASU 2017-04 and does not expect it to have a material impact on its accounting and disclosures.
Business Combinations:
In January 2017, the FASB issued ASU No. 2017-01 “
Business Combinations (Topic 805) - Clarifying the Definition of a Business.”
ASU 2017-01 provides amendments to clarify the definition of a business and affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied prospectively as of the beginning of the period of adoption. Early adoption is permitted under certain circumstances. The Company adopted ASU 2017-01 on January 1, 2018 and it did not have an impact on its accounting and disclosures.
Restricted Cash:
In November 2016, the FASB issued ASU No. 2016-18 “
Statement of Cash Flows (Topic 230) - Restricted Cash.”
ASU 2016-18 provides amendments to cash flow statement classification and presentation to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied using a retrospective transition method to each period presented. Early adoption is permitted, including adoption in an interim period. The Company adopted ASU 2016-18 on January 1, 2018 and it did not have a material impact on its accounting and disclosures.
Intra-Entity Transfers of Assets Other Than Inventory:
In October 2016, the FASB issued ASU No. 2016-16 “
Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory.”
The amendments in ASU 2016-16 require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments do not include new disclosure requirements; however existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company adopted ASU 2016-16 on January 1, 2018 and it did not have an impact on its accounting and disclosures.
Classification of Certain Cash Receipts and Cash Payments:
In August 2016, the FASB issued ASU No. 2016-15 “
Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.”
ASU 2016-15 provides cash flow statement classification guidance for certain transactions including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company adopted ASU 2016-15 on January 1, 2018 and it did not 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.
For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense.
Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security.
ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has an implementation team working through the provisions of ASU 2016-13 including assessing the impact on its accounting and disclosures.
Leases:
In February 2016, the FASB issued ASU No. 2016-02 “
Leases (Topic 842).”
ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company has an implementation team working through the provisions of ASU 2016-02 including a review of all leases to assess the impact on its accounting, disclosures and the election of certain practical expedients. It is expected that the Company will recognize discounted right of use assets and lease liabilities (estimated between
$7 million
and
$10 million
) upon adoption on January 1, 2019. The estimates will change due to changes in the lease portfolio.
Recognition and Measurement of Financial Instruments:
In January 2016, the FASB issued ASU No. 2016-01 “
Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.”
ASU 2016-01 is intended to improve the recognition and measurement of financial instruments by requiring equity investments to be measured at fair value with changes in fair value recognized in net income; requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured and amortized at cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. ASU 2016-01 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted ASU 2016-01 on January 1, 2018 and it did not have a material effect on its accounting for equity investments, fair value disclosures and other disclosure requirements.
Revenue from Contracts with Customers:
In May 2014, the FASB issued ASU No. 2014-09 “
Revenue from Contracts with Customers (Topic 606).”
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB approved amendments deferring the effective date by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted but not before the original public entity effective date,
i.e
., annual periods beginning after December 15, 2016. In March 2016, the FASB issued final amendments (ASU No. 2016-08 and ASU No. 2016-10) to clarify the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting for licenses of intellectual property. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. In May 2016, the FASB issued final amendments (ASU No. 2016-12 and ASU 2016-11) to address narrow-scope improvements to the guidance on collectibility, non-cash consideration, completed contracts at transition and to provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. Additionally, the amendments included a rescission of SEC guidance because of ASU 2014-09 related to revenue and expense recognition for freight services in process, accounting for shipping and handling fees and costs, and accounting for consideration given by a vendor to a customer. In December 2016, the FASB issued final guidance (ASU 2016-20) that allows entities not to make quantitative disclosures about performance obligations in certain cases and requires entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. It also makes 12 additional technical corrections and improvements to the new revenue standard. These amendments are effective upon the adoption of ASU 2014-09. The Company’s revenue is comprised of net interest income, which is explicitly excluded from the scope of ASU 2014-09, and noninterest income. ASU 2014-09 required the Company to evaluate how it recognizes certain recurring revenue streams related to noninterest income. The Company adopted ASU 2014-09 on January 1, 2018 and did not identify any significant changes in the timing of revenue recognition when considering the amended accounting guidance. The Company will have additional disclosures beginning in the first quarter of 2018 as required by the guidance.
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
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and Federal agencies securities
|
|
$
|
471,508
|
|
|
$
|
57
|
|
|
$
|
(3,446
|
)
|
|
$
|
468,119
|
|
U.S. States and political subdivisions securities
|
|
116,260
|
|
|
648
|
|
|
(908
|
)
|
|
116,000
|
|
Mortgage-backed securities - Federal agencies
|
|
289,327
|
|
|
1,456
|
|
|
(2,873
|
)
|
|
287,910
|
|
Corporate debt securities
|
|
31,573
|
|
|
5
|
|
|
(284
|
)
|
|
31,294
|
|
Foreign government and other securities
|
|
700
|
|
|
10
|
|
|
—
|
|
|
710
|
|
Total investment securities available-for-sale
|
|
$
|
909,368
|
|
|
$
|
2,176
|
|
|
$
|
(7,511
|
)
|
|
$
|
904,033
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and Federal agencies securities
|
|
$
|
424,495
|
|
|
$
|
809
|
|
|
$
|
(4,471
|
)
|
|
$
|
420,833
|
|
U.S. States and political subdivisions securities
|
|
133,509
|
|
|
1,036
|
|
|
(1,570
|
)
|
|
132,975
|
|
Mortgage-backed securities - Federal agencies
|
|
252,981
|
|
|
2,175
|
|
|
(2,582
|
)
|
|
252,574
|
|
Corporate debt securities
|
|
35,266
|
|
|
111
|
|
|
(301
|
)
|
|
35,076
|
|
Foreign government and other securities
|
|
800
|
|
|
7
|
|
|
—
|
|
|
807
|
|
Total debt securities
|
|
847,051
|
|
|
4,138
|
|
|
(8,924
|
)
|
|
842,265
|
|
Marketable equity securities
|
|
1,265
|
|
|
7,007
|
|
|
(70
|
)
|
|
8,202
|
|
Total investment securities available-for-sale
|
|
$
|
848,316
|
|
|
$
|
11,145
|
|
|
$
|
(8,994
|
)
|
|
$
|
850,467
|
|
At
December 31, 2017
, 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 Company did not hold any marketable equity securities at December 31, 2017.
The following table shows the contractual maturities of investments in debt securities available-for-sale at
December 31, 2017
. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
Fair Value
|
Due in one year or less
|
|
$
|
94,929
|
|
|
$
|
95,016
|
|
Due after one year through five years
|
|
493,262
|
|
|
489,615
|
|
Due after five years through ten years
|
|
31,850
|
|
|
31,492
|
|
Due after ten years
|
|
—
|
|
|
—
|
|
Mortgage-backed securities
|
|
289,327
|
|
|
287,910
|
|
Total debt securities available-for-sale
|
|
$
|
909,368
|
|
|
$
|
904,033
|
|
The following table summarizes gross unrealized losses and fair value by investment category and age.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 months or Longer
|
|
Total
|
(Dollars in thousands)
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and Federal agencies securities
|
|
$
|
311,865
|
|
|
$
|
(1,161
|
)
|
|
$
|
89,617
|
|
|
$
|
(2,285
|
)
|
|
$
|
401,482
|
|
|
$
|
(3,446
|
)
|
U.S. States and political subdivisions securities
|
|
34,971
|
|
|
(287
|
)
|
|
24,909
|
|
|
(621
|
)
|
|
59,880
|
|
|
(908
|
)
|
Mortgage-backed securities - Federal agencies
|
|
137,169
|
|
|
(1,336
|
)
|
|
60,162
|
|
|
(1,537
|
)
|
|
197,331
|
|
|
(2,873
|
)
|
Corporate debt securities
|
|
13,747
|
|
|
(57
|
)
|
|
10,048
|
|
|
(227
|
)
|
|
23,795
|
|
|
(284
|
)
|
Foreign government and other securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total temporarily impaired available-for-sale securities
|
|
$
|
497,752
|
|
|
$
|
(2,841
|
)
|
|
$
|
184,736
|
|
|
$
|
(4,670
|
)
|
|
$
|
682,488
|
|
|
$
|
(7,511
|
)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and Federal agencies securities
|
|
$
|
263,680
|
|
|
$
|
(4,471
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
263,680
|
|
|
$
|
(4,471
|
)
|
U.S. States and political subdivisions securities
|
|
74,129
|
|
|
(1,515
|
)
|
|
3,337
|
|
|
(55
|
)
|
|
77,466
|
|
|
(1,570
|
)
|
Mortgage-backed securities - Federal agencies
|
|
168,554
|
|
|
(2,341
|
)
|
|
5,102
|
|
|
(241
|
)
|
|
173,656
|
|
|
(2,582
|
)
|
Corporate debt securities
|
|
13,312
|
|
|
(301
|
)
|
|
—
|
|
|
—
|
|
|
13,312
|
|
|
(301
|
)
|
Foreign government and other securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total debt securities
|
|
519,675
|
|
|
(8,628
|
)
|
|
8,439
|
|
|
(296
|
)
|
|
528,114
|
|
|
(8,924
|
)
|
Marketable equity securities
|
|
280
|
|
|
(70
|
)
|
|
4
|
|
|
—
|
|
|
284
|
|
|
(70
|
)
|
Total temporarily impaired available-for-sale securities
|
|
$
|
519,955
|
|
|
$
|
(8,698
|
)
|
|
$
|
8,443
|
|
|
$
|
(296
|
)
|
|
$
|
528,398
|
|
|
$
|
(8,994
|
)
|
At
December 31, 2017
, the Company does not have the intent to sell any of the available-for-sale securities in the table above and believes that it is more likely than not that it will not have to sell any such securities before an anticipated recovery of cost. The unrealized losses on debt securities are due to market volatility. The fair value is expected to recover on all debt securities as they approach their maturity date or repricing date or if market yields for such investments decline. The Company does not believe any of the securities are impaired due to reasons of credit quality.
The following table shows the gross realized gains and losses from the securities available-for-sale portfolio, including marketable equity securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Gross realized gains
|
|
$
|
7,425
|
|
|
$
|
2,090
|
|
|
$
|
4
|
|
Gross realized losses
|
|
(2,895
|
)
|
|
—
|
|
|
—
|
|
OTTI losses
|
|
(190
|
)
|
|
(294
|
)
|
|
—
|
|
Net realized gains
|
|
$
|
4,340
|
|
|
$
|
1,796
|
|
|
$
|
4
|
|
At
December 31, 2017
and
2016
, investment securities with carrying values of
$289.05 million
and
$276.29 million
, respectively, were pledged as collateral for security repurchase agreements and for other purposes.
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, 2017
and
2016
, and totaled
$4.53 billion
and
$4.19 billion
, respectively. At
December 31, 2017
and
2016
, net deferred loan and lease costs were
$3.85 million
and
$3.78 million
, respectively.
The loan and lease portfolio includes direct financing leases, which are included in commercial and agricultural, auto and light truck, medium and heavy duty truck, aircraft, and construction equipment on the Statements of Financial Condition.
The following table shows the summary of the gross investment in lease financing and the components of the investment in lease financing at
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
Direct finance leases:
|
|
|
|
|
|
|
Rentals receivable
|
|
$
|
208,295
|
|
|
$
|
218,543
|
|
Estimated residual value of leased assets
|
|
29,638
|
|
|
21,992
|
|
Gross investment in lease financing
|
|
237,933
|
|
|
240,535
|
|
Unearned income
|
|
(37,851
|
)
|
|
(35,751
|
)
|
Net investment in lease financing
|
|
$
|
200,082
|
|
|
$
|
204,784
|
|
At
December 31, 2017
, the direct financing minimum future lease payments receivable for each of the years
2018
through
2022
were
$51.17 million
,
$44.04 million
,
$39.03 million
,
$30.45 million
, and
$27.83 million
, respectively.
In the ordinary course of business, the Company has 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 persons not related to the Company and did not involve more than the normal risk of collectability, or present other unfavorable features. The loans are consistent with sound banking practices and within applicable regulatory and lending limitations. The aggregate dollar amounts of these loans were
$14.61 million
and
$31.46 million
at
December 31, 2017
and
2016
, respectively. During
2017
,
$2.30 million
of new loans and other additions were made and repayments and other reductions totaled
$19.15 million
.
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 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 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
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
$
|
906,074
|
|
|
$
|
23,923
|
|
|
$
|
929,997
|
|
Auto and light truck
|
|
482,455
|
|
|
14,361
|
|
|
496,816
|
|
Medium and heavy duty truck
|
|
293,318
|
|
|
3,617
|
|
|
296,935
|
|
Aircraft
|
|
815,956
|
|
|
28,701
|
|
|
844,657
|
|
Construction equipment
|
|
552,684
|
|
|
10,753
|
|
|
563,437
|
|
Commercial real estate
|
|
726,134
|
|
|
15,434
|
|
|
741,568
|
|
Total
|
|
$
|
3,776,621
|
|
|
$
|
96,789
|
|
|
$
|
3,873,410
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
$
|
784,811
|
|
|
$
|
27,453
|
|
|
$
|
812,264
|
|
Auto and light truck
|
|
407,931
|
|
|
3,833
|
|
|
411,764
|
|
Medium and heavy duty truck
|
|
291,558
|
|
|
3,232
|
|
|
294,790
|
|
Aircraft
|
|
772,802
|
|
|
29,612
|
|
|
802,414
|
|
Construction equipment
|
|
486,923
|
|
|
9,002
|
|
|
495,925
|
|
Commercial real estate
|
|
707,252
|
|
|
11,918
|
|
|
719,170
|
|
Total
|
|
$
|
3,451,277
|
|
|
$
|
85,050
|
|
|
$
|
3,536,327
|
|
For residential real estate and home equity and consumer loans, credit quality is based on the aging status of the loan and by payment activity. The following table shows the recorded investment in residential real estate and home equity and consumer loans by performing or nonperforming status. Nonperforming loans are those loans which are on nonaccrual status or are
90 days
or more past due.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Performing
|
|
Nonperforming
|
|
Total
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Residential real estate and home equity
|
|
$
|
523,803
|
|
|
$
|
2,319
|
|
|
$
|
526,122
|
|
Consumer
|
|
127,982
|
|
|
164
|
|
|
128,146
|
|
Total
|
|
$
|
651,785
|
|
|
$
|
2,483
|
|
|
$
|
654,268
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Residential real estate and home equity
|
|
$
|
518,896
|
|
|
$
|
3,035
|
|
|
$
|
521,931
|
|
Consumer
|
|
129,585
|
|
|
228
|
|
|
129,813
|
|
Total
|
|
$
|
648,481
|
|
|
$
|
3,263
|
|
|
$
|
651,744
|
|
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
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
$
|
927,113
|
|
|
$
|
281
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
927,394
|
|
|
$
|
2,603
|
|
|
$
|
929,997
|
|
Auto and light truck
|
|
485,885
|
|
|
2,869
|
|
|
21
|
|
|
—
|
|
|
488,775
|
|
|
8,041
|
|
|
496,816
|
|
Medium and heavy duty truck
|
|
296,564
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
296,564
|
|
|
371
|
|
|
296,935
|
|
Aircraft
|
|
823,638
|
|
|
14,570
|
|
|
4,492
|
|
|
—
|
|
|
842,700
|
|
|
1,957
|
|
|
844,657
|
|
Construction equipment
|
|
561,665
|
|
|
333
|
|
|
448
|
|
|
—
|
|
|
562,446
|
|
|
991
|
|
|
563,437
|
|
Commercial real estate
|
|
738,006
|
|
|
23
|
|
|
121
|
|
|
—
|
|
|
738,150
|
|
|
3,418
|
|
|
741,568
|
|
Residential real estate and home equity
|
|
521,943
|
|
|
1,508
|
|
|
352
|
|
|
429
|
|
|
524,232
|
|
|
1,890
|
|
|
526,122
|
|
Consumer
|
|
127,107
|
|
|
776
|
|
|
99
|
|
|
30
|
|
|
128,012
|
|
|
134
|
|
|
128,146
|
|
Total
|
|
$
|
4,481,921
|
|
|
$
|
20,360
|
|
|
$
|
5,533
|
|
|
$
|
459
|
|
|
$
|
4,508,273
|
|
|
$
|
19,405
|
|
|
$
|
4,527,678
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
$
|
808,283
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
808,283
|
|
|
$
|
3,981
|
|
|
$
|
812,264
|
|
Auto and light truck
|
|
411,300
|
|
|
298
|
|
|
—
|
|
|
—
|
|
|
411,598
|
|
|
166
|
|
|
411,764
|
|
Medium and heavy duty truck
|
|
294,790
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
294,790
|
|
|
—
|
|
|
294,790
|
|
Aircraft
|
|
791,559
|
|
|
1,429
|
|
|
3,316
|
|
|
—
|
|
|
796,304
|
|
|
6,110
|
|
|
802,414
|
|
Construction equipment
|
|
493,131
|
|
|
1,546
|
|
|
—
|
|
|
—
|
|
|
494,677
|
|
|
1,248
|
|
|
495,925
|
|
Commercial real estate
|
|
713,482
|
|
|
133
|
|
|
—
|
|
|
—
|
|
|
713,615
|
|
|
5,555
|
|
|
719,170
|
|
Residential real estate and home equity
|
|
517,212
|
|
|
1,310
|
|
|
374
|
|
|
394
|
|
|
519,290
|
|
|
2,641
|
|
|
521,931
|
|
Consumer
|
|
129,000
|
|
|
453
|
|
|
132
|
|
|
22
|
|
|
129,607
|
|
|
206
|
|
|
129,813
|
|
Total
|
|
$
|
4,158,757
|
|
|
$
|
5,169
|
|
|
$
|
3,822
|
|
|
$
|
416
|
|
|
$
|
4,168,164
|
|
|
$
|
19,907
|
|
|
$
|
4,188,071
|
|
Interest income for the years ended
December 31, 2017
,
2016
, and
2015
, would have increased by approximately
$1.14 million
,
$1.11 million
, and
$1.03 million
, respectively, if the nonaccrual loans and leases had earned interest at their full contract rate.
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
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
With no related reserve recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
$
|
2,439
|
|
|
$
|
2,439
|
|
|
$
|
—
|
|
Auto and light truck
|
|
—
|
|
|
—
|
|
|
—
|
|
Medium and heavy duty truck
|
|
371
|
|
|
371
|
|
|
—
|
|
Aircraft
|
|
1,901
|
|
|
1,901
|
|
|
—
|
|
Construction equipment
|
|
584
|
|
|
584
|
|
|
—
|
|
Commercial real estate
|
|
2,375
|
|
|
2,375
|
|
|
—
|
|
Residential real estate and home equity
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
Total with no related reserve recorded
|
|
7,670
|
|
|
7,670
|
|
|
—
|
|
With a reserve recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
—
|
|
|
—
|
|
|
—
|
|
Auto and light truck
|
|
7,780
|
|
|
7,780
|
|
|
243
|
|
Medium and heavy duty truck
|
|
—
|
|
|
—
|
|
|
—
|
|
Aircraft
|
|
—
|
|
|
—
|
|
|
—
|
|
Construction equipment
|
|
344
|
|
|
344
|
|
|
108
|
|
Commercial real estate
|
|
971
|
|
|
971
|
|
|
181
|
|
Residential real estate and home equity
|
|
352
|
|
|
354
|
|
|
134
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
Total with a reserve recorded
|
|
9,447
|
|
|
9,449
|
|
|
666
|
|
Total impaired loans
|
|
$
|
17,117
|
|
|
$
|
17,119
|
|
|
$
|
666
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
With no related reserve recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
$
|
1,700
|
|
|
$
|
1,700
|
|
|
$
|
—
|
|
Auto and light truck
|
|
115
|
|
|
115
|
|
|
—
|
|
Medium and heavy duty truck
|
|
—
|
|
|
—
|
|
|
—
|
|
Aircraft
|
|
2,918
|
|
|
2,918
|
|
|
—
|
|
Construction equipment
|
|
605
|
|
|
605
|
|
|
—
|
|
Commercial real estate
|
|
2,607
|
|
|
2,607
|
|
|
—
|
|
Residential real estate and home equity
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
Total with no related reserve recorded
|
|
7,945
|
|
|
7,945
|
|
|
—
|
|
With a reserve recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
1,890
|
|
|
1,890
|
|
|
297
|
|
Auto and light truck
|
|
—
|
|
|
—
|
|
|
—
|
|
Medium and heavy duty truck
|
|
—
|
|
|
—
|
|
|
—
|
|
Aircraft
|
|
3,192
|
|
|
3,192
|
|
|
1,076
|
|
Construction equipment
|
|
562
|
|
|
562
|
|
|
35
|
|
Commercial real estate
|
|
2,765
|
|
|
2,765
|
|
|
322
|
|
Residential real estate and home equity
|
|
674
|
|
|
676
|
|
|
148
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
Total with a reserve recorded
|
|
9,083
|
|
|
9,085
|
|
|
1,878
|
|
Total impaired loans
|
|
$
|
17,028
|
|
|
$
|
17,030
|
|
|
$
|
1,878
|
|
The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by class, for years ending
December 31, 2017
,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
(Dollars in thousands)
|
|
Average
Recorded
Investment
|
|
Interest
Income
|
|
Average
Recorded
Investment
|
|
Interest
Income
|
|
Average
Recorded
Investment
|
|
Interest
Income
|
Commercial and agricultural
|
|
$
|
4,526
|
|
|
$
|
1
|
|
|
$
|
3,484
|
|
|
$
|
6
|
|
|
$
|
5,362
|
|
|
$
|
32
|
|
Auto and light truck
|
|
766
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Medium and heavy duty truck
|
|
658
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Aircraft
|
|
4,873
|
|
|
5
|
|
|
6,291
|
|
|
2
|
|
|
7,285
|
|
|
6
|
|
Construction equipment
|
|
1,011
|
|
|
—
|
|
|
766
|
|
|
—
|
|
|
695
|
|
|
—
|
|
Commercial real estate
|
|
3,220
|
|
|
2
|
|
|
5,417
|
|
|
123
|
|
|
10,126
|
|
|
518
|
|
Residential real estate and home equity
|
|
355
|
|
|
15
|
|
|
415
|
|
|
15
|
|
|
370
|
|
|
16
|
|
Consumer loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
15,409
|
|
|
$
|
23
|
|
|
$
|
16,383
|
|
|
$
|
146
|
|
|
$
|
23,838
|
|
|
$
|
572
|
|
The following table shows the number of loans and leases classified as troubled debt restructuring (TDR) during
2017
,
2016
and
2015
, segregated by class, as well as the recorded investment as of December 31. The classification between nonperforming and performing is shown at the time of modification. 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. There were
one
modification during
2017
,
one
modification during
2016
, and
no
modifications during
2015
that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modifications was immaterial.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
(Dollars in thousands)
|
|
Number of Modifications
|
|
Recorded Investment
|
|
Number of Modifications
|
|
Recorded Investment
|
|
Number of Modifications
|
|
Recorded Investment
|
Performing TDRs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
2
|
|
|
$
|
218
|
|
Auto and light truck
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Medium and heavy duty truck
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Aircraft
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Construction equipment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate and home equity
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total performing TDR modifications
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
218
|
|
Nonperforming TDRs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Auto and light truck
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Medium and heavy duty truck
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Aircraft
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Construction equipment
|
|
—
|
|
|
—
|
|
|
1
|
|
|
562
|
|
|
—
|
|
|
—
|
|
Commercial real estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate and home equity
|
|
—
|
|
|
—
|
|
|
1
|
|
|
314
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total nonperforming TDR modifications
|
|
1
|
|
|
—
|
|
|
2
|
|
|
876
|
|
|
—
|
|
|
—
|
|
Total TDR modifications
|
|
1
|
|
|
$
|
—
|
|
|
2
|
|
|
$
|
876
|
|
|
2
|
|
|
$
|
218
|
|
There were
no
performing TDRs which had payment defaults within the twelve months following modification during the years ended
December 31, 2017
,
2016
and
2015
.
There was
one
nonperforming construction equipment TDR with a recorded investment of
$0.41 million
which had a payment default within the twelve months following modification for the year ended December 31, 2017 and no nonperforming TDRs which had payment defaults within the twelve months following modification during the years ended December 31, 2016 and 2015.
The classification between nonperforming and performing is shown at the time of modification. 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 December 31.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
(Dollars in thousands)
|
|
2017
|
|
2016
|
Performing TDRs
|
|
$
|
352
|
|
|
$
|
360
|
|
Nonperforming TDRs
|
|
537
|
|
|
1,642
|
|
Total TDRs
|
|
$
|
889
|
|
|
$
|
2,002
|
|
Note 5 — Reserve for Loan and Lease Losses
The following table shows the changes in the reserve for loan and lease losses, segregated by class, for each of the three years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
14,668
|
|
|
$
|
8,064
|
|
|
$
|
4,740
|
|
|
$
|
34,352
|
|
|
$
|
8,207
|
|
|
$
|
13,677
|
|
|
$
|
3,550
|
|
|
$
|
1,285
|
|
|
$
|
88,543
|
|
Charge-offs
|
|
2,415
|
|
|
774
|
|
|
—
|
|
|
1,872
|
|
|
164
|
|
|
344
|
|
|
124
|
|
|
836
|
|
|
6,529
|
|
Recoveries
|
|
984
|
|
|
1,153
|
|
|
—
|
|
|
227
|
|
|
298
|
|
|
851
|
|
|
109
|
|
|
267
|
|
|
3,889
|
|
Net charge-offs (recoveries)
|
|
1,431
|
|
|
(379
|
)
|
|
—
|
|
|
1,645
|
|
|
(134
|
)
|
|
(507
|
)
|
|
15
|
|
|
569
|
|
|
2,640
|
|
Provision (recovery of provision)
|
|
2,991
|
|
|
1,660
|
|
|
104
|
|
|
1,912
|
|
|
1,002
|
|
|
608
|
|
|
131
|
|
|
572
|
|
|
8,980
|
|
Balance, end of year
|
|
$
|
16,228
|
|
|
$
|
10,103
|
|
|
$
|
4,844
|
|
|
$
|
34,619
|
|
|
$
|
9,343
|
|
|
$
|
14,792
|
|
|
$
|
3,666
|
|
|
$
|
1,288
|
|
|
$
|
94,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
15,456
|
|
|
$
|
9,269
|
|
|
$
|
4,699
|
|
|
$
|
32,373
|
|
|
$
|
7,592
|
|
|
$
|
13,762
|
|
|
$
|
3,662
|
|
|
$
|
1,299
|
|
|
$
|
88,112
|
|
Charge-offs
|
|
547
|
|
|
4
|
|
|
—
|
|
|
6,123
|
|
|
128
|
|
|
32
|
|
|
219
|
|
|
888
|
|
|
7,941
|
|
Recoveries
|
|
509
|
|
|
253
|
|
|
10
|
|
|
528
|
|
|
461
|
|
|
469
|
|
|
31
|
|
|
278
|
|
|
2,539
|
|
Net charge-offs (recoveries)
|
|
38
|
|
|
(249
|
)
|
|
(10
|
)
|
|
5,595
|
|
|
(333
|
)
|
|
(437
|
)
|
|
188
|
|
|
610
|
|
|
5,402
|
|
Provision (recovery of provision)
|
|
(750
|
)
|
|
(1,454
|
)
|
|
31
|
|
|
7,574
|
|
|
282
|
|
|
(522
|
)
|
|
76
|
|
|
596
|
|
|
5,833
|
|
Balance, end of year
|
|
$
|
14,668
|
|
|
$
|
8,064
|
|
|
$
|
4,740
|
|
|
$
|
34,352
|
|
|
$
|
8,207
|
|
|
$
|
13,677
|
|
|
$
|
3,550
|
|
|
$
|
1,285
|
|
|
$
|
88,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
11,760
|
|
|
$
|
10,326
|
|
|
$
|
4,500
|
|
|
$
|
32,234
|
|
|
$
|
7,008
|
|
|
$
|
13,270
|
|
|
$
|
4,504
|
|
|
$
|
1,466
|
|
|
$
|
85,068
|
|
Charge-offs
|
|
3,489
|
|
|
24
|
|
|
—
|
|
|
244
|
|
|
—
|
|
|
—
|
|
|
295
|
|
|
658
|
|
|
4,710
|
|
Recoveries
|
|
851
|
|
|
380
|
|
|
28
|
|
|
802
|
|
|
434
|
|
|
2,807
|
|
|
34
|
|
|
258
|
|
|
5,594
|
|
Net charge-offs (recoveries)
|
|
2,638
|
|
|
(356
|
)
|
|
(28
|
)
|
|
(558
|
)
|
|
(434
|
)
|
|
(2,807
|
)
|
|
261
|
|
|
400
|
|
|
(884
|
)
|
Provision (recovery of provision)
|
|
6,334
|
|
|
(1,413
|
)
|
|
171
|
|
|
(419
|
)
|
|
150
|
|
|
(2,315
|
)
|
|
(581
|
)
|
|
233
|
|
|
2,160
|
|
Balance, end of year
|
|
$
|
15,456
|
|
|
$
|
9,269
|
|
|
$
|
4,699
|
|
|
$
|
32,373
|
|
|
$
|
7,592
|
|
|
$
|
13,762
|
|
|
$
|
3,662
|
|
|
$
|
1,299
|
|
|
$
|
88,112
|
|
The following table shows the reserve for loan and lease losses and recorded investment in loans and leases, segregated by class, separated by individually and collectively evaluated for impairment as of
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for loan and lease losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
243
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
108
|
|
|
$
|
181
|
|
|
$
|
134
|
|
|
$
|
—
|
|
|
$
|
666
|
|
Ending balance, collectively evaluated for impairment
|
|
16,228
|
|
|
9,860
|
|
|
4,844
|
|
|
34,619
|
|
|
9,235
|
|
|
14,611
|
|
|
3,532
|
|
|
1,288
|
|
|
94,217
|
|
Total reserve for loan and lease losses
|
|
$
|
16,228
|
|
|
$
|
10,103
|
|
|
$
|
4,844
|
|
|
$
|
34,619
|
|
|
$
|
9,343
|
|
|
$
|
14,792
|
|
|
$
|
3,666
|
|
|
$
|
1,288
|
|
|
$
|
94,883
|
|
Recorded investment in loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, individually evaluated for impairment
|
|
$
|
2,439
|
|
|
$
|
7,780
|
|
|
$
|
371
|
|
|
$
|
1,901
|
|
|
$
|
928
|
|
|
$
|
3,346
|
|
|
$
|
352
|
|
|
$
|
—
|
|
|
$
|
17,117
|
|
Ending balance, collectively evaluated for impairment
|
|
927,558
|
|
|
489,036
|
|
|
296,564
|
|
|
842,756
|
|
|
562,509
|
|
|
738,222
|
|
|
525,770
|
|
|
128,146
|
|
|
4,510,561
|
|
Total recorded investment in loans
|
|
$
|
929,997
|
|
|
$
|
496,816
|
|
|
$
|
296,935
|
|
|
$
|
844,657
|
|
|
$
|
563,437
|
|
|
$
|
741,568
|
|
|
$
|
526,122
|
|
|
$
|
128,146
|
|
|
$
|
4,527,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for loan and lease losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, individually evaluated for impairment
|
|
$
|
297
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,076
|
|
|
$
|
35
|
|
|
$
|
322
|
|
|
$
|
148
|
|
|
$
|
—
|
|
|
$
|
1,878
|
|
Ending balance, collectively evaluated for impairment
|
|
14,371
|
|
|
8,064
|
|
|
4,740
|
|
|
33,276
|
|
|
8,172
|
|
|
13,355
|
|
|
3,402
|
|
|
1,285
|
|
|
86,665
|
|
Total reserve for loan and lease losses
|
|
$
|
14,668
|
|
|
$
|
8,064
|
|
|
$
|
4,740
|
|
|
$
|
34,352
|
|
|
$
|
8,207
|
|
|
$
|
13,677
|
|
|
$
|
3,550
|
|
|
$
|
1,285
|
|
|
$
|
88,543
|
|
Recorded investment in loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, individually evaluated for impairment
|
|
$
|
3,590
|
|
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
6,110
|
|
|
$
|
1,167
|
|
|
$
|
5,372
|
|
|
$
|
674
|
|
|
$
|
—
|
|
|
$
|
17,028
|
|
Ending balance, collectively evaluated for impairment
|
|
808,674
|
|
|
411,649
|
|
|
294,790
|
|
|
796,304
|
|
|
494,758
|
|
|
713,798
|
|
|
521,257
|
|
|
129,813
|
|
|
4,171,043
|
|
Total recorded investment in loans
|
|
$
|
812,264
|
|
|
$
|
411,764
|
|
|
$
|
294,790
|
|
|
$
|
802,414
|
|
|
$
|
495,925
|
|
|
$
|
719,170
|
|
|
$
|
521,931
|
|
|
$
|
129,813
|
|
|
$
|
4,188,071
|
|
Note 6 — Operating Leases
Operating lease equipment at
December 31, 2017
and
2016
was
$139.58 million
and
$118.79 million
, respectively, net of accumulated depreciation of
$49.74 million
and
$42.23 million
, respectively.
The minimum future lease rental payments due from clients on operating lease equipment at
December 31, 2017
, totaled
$108.84 million
, of which
$28.81 million
is due in
2018
,
$26.88 million
in
2019
,
$28.52 million
in
2020
,
$14.62 million
in
2021
,
$7.05 million
in
2022
, and
$2.96 million
thereafter. Depreciation expense related to operating lease equipment for the years ended
December 31, 2017
,
2016
and
2015
was
$25.22 million
,
$21.68 million
and
$18.28 million
, respectively.
Note 7 — Premises and Equipment
The following table shows premises and equipment as of December 31.
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
Land
|
|
$
|
15,413
|
|
|
$
|
16,127
|
|
Buildings and improvements
|
|
58,981
|
|
|
59,027
|
|
Furniture and equipment
|
|
39,978
|
|
|
37,604
|
|
Total premises and equipment
|
|
114,372
|
|
|
112,758
|
|
Accumulated depreciation and amortization
|
|
(59,760
|
)
|
|
(56,050
|
)
|
Net premises and equipment
|
|
$
|
54,612
|
|
|
$
|
56,708
|
|
Depreciation and amortization of properties and equipment totaled
$5.66 million
in
2017
,
$5.25 million
in
2016
, and
$4.78 million
in
2015
.
During
2017
,
2016
and
2015
, the Company recorded long-lived asset impairment charges totaling
$410,000
,
$0
and
$150,000
, respectively. The impairment charges were recorded as a result of appraisals on buildings and were recognized in Other Expense on the Statements of Income.
Note 8 — Mortgage Servicing Rights
The unpaid principal balance of residential mortgage loans serviced for third parties was
$752.99 million
at
December 31, 2017
, compared to
$761.85 million
at
December 31, 2016
, and
$798.51 million
at
December 31, 2015
.
Amortization expense on MSRs is expected to total
$0.66 million
,
$0.57 million
,
$0.49 million
,
$0.42 million
, and
$0.36 million
in
2018
,
2019
,
2020
,
2021
and
2022
, respectively. Projected amortization excludes the impact of future asset additions or disposals.
The following table shows changes in the carrying value of MSRs and the associated valuation allowance.
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
Mortgage servicing rights:
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
4,297
|
|
|
$
|
4,608
|
|
Additions
|
|
1,144
|
|
|
1,167
|
|
Amortization
|
|
(1,092
|
)
|
|
(1,478
|
)
|
Sales
|
|
—
|
|
|
—
|
|
Carrying value before valuation allowance at end of year
|
|
4,349
|
|
|
4,297
|
|
Valuation allowance:
|
|
|
|
|
|
|
Balance at beginning of year
|
|
—
|
|
|
—
|
|
Impairment recoveries
|
|
—
|
|
|
—
|
|
Balance at end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
Net carrying value of mortgage servicing rights at end of year
|
|
$
|
4,349
|
|
|
$
|
4,297
|
|
Fair value of mortgage servicing rights at end of year
|
|
$
|
7,187
|
|
|
$
|
7,484
|
|
At
December 31, 2017
, the fair value of MSRs exceeded the carrying value reported in the Statements of Financial Condition by
$2.84 million
. This difference represents increases in the fair value of certain MSRs that could not be recorded above cost basis.
Funds held in trust at 1st Source for the payment of principal, interest, taxes and insurance premiums applicable to mortgage loans being serviced for others, were approximately
$10.42 million
and
$12.62 million
at
December 31, 2017
and
December 31, 2016
, respectively. Mortgage loan contractual servicing fees, including late fees and ancillary income, were
$2.70 million
,
$2.69 million
, and
$2.84 million
for
2017
,
2016
, and
2015
, respectively. Mortgage loan contractual servicing fees are included in Mortgage Banking Income on the Statements of Income.
Note 9 — Intangible Assets and Goodwill
At
December 31, 2017
, intangible assets consisted of goodwill of
$83.68 million
and other intangible assets of
$0.06 million
, which was net of accumulated amortization of
$9.48 million
. At
December 31, 2016
, intangible assets consisted of goodwill of
$83.68 million
and other intangible assets of
$0.42 million
, which was net of accumulated amortization of
$9.14 million
. Intangible asset amortization was
$0.36 million
,
$0.58 million
, and
$0.69 million
for
2017
,
2016
, and
2015
, respectively. Amortization on other intangible assets is expected to total
$0.05 million
and
$0.01 million
in
2018
and
2019
, respectively.
The following table shows a summary of core deposit intangible and other intangible assets as of December 31.
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
Core deposit intangibles:
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
9,546
|
|
|
$
|
9,566
|
|
Less: accumulated amortization
|
|
(9,484
|
)
|
|
(9,143
|
)
|
Net carrying amount
|
|
$
|
62
|
|
|
$
|
423
|
|
Other intangibles:
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
—
|
|
|
$
|
—
|
|
Less: accumulated amortization
|
|
—
|
|
|
—
|
|
Net carrying amount
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 10 — Deposits
The aggregate amount of certificates of deposit of $250,000 or more and other time deposits of $250,000 or more outstanding at
December 31, 2017
and
2016
was
$553.80 million
and
$348.30 million
, respectively.
The following table shows the amount of certificates of deposit of $250,000 or more and other time deposits of $250,000 or more outstanding at
December 31, 2017
, by time remaining until maturity.
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Under 3 months
|
|
$
|
107,747
|
|
4 – 6 months
|
|
75,414
|
|
7 – 12 months
|
|
109,311
|
|
Over 12 months
|
|
261,330
|
|
Total
|
|
$
|
553,802
|
|
The following table shows scheduled maturities of time deposits, including both private and public funds, at
December 31, 2017
.
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
2018
|
|
$
|
612,866
|
|
2019
|
|
385,988
|
|
2020
|
|
205,651
|
|
2021
|
|
45,726
|
|
2022
|
|
16,415
|
|
Thereafter
|
|
3,327
|
|
Total
|
|
$
|
1,269,973
|
|
Note 11 — Borrowed Funds and Mandatorily Redeemable Securities
The following table shows the details of long-term debt and mandatorily redeemable securities as of
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
Federal Home Loan Bank borrowings (1.04% – 5.86%)
|
|
$
|
47,114
|
|
|
$
|
53,075
|
|
Mandatorily redeemable securities
|
|
18,948
|
|
|
19,177
|
|
Other long-term debt
|
|
3,998
|
|
|
2,056
|
|
Total long-term debt and mandatorily redeemable securities
|
|
$
|
70,060
|
|
|
$
|
74,308
|
|
Annual maturities of long-term debt outstanding at
December 31, 2017
, for the next five years and thereafter beginning in
2018
, are as follows (in thousands):
$1,634
;
$1,545
;
$1,440
;
$1,728
;
$3,390
; and
$60,323
.
At
December 31, 2017
, the Federal Home Loan Bank borrowings represented a source of funding for community economic development activities, agricultural loans and general funding for the bank and consisted of
18
fixed rate notes with maturities ranging from
2018
to
2027
. These notes were collateralized by
$58.88 million
of certain real estate loans.
Mandatorily redeemable securities as of
December 31, 2017
and
2016
, of
$18.95 million
and
$19.18 million
, respectively reflected the “book value” shares under the 1st Source Executive Incentive Plan. See Note 16 - Employee Stock Benefit Plans for additional information. Dividends paid on these shares and changes in book value per share are recorded as other interest expense. Total interest expense recorded for
2017
,
2016
, and
2015
was
$1.68 million
,
$1.45 million
, and
$1.37 million
, respectively.
The following table shows the details of short-term borrowings as of
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
(Dollars in thousands)
|
|
Amount
|
|
Weighted Average Rate
|
|
Amount
|
|
Weighted Average Rate
|
Federal funds purchased
|
|
$
|
56,000
|
|
|
1.63
|
%
|
|
$
|
—
|
|
|
—
|
%
|
Security repurchase agreements
|
|
149,834
|
|
|
0.20
|
|
|
162,913
|
|
|
0.17
|
|
Commercial paper
|
|
6,115
|
|
|
0.27
|
|
|
5,761
|
|
|
0.27
|
|
Other short-term borrowings
|
|
2,646
|
|
|
—
|
|
|
123,269
|
|
|
0.57
|
|
Total short-term borrowings
|
|
$
|
214,595
|
|
|
0.57
|
%
|
|
$
|
291,943
|
|
|
0.34
|
%
|
Note 12 — Subordinated Notes
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
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
|
3.07
|
%
|
|
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 13 — 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 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.
No
stock options were considered antidilutive as of
December 31, 2017
,
2016
and
2015
.
The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share for the three years ending December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands - except per share amounts)
|
|
2017
|
|
2016
|
|
2015
|
Distributed earnings allocated to common stock
|
|
$
|
19,701
|
|
|
$
|
18,707
|
|
|
$
|
17,582
|
|
Undistributed earnings allocated to common stock
|
|
47,830
|
|
|
38,670
|
|
|
39,336
|
|
Net earnings allocated to common stock
|
|
67,531
|
|
|
57,377
|
|
|
56,918
|
|
Net earnings allocated to participating securities
|
|
520
|
|
|
409
|
|
|
568
|
|
Net income allocated to common stock and participating securities
|
|
$
|
68,051
|
|
|
$
|
57,786
|
|
|
$
|
57,486
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per common share
|
|
25,925,820
|
|
|
25,879,397
|
|
|
26,173,351
|
|
Dilutive effect of stock compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average shares outstanding for diluted earnings per common share
|
|
25,925,820
|
|
|
25,879,397
|
|
|
26,173,351
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
2.60
|
|
|
$
|
2.22
|
|
|
$
|
2.17
|
|
Diluted earnings per common share
|
|
$
|
2.60
|
|
|
$
|
2.22
|
|
|
$
|
2.17
|
|
|
|
|
|
|
|
|
Note 14 — Accumulated Other Comprehensive Income
The following table presents reclassifications out of accumulated other comprehensive income related to unrealized gains and losses on available-for-sale securities for the two years ending December 31.
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
|
Affected Line Item in the Statements of Income
|
Realized gains included in net income
|
|
$
|
4,340
|
|
|
$
|
1,796
|
|
|
Gains on investment securities available-for-sale
|
|
|
4,340
|
|
|
1,796
|
|
|
Income before income taxes
|
Tax effect
|
|
(1,629
|
)
|
|
(674
|
)
|
|
Income tax expense
|
Net of tax
|
|
$
|
2,711
|
|
|
$
|
1,122
|
|
|
Net income
|
Note 15 — Employee Benefit Plans
The 1st Source Corporation Employee Stock Ownership and Profit Sharing Plan (as amended, the “Plan”) includes an employee stock ownership component, which is designed to invest in and hold 1st Source common stock, and a 401(k) plan component, which holds all Plan assets not invested in 1st Source common stock. The Plan encourages diversification of investments with opportunities to change investment elections and contribution levels.
Employees are eligible to participate in the Plan the first of the month following
90 days
of employment. The Company matches dollar for dollar on the first
4%
of deferred compensation, plus
50
cents on the dollar of the next
2%
deferrals. The Company will also contribute to the Plan an amount designated as a fixed
2%
employer contribution. The amount of fixed contribution is equal to two percent of the participant’s eligible compensation. Additionally, each year the Company may, in its sole discretion, make a discretionary profit sharing contribution. As of
December 31, 2017
and
2016
, there were
1,126,939
and
1,252,417
shares, respectively, of 1st Source Corporation common stock held in relation to employee benefit plans.
The Company contributions are allocated among the participants on the basis of compensation. Each participant’s account is credited with cash and/or shares of 1st Source common stock based on that participant’s compensation earned during the year. After completing
5 years
of service in which they worked at least
1,000
hours per year, a participant will be completely vested in the Company’s contribution. An employee is always
100%
vested in their deferral. Plan participants are entitled to receive distributions from their Plan accounts upon termination of service, retirement, or death.
Contribution expense for the years ended
December 31, 2017
,
2016
, and
2015
, amounted to
$4.88 million
,
$4.71 million
, and
$4.57 million
, respectively.
In addition to the 1st Source Corporation Employee Stock Ownership and Profit Sharing Plan, the Company provides a limited health care and life insurance benefit for some of its retired employees. Effective March 31, 2009, the Company amended the plan so that no new retirees would be covered by the plan. The amendment will have no effect on the coverage for retirees covered at the time of the amendment. Prior to amendment, all full-time employees became eligible for these retiree benefits upon reaching age
55
with
20 years
of credited service. The retiree medical plan pays a stated percentage of eligible medical expenses reduced by any deductibles and payments made by government programs and other group coverage. The lifetime maximum benefit payable under the medical plan is
$15,000
and for life insurance is
$3,000
.
The Company’s net periodic post retirement benefit (recovery) cost recognized in Salaries and Employee Benefits in the Statements of Income for the years ended
December 31, 2017
,
2016
and
2015
, amounted to
$(0.01) million
,
$(0.01) million
, and
$(0.02) million
, respectively. The accrued post retirement benefit cost was not material at
December 31, 2017
,
2016
, and
2015
.
Note 16 — Stock Based Compensation
As of
December 31, 2017
, the Company had
four
active stock-based employee compensation plans. These plans include
three
executive stock award plans, the Executive Incentive Plan (EIP), the Restricted Stock Award Plan (RSAP), the Strategic Deployment Incentive Plan (SDP); and the Employee Stock Purchase Plan (ESPP). The 2011 Stock Option Plan was approved by the shareholders on April 21, 2011 but the Company had not made any grants through
December 31, 2017
. These stock-based employee compensation plans were established to help retain and motivate key employees. All of the plans have been approved by the shareholders of 1st Source Corporation. The Executive Compensation and Human Resources Committee (the “Committee”) of the 1st Source Corporation Board of Directors has sole authority to select the employees, establish the awards to be issued, and approve the terms and conditions of each award under the stock-based compensation plans.
Stock-based compensation to employees is recognized as compensation cost in the Statements of Income based on their fair values on the measurement date, which, for 1st Source, is the date of grant. Stock-based compensation expense is recognized ratably over the requisite service period for all awards. The total fair value of share awards vested was
$2.37 million
during
2017
,
$4.53 million
in
2016
, and
$4.37 million
in
2015
.
The following table shows the combined summary of activity regarding active stock option and stock award plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested Stock Awards Outstanding
|
|
Shares Available for Grant
|
|
Number of Shares
|
|
Weighted-Average Grant-Date Fair Value
|
Balance, January 1, 2015
|
2,460,208
|
|
|
440,035
|
|
|
$
|
20.60
|
|
Shares authorized - 2015 EIP
|
70,202
|
|
|
—
|
|
|
—
|
|
Granted
|
(81,591
|
)
|
|
81,591
|
|
|
24.44
|
|
Stock awards vested
|
—
|
|
|
(159,381
|
)
|
|
19.51
|
|
Forfeited
|
1,980
|
|
|
(3,384
|
)
|
|
23.85
|
|
Balance, December 31, 2015
|
2,450,799
|
|
|
358,861
|
|
|
21.93
|
|
Shares authorized - 2016 EIP
|
59,342
|
|
|
—
|
|
|
—
|
|
Shares authorized - Restricted Stock Award Plan
(1)
|
229,439
|
|
|
—
|
|
|
—
|
|
Granted
|
(79,118
|
)
|
|
79,118
|
|
|
26.19
|
|
Stock awards vested
|
—
|
|
|
(155,981
|
)
|
|
20.47
|
|
Forfeited
|
3,543
|
|
|
(5,383
|
)
|
|
23.39
|
|
Canceled
|
(1,950,000
|
)
|
|
—
|
|
|
—
|
|
Balance, December 31, 2016
|
714,005
|
|
|
276,615
|
|
|
23.94
|
|
Shares authorized - 2017 EIP
|
59,064
|
|
|
—
|
|
|
—
|
|
Granted
|
(98,625
|
)
|
|
98,625
|
|
|
33.54
|
|
Stock awards vested
|
—
|
|
|
(76,858
|
)
|
|
22.71
|
|
Forfeited
|
2,000
|
|
|
(2,456
|
)
|
|
29.93
|
|
Balance, December 31, 2017
|
676,444
|
|
|
295,926
|
|
|
$
|
27.41
|
|
|
|
|
|
|
|
(1) Shares issuable under the Plan, after taking into account previously granted and forfeited shares, were adjusted to
250,000
shares effective November 9, 2016.
Stock Option Plans
— Incentive stock option plans include the 2011 Stock Option Plan (the “2011 Plan”). Shares available for issuance under the 2011 Plan were reduced from
2,200,000
shares to
250,000
shares effective November 9, 2016.
Each award from the plan is evidenced by an award agreement that specifies the option price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the Committee determines. The option price is equal to the fair market value of a share of 1st Source Corporation’s common stock on the date of grant. Options granted expire at such time as the Committee determines at the date of grant and in no event does the exercise period exceed a maximum of
ten years
. Upon merger, consolidation, or other corporate consolidation in which 1st Source Corporation is not the surviving corporation, as defined in the plans, all outstanding options immediately vest.
There were
zero
stock options exercised during
2017
,
2016
or
2015
. All shares issued in connection with stock option exercises and non-vested stock awards are issued from available treasury stock.
No stock-based compensation expense related to stock options was recognized in
2017
,
2016
or
2015
.
The fair value of each option on the date of grant is estimated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility estimated over a period equal to the expected life of the options. In estimating the fair value of stock options under the Black-Scholes valuation model, separate groups of employees that have similar historical exercise behavior are considered separately. The expected life of the options granted is derived based on past experience and represents the period of time that options granted are expected to be outstanding.
Stock Award Plans
— Incentive stock award plans include the EIP, the SDP and the RSAP. The EIP is administered by the Committee. Awards under the EIP and SDP include “book value” shares and “market value” shares of common stock. These shares are awarded annually based on weighted performance criteria and generally vest over a period of
five years
. The EIP book value shares may only be sold to 1st Source and such sale is mandatory in the event of death, retirement, disability, or termination of employment. The RSAP is designed for key employees. Awards under the RSAP are made to employees recommended by the Chief Executive Officer and approved by the Committee. Shares granted under the RSAP vest over
two
to
ten years
and vesting is based upon meeting certain various criteria, including continued employment with 1st Source. Shares issuable under the RSAP, after taking into account previously granted and forfeited shares, were adjusted to
250,000
shares effective November 9, 2016.
Stock-based compensation expense relating to the EIP, SDP and RSAP totaled
$2.96 million
in
2017
,
$2.88 million
in
2016
, and
$3.84 million
in
2015
. The total income tax benefit recognized in the accompanying Statements of Income related to stock-based compensation was
$1.11 million
in
2017
,
$1.07 million
in
2016
, and
$1.45 million
in
2015
. Unrecognized stock-based compensation expense related to non-vested stock awards (EIP/SDP/RSAP) was
$5.97 million
at
December 31, 2017
. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was
3.11 years
.
The fair value of non-vested stock awards for the purposes of recognizing stock-based compensation expense is market price of the stock on the measurement date, which, for the Company’s purposes is the date of the award.
Employee Stock Purchase Plan
— The Company offers an ESPP for substantially all employees with at least
two years
of service on the effective date of an offering under the plan. Eligible employees may elect to purchase any dollar amount of stock, so long as such amount does not exceed
25%
of their base rate of pay and the aggregate stock accrual rate for all offerings does not exceed
$25,000
in any calendar year. The purchase price for shares offered is the lower of the closing market bid price for the offering date or the average market bid price for the five business days preceding the offering date. The purchase price and premium/(discount) to the actual market closing price on the offering date for the
2017
,
2016
, and
2015
offerings were
$46.18
(
-1.32%
),
$33.87
(
-0.29%
), and
$28.80
(
0.23%
), respectively. Payment for the stock is made through payroll deductions over the offering period, and employees may discontinue the deductions at any time and exercise the option or take the funds out of the program. The most recent offering began June 1, 2017 and runs through May 31, 2019, with
$152,786
in stock value to be purchased at
$46.18
per share.
Note 17 — Income Taxes
The following table shows the composition of income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
(Dollars in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
26,012
|
|
|
$
|
25,479
|
|
|
$
|
26,092
|
|
State
|
|
4,530
|
|
|
3,005
|
|
|
3,365
|
|
Total current
|
|
30,542
|
|
|
28,484
|
|
|
29,457
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
5,869
|
|
|
2,530
|
|
|
1,577
|
|
State
|
|
(488
|
)
|
|
326
|
|
|
43
|
|
Deferred tax liability remeasurement
|
|
(2,614
|
)
|
|
—
|
|
|
—
|
|
Total deferred
|
|
2,767
|
|
|
2,856
|
|
|
1,620
|
|
Total provision
|
|
$
|
33,309
|
|
|
$
|
31,340
|
|
|
$
|
31,077
|
|
The following table shows the reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate (
35%
) to income before income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Year Ended December 31
(Dollars in thousands)
|
|
Amount
|
|
Percent of Pretax Income
|
|
Amount
|
|
Percent of Pretax Income
|
|
Amount
|
|
Percent of Pretax Income
|
Statutory federal income tax
|
|
$
|
35,476
|
|
|
35.0
|
%
|
|
$
|
31,194
|
|
|
35.0
|
%
|
|
$
|
30,997
|
|
|
35.0
|
%
|
(Decrease) increase in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest income
|
|
(1,197
|
)
|
|
(1.2
|
)
|
|
(1,235
|
)
|
|
(1.4
|
)
|
|
(1,152
|
)
|
|
(1.3
|
)
|
State taxes, net of federal income tax benefit
|
|
2,627
|
|
|
2.6
|
|
|
2,165
|
|
|
2.4
|
|
|
2,215
|
|
|
2.5
|
|
Deferred tax liability remeasurement
|
|
(2,614
|
)
|
|
(2.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
(983
|
)
|
|
(0.9
|
)
|
|
(784
|
)
|
|
(0.8
|
)
|
|
(983
|
)
|
|
(1.1
|
)
|
Total
|
|
$
|
33,309
|
|
|
32.9
|
%
|
|
$
|
31,340
|
|
|
35.2
|
%
|
|
$
|
31,077
|
|
|
35.1
|
%
|
The tax expense related to gains on investment securities available-for-sale for the years
2017
,
2016
, and
2015
was approximately
$1,629,000
,
$674,000
, and
$2,000
, respectively.
The following table shows the composition of deferred tax assets and liabilities as of
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
|
Reserve for loan and lease losses
|
|
$
|
23,791
|
|
|
$
|
34,663
|
|
Accruals for employee benefits
|
|
2,369
|
|
|
3,948
|
|
Tax advantaged partnerships
|
|
—
|
|
|
1,411
|
|
Net unrealized losses on securities available-for-sale
|
|
1,285
|
|
|
—
|
|
Other
|
|
622
|
|
|
477
|
|
Total deferred tax assets
|
|
28,067
|
|
|
40,499
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Differing depreciable bases in premises and leased equipment
|
|
22,641
|
|
|
31,449
|
|
Net unrealized gains on securities available-for-sale
|
|
—
|
|
|
807
|
|
Differing bases in assets related to acquisitions
|
|
3,954
|
|
|
6,170
|
|
Tax advantaged partnerships
|
|
1,921
|
|
|
—
|
|
Mortgage servicing
|
|
745
|
|
|
1,540
|
|
Capitalized loan costs
|
|
867
|
|
|
1,463
|
|
Prepaid expenses
|
|
387
|
|
|
646
|
|
Other
|
|
222
|
|
|
419
|
|
Total deferred tax liabilities
|
|
30,737
|
|
|
42,494
|
|
Net deferred tax liability
|
|
$
|
(2,670
|
)
|
|
$
|
(1,995
|
)
|
No
valuation allowance for deferred tax assets was recorded at
December 31, 2017
and
2016
as the Company believes it is more likely than not that all of the deferred tax assets will be realized.
The following table shows a reconciliation of the beginning and ending amounts of unrecognized tax benefits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Balance, beginning of year
|
|
$
|
762
|
|
|
$
|
380
|
|
|
$
|
—
|
|
Additions based on tax positions related to the current year
|
|
350
|
|
|
382
|
|
|
380
|
|
Additions for tax positions of prior years
|
|
—
|
|
|
—
|
|
|
—
|
|
Reductions for tax positions of prior years
|
|
—
|
|
|
—
|
|
|
—
|
|
Reductions due to lapse in statute of limitations
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance, end of year
|
|
$
|
1,112
|
|
|
$
|
762
|
|
|
$
|
380
|
|
The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was
$0.72 million
at
December 31, 2017
,
$0.50 million
at
December 31, 2016
, and
$0.25 million
at
December 31, 2015
. Interest and penalties are recognized through the income tax provision. For the years
2017
,
2016
and
2015
, the Company recognized approximately
$0.05 million
,
$0.04 million
and
$0.00 million
in interest, net of tax effect, and penalties, respectively. There was
$0.09 million
,
$0.04 million
and
$0.00 million
accrued interest and penalties at
December 31, 2017
,
2016
and
2015
, respectively.
Tax years that remain open and subject to audit include the federal 2014-2017 years and the Indiana 2014-2017 years. The Company does not anticipate a significant change in the amount of uncertain tax positions within the next 12 months.
The
Tax Cuts and Jobs Act
was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to
21%
. At December 31, 2017, the Company had not completed its accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, the Company made a reasonable estimate of the effects on its existing deferred tax balances. The Company will continue to make and refine its calculations as additional analysis is completed. In addition, the Company’s estimates may also be affected as it gains a more thorough understanding of the tax law.
Provisional amounts
Deferred tax assets and liabilities:
The Company remeasured certain deferred tax assets and liabilities based on the rates at which it expects to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of its deferred tax balance was a benefit of $2.61 million, which is included as a component of Income Tax Expense in the Consolidated Statements of Income and decreased the effective tax rate by 2.6%.
Further, at December 31, 2017, the Company was unable to fully revalue the deferred tax liabilities associated with its partnership investments in renewable energy and affordable housing and estimated the deferred tax liability associated with those projects to be $1.92 million. This estimation was necessary due to incomplete information for 2017 operations from those partnerships at year end. Upon receipt of the partnership Form 1065 K-1’s, the Company will complete the revaluation of those related deferred tax liabilities as provided by the U.S. Securities and Exchange Commission’s SAB No. 118, Income Tax Accounting Implications of the
Tax Cuts and Jobs Act
.
Note 18 — Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk
Contingent Liabilities
—1st Source and its subsidiaries are defendants in various legal proceedings arising in the normal course of business. In the opinion of management, based upon present information including the advice of legal counsel, the ultimate resolution of these proceedings will not have a material effect on the Company’s consolidated financial position or results of operations.
1st Source Bank sells residential mortgage loans to Fannie Mae as well as FHA-insured, USDA-insured and VA-guaranteed loans in Ginnie Mae mortgage-backed securities. Additionally, the Bank has sold loans on a service released basis to various other financial institutions in the past. The agreements under which the Bank sells these mortgage loans contain various representations and warranties regarding the acceptability of loans for purchase. On occasion, the Bank may be required to indemnify the loan purchaser for credit losses on loans that were later deemed ineligible for purchase or may be required to repurchase a loan. Both circumstances are collectively referred to as “repurchases.”
The Company’s liability for repurchases, included in Accrued Expenses and Other Liabilities on the Statements of Financial Condition, was
$0.39 million
and
$0.42 million
as of
December 31, 2017
and
2016
, respectively. The mortgage repurchase liability represents the Company’s best estimate of the loss that it may incur. The estimate is based on specific loan repurchase requests and a historical loss ratio with respect to origination dollar volume. Because the level of mortgage loan repurchase losses are dependent on economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment.
Commitments
— 1st Source and its subsidiaries are obligated under operating leases for certain office premises and equipment. The Company also leases certain owned premises and receives rental income from such lease agreements. Future minimum rental commitments for all noncancellable operating leases total approximately,
$3.30 million
in
2018
,
$3.07 million
in
2019
,
$2.74 million
in
2020
,
$1.60 million
in
2021
,
$0.43 million
in
2022
, and
$1.86 million
, thereafter.
The following table shows rental expense of office premises and equipment and rental income from owned premises.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
(Dollars in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Gross rental expense
|
|
$
|
4,183
|
|
|
$
|
3,995
|
|
|
$
|
3,889
|
|
Gross rental income
|
|
(856
|
)
|
|
(921
|
)
|
|
(914
|
)
|
Net rental expense
|
|
$
|
3,327
|
|
|
$
|
3,074
|
|
|
$
|
2,975
|
|
The Company has made investments directly in various tax-advantaged and other operating partnerships formed by third parties. The Company’s investments are primarily related to investments promoting affordable housing, community development and renewable energy sources. 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 the activities that most significantly influence the economic performance of their respective partnerships. At
December 31, 2017
and
2016
, investment balances, including all legally binding commitments to fund future investments, totaled
$23.76 million
and
$11.14 million
, respectively. In addition, the Company had a liability for all legally binding unfunded commitments of
$15.71 million
and
$4.95 million
at
December 31, 2017
and
2016
, respectively.
Financial Instruments with Off-Balance-Sheet Risk
— To meet the financing needs of our clients, 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 consolidated statements of financial condition.
Financial instruments, whose contract amounts represent credit risk as of December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
Amounts of commitments:
|
|
|
|
|
Loan commitments to extend credit
|
|
$
|
1,030,334
|
|
|
$
|
868,267
|
|
Standby letters of credit
|
|
$
|
29,961
|
|
|
$
|
33,397
|
|
Commercial and similar letters of credit
|
|
$
|
1,837
|
|
|
$
|
1,704
|
|
The Company’s 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.
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. The Company 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.
Standby letters of credit are conditional commitments issued to guarantee the performance of a client to a third party. The credit risk involved in and collateral obtained when issuing standby letters of credit are essentially the same as those involved in extending loan commitments to clients. Standby letters of credit generally have terms ranging from
six 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
three months
to
six months
.
Note 19 — 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 18 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 Statement 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 institution 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 at
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Interest rate swap contracts
|
|
$
|
756,550
|
|
|
Other assets
|
|
$
|
5,167
|
|
|
Other liabilities
|
|
$
|
5,262
|
|
Loan commitments
|
|
8,504
|
|
|
Mortgages held for sale
|
|
66
|
|
|
N/A
|
|
—
|
|
Forward contracts - mortgage loan
|
|
19,390
|
|
|
N/A
|
|
—
|
|
|
Mortgages held for sale
|
|
10
|
|
Total - December 31, 2017
|
|
$
|
784,444
|
|
|
|
|
$
|
5,233
|
|
|
|
|
$
|
5,272
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
$
|
570,004
|
|
|
Other assets
|
|
$
|
6,621
|
|
|
Other liabilities
|
|
$
|
6,743
|
|
Loan commitments
|
|
5,527
|
|
|
Mortgages held for sale
|
|
43
|
|
|
N/A
|
|
—
|
|
Forward contracts - mortgage loan
|
|
16,525
|
|
|
Mortgages held for sale
|
|
222
|
|
|
N/A
|
|
—
|
|
Total - December 31, 2016
|
|
$
|
592,056
|
|
|
|
|
$
|
6,886
|
|
|
|
|
$
|
6,743
|
|
The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments at
December 31, 2017
,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss)
|
(Dollars in thousands)
|
|
Statement of Income classification
|
|
2017
|
|
2016
|
|
2015
|
Interest rate swap contracts
|
|
Other expense
|
|
$
|
26
|
|
|
$
|
64
|
|
|
$
|
(8
|
)
|
Interest rate swap contracts
|
|
Other income
|
|
1,585
|
|
|
730
|
|
|
1,045
|
|
Loan commitments
|
|
Mortgage banking
|
|
23
|
|
|
(4
|
)
|
|
45
|
|
Forward contracts - mortgage loan
|
|
Mortgage banking
|
|
(232
|
)
|
|
209
|
|
|
155
|
|
Total
|
|
|
|
$
|
1,402
|
|
|
$
|
999
|
|
|
$
|
1,237
|
|
The following table shows the offsetting of financial assets and derivative assets at
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
5,194
|
|
|
$
|
27
|
|
|
$
|
5,167
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
6,681
|
|
|
$
|
60
|
|
|
$
|
6,621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,621
|
|
The following table shows the offsetting of financial liabilities and derivative liabilities at
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
5,289
|
|
|
$
|
27
|
|
|
$
|
5,262
|
|
|
$
|
—
|
|
|
$
|
2,705
|
|
|
$
|
2,557
|
|
Repurchase agreements
|
|
149,835
|
|
|
—
|
|
|
149,835
|
|
|
149,835
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
155,124
|
|
|
$
|
27
|
|
|
$
|
155,097
|
|
|
$
|
149,835
|
|
|
$
|
2,705
|
|
|
$
|
2,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
6,803
|
|
|
$
|
60
|
|
|
$
|
6,743
|
|
|
$
|
—
|
|
|
$
|
3,794
|
|
|
$
|
2,949
|
|
Repurchase agreements
|
|
162,913
|
|
|
—
|
|
|
162,913
|
|
|
162,913
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
169,716
|
|
|
$
|
60
|
|
|
$
|
169,656
|
|
|
$
|
162,913
|
|
|
$
|
3,794
|
|
|
$
|
2,949
|
|
If a default in performance of any obligation of a repurchase or derivative agreement occurs, each party will set-off property held, or loan indebtedness owing, in respect of transactions against obligations owing in respect of any other transactions. At
December 31, 2017
and
December 31, 2016
, repurchase agreements had a remaining contractual maturity of
$148.22 million
and
$160.38 million
in overnight,
$1.32 million
and
$2.23 million
in up to 30 days and
$0.30 million
and
$0.30 million
in greater than 90 days, respectively and were collateralized by U.S. Treasury and Federal agencies securities.
Note 20 — Regulatory Matters
The Company is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total capital, Tier 1 capital, and common equity Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. The Company believes that it meets all capital adequacy requirements to which it is subject.
The most recent notification from the Federal bank regulators categorized 1st Source Bank, the largest of its subsidiaries, as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that the Company believes will have changed the institution’s category.
As discussed in Note 12, the capital securities held by the Capital Trusts qualify as Tier 1 capital under Federal Reserve Board guidelines. The following table shows the actual and required capital amounts and ratios for 1st Source Corporation and 1st Source Bank as of
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Minimum Capital Adequacy
|
|
Minimum Capital Adequacy with Capital Buffer
(1)
|
|
To Be Well Capitalized Under Prompt Corrective Action Provisions
|
(Dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Source Corporation
|
|
$
|
764,853
|
|
|
14.70
|
%
|
|
$
|
416,174
|
|
|
8.00
|
%
|
|
$
|
481,201
|
|
|
9.25
|
%
|
|
$
|
520,218
|
|
|
10.00
|
%
|
1st Source Bank
|
|
696,248
|
|
|
13.36
|
|
|
416,902
|
|
|
8.00
|
|
|
482,043
|
|
|
9.25
|
|
|
521,127
|
|
|
10.00
|
|
Tier 1 Capital (to Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Source Corporation
|
|
699,420
|
|
|
13.44
|
|
|
312,131
|
|
|
6.00
|
|
|
377,158
|
|
|
7.25
|
|
|
416,174
|
|
|
8.00
|
|
1st Source Bank
|
|
630,702
|
|
|
12.10
|
|
|
312,676
|
|
|
6.00
|
|
|
377,817
|
|
|
7.25
|
|
|
416,902
|
|
|
8.00
|
|
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Source Corporation
|
|
642,420
|
|
|
12.35
|
|
|
234,098
|
|
|
4.50
|
|
|
299,125
|
|
|
5.75
|
|
|
338,142
|
|
|
6.50
|
|
1st Source Bank
|
|
630,702
|
|
|
12.10
|
|
|
234,507
|
|
|
4.50
|
|
|
299,648
|
|
|
5.75
|
|
|
338,733
|
|
|
6.50
|
|
Tier 1 Capital (to Average Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Source Corporation
|
|
699,420
|
|
|
12.17
|
|
|
229,890
|
|
|
4.00
|
|
|
N/A
|
|
|
N/A
|
|
|
287,362
|
|
|
5.00
|
|
1st Source Bank
|
|
630,702
|
|
|
10.98
|
|
|
229,789
|
|
|
4.00
|
|
|
N/A
|
|
|
N/A
|
|
|
287,236
|
|
|
5.00
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Source Corporation
|
|
$
|
713,498
|
|
|
15.12
|
%
|
|
$
|
377,432
|
|
|
8.00
|
%
|
|
$
|
406,919
|
|
|
8.625
|
%
|
|
$
|
471,791
|
|
|
10.00
|
%
|
1st Source Bank
|
|
662,531
|
|
|
14.06
|
|
|
377,014
|
|
|
8.00
|
|
|
406,468
|
|
|
8.625
|
|
|
471,267
|
|
|
10.00
|
|
Tier 1 Capital (to Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Source Corporation
|
|
651,006
|
|
|
13.80
|
|
|
283,074
|
|
|
6.00
|
|
|
312,561
|
|
|
6.625
|
|
|
377,432
|
|
|
8.00
|
|
1st Source Bank
|
|
603,022
|
|
|
12.80
|
|
|
282,760
|
|
|
6.00
|
|
|
312,214
|
|
|
6.625
|
|
|
377,014
|
|
|
8.00
|
|
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Source Corporation
|
|
594,006
|
|
|
12.59
|
|
|
212,306
|
|
|
4.50
|
|
|
241,793
|
|
|
5.125
|
|
|
306,664
|
|
|
6.50
|
|
1st Source Bank
|
|
603,022
|
|
|
12.80
|
|
|
212,070
|
|
|
4.50
|
|
|
241,524
|
|
|
5.125
|
|
|
306,324
|
|
|
6.50
|
|
Tier 1 Capital (to Average Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Source Corporation
|
|
651,006
|
|
|
12.11
|
|
|
215,115
|
|
|
4.00
|
|
|
N/A
|
|
|
N/A
|
|
|
268,893
|
|
|
5.00
|
|
1st Source Bank
|
|
603,022
|
|
|
11.22
|
|
|
214,949
|
|
|
4.00
|
|
|
N/A
|
|
|
N/A
|
|
|
268,686
|
|
|
5.00
|
|
(1) The capital conservation buffer requirement will be phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to
7.0%
, the Tier 1 capital ratio to
8.5%
, and the total capital ratio to
10.5%
on a fully phased-in basis.
The Bank was not required to maintain noninterest bearing cash balances with the Federal Reserve Bank as of December 31,
2017
and
2016
.
Dividends that may be paid by a subsidiary bank to the parent company are subject to certain legal and regulatory limitations and also may be affected by capital needs, as well as other factors.
Due to the Company’s mortgage activities, 1st Source Bank is required to maintain minimum net worth capital requirements established by various governmental agencies. 1st Source Bank’s net worth requirements are governed by the Department of Housing and Urban Development and GNMA. As of
December 31, 2017
, 1st Source Bank met its minimum net worth capital requirements.
Note 21 — Fair Value Measurements
The Company determines the fair values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. 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
December 31, 2017
and
2016
, all mortgages held for sale are carried at fair value.
The following table shows the differences between 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 on
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Fair value carrying amount
|
|
Aggregate unpaid principal
|
|
Excess of fair value carrying amount over (under) unpaid principal
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Mortgages held for sale reported at fair value:
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
13,123
|
|
|
$
|
12,967
|
|
|
$
|
156
|
|
(1)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Mortgages held for sale reported at fair value:
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
15,849
|
|
|
$
|
15,809
|
|
|
$
|
40
|
|
(1)
|
(1) The excess of fair value carrying amount over (under) unpaid principal is included in mortgage banking income and includes changes in fair value at and subsequent to funding and gains and losses on the related loan commitment prior to funding.
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.
|
|
|
•
|
Inactively traded government-sponsored agency securities are primarily priced using consensus pricing and dealer quotes.
|
|
|
•
|
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 incorporates a credit spread assumption.
|
|
|
•
|
Marketable equity (common) securities are primarily priced using the market approach and utilizing live data feeds from active market exchanges for identical securities.
|
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 imbedded 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
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and Federal agencies securities
|
|
$
|
27,971
|
|
|
$
|
440,148
|
|
|
$
|
—
|
|
|
$
|
468,119
|
|
U.S. States and political subdivisions securities
|
|
—
|
|
|
113,845
|
|
|
2,155
|
|
|
116,000
|
|
Mortgage-backed securities - Federal agencies
|
|
—
|
|
|
287,910
|
|
|
—
|
|
|
287,910
|
|
Corporate debt securities
|
|
—
|
|
|
31,294
|
|
|
—
|
|
|
31,294
|
|
Foreign government and other securities
|
|
—
|
|
|
—
|
|
|
710
|
|
|
710
|
|
Total investment securities available-for-sale
|
|
27,971
|
|
|
873,197
|
|
|
2,865
|
|
|
904,033
|
|
Mortgages held for sale
|
|
—
|
|
|
13,123
|
|
|
—
|
|
|
13,123
|
|
Accrued income and other assets (interest rate swap agreements)
|
|
—
|
|
|
5,167
|
|
|
—
|
|
|
5,167
|
|
Total
|
|
$
|
27,971
|
|
|
$
|
891,487
|
|
|
$
|
2,865
|
|
|
$
|
922,323
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities (interest rate swap agreements)
|
|
$
|
—
|
|
|
$
|
5,262
|
|
|
$
|
—
|
|
|
$
|
5,262
|
|
Total
|
|
$
|
—
|
|
|
$
|
5,262
|
|
|
$
|
—
|
|
|
$
|
5,262
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and Federal agencies securities
|
|
$
|
20,164
|
|
|
$
|
400,669
|
|
|
$
|
—
|
|
|
$
|
420,833
|
|
U.S. States and political subdivisions securities
|
|
—
|
|
|
130,276
|
|
|
2,699
|
|
|
132,975
|
|
Mortgage-backed securities - Federal agencies
|
|
—
|
|
|
252,574
|
|
|
—
|
|
|
252,574
|
|
Corporate debt securities
|
|
—
|
|
|
35,076
|
|
|
—
|
|
|
35,076
|
|
Foreign government and other securities
|
|
—
|
|
|
—
|
|
|
807
|
|
|
807
|
|
Total debt securities
|
|
20,164
|
|
|
818,595
|
|
|
3,506
|
|
|
842,265
|
|
Marketable equity securities
|
|
8,202
|
|
|
—
|
|
|
—
|
|
|
8,202
|
|
Total investment securities available-for-sale
|
|
28,366
|
|
|
818,595
|
|
|
3,506
|
|
|
850,467
|
|
Mortgages held for sale
|
|
—
|
|
|
15,849
|
|
|
—
|
|
|
15,849
|
|
Accrued income and other assets (interest rate swap agreements)
|
|
—
|
|
|
6,621
|
|
|
—
|
|
|
6,621
|
|
Total
|
|
$
|
28,366
|
|
|
$
|
841,065
|
|
|
$
|
3,506
|
|
|
$
|
872,937
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities (interest rate swap agreements)
|
|
$
|
—
|
|
|
$
|
6,743
|
|
|
$
|
—
|
|
|
$
|
6,743
|
|
Total
|
|
$
|
—
|
|
|
$
|
6,743
|
|
|
$
|
—
|
|
|
$
|
6,743
|
|
The following table shows the changes in Level 3 assets and liabilities measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
U.S. States and political subdivisions securities
|
|
Foreign government and other securities
|
|
Investment securities available-for-sale
|
Beginning balance January 1, 2017
|
|
$
|
2,699
|
|
|
$
|
807
|
|
|
$
|
3,506
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
—
|
|
|
—
|
|
|
—
|
|
Included in other comprehensive income
|
|
31
|
|
|
3
|
|
|
34
|
|
Purchases
|
|
1,437
|
|
|
500
|
|
|
1,937
|
|
Issuances
|
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
Maturities
|
|
(2,012
|
)
|
|
(600
|
)
|
|
(2,612
|
)
|
Transfers into Level 3
|
|
—
|
|
|
—
|
|
|
—
|
|
Transfers out of Level 3
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance December 31, 2017
|
|
$
|
2,155
|
|
|
$
|
710
|
|
|
$
|
2,865
|
|
|
|
|
|
|
|
|
Beginning balance January 1, 2016
|
|
$
|
4,528
|
|
|
$
|
809
|
|
|
$
|
5,337
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
—
|
|
|
—
|
|
|
—
|
|
Included in other comprehensive income
|
|
(24
|
)
|
|
(2
|
)
|
|
(26
|
)
|
Purchases
|
|
1,100
|
|
|
—
|
|
|
1,100
|
|
Issuances
|
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
Maturities
|
|
(2,905
|
)
|
|
—
|
|
|
(2,905
|
)
|
Transfers into Level 3
|
|
—
|
|
|
—
|
|
|
—
|
|
Transfers out of Level 3
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance December 31, 2016
|
|
$
|
2,699
|
|
|
$
|
807
|
|
|
$
|
3,506
|
|
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
December 31, 2017
or
2016
. No transfers between levels occurred during
2017
or
2016
.
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
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
Direct placement municipal securities
|
|
$
|
2,155
|
|
|
Discounted cash flows
|
|
Credit spread assumption
|
|
2.21% - 2.93%
|
|
|
|
|
|
|
|
|
|
Foreign government
|
|
$
|
710
|
|
|
Discounted cash flows
|
|
Market yield assumption
|
|
0.35% - 1.23%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
Direct placement municipal securities
|
|
$
|
2,699
|
|
|
Discounted cash flows
|
|
Credit spread assumption
|
|
0.92% - 3.17%
|
|
|
|
|
|
|
|
|
|
Foreign government
|
|
$
|
807
|
|
|
Discounted cash flows
|
|
Market yield assumption
|
|
0.28% - 1.12%
|
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. The significant unobservable input for foreign government securities are the market yield assumptions. The market yield assumption is negatively correlated to the fair value measure. An increase (decrease) in the determined market yield assumption will decrease (increase) the fair value measurement.
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 gain 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%
at a minimum 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.
Partnership investments and the adjustments to fair value primarily result from application of lower of cost or fair value accounting. The partnership investments are priced using financial statements provided by the partnerships. Quantitative unobservable inputs are not reasonably available for reporting purposes.
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 year ended
December 31, 2017
and
2016
, respectively: impaired loans -
$0.50 million
and
$0.00 million
; partnership investments -
$0.00 million
and
$0.00 million
; MSRs -
$0.00 million
and
$0.00 million
; repossessions -
$0.79 million
and
$0.58 million
, and other real estate -
$0.05 million
and
$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
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans - collateral based
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,994
|
|
|
$
|
7,994
|
|
Accrued income and other assets (partnership investments)
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
1,000
|
|
Accrued income and other assets (mortgage servicing rights)
|
|
—
|
|
|
—
|
|
|
4,349
|
|
|
4,349
|
|
Accrued income and other assets (repossessions)
|
|
—
|
|
|
—
|
|
|
10,114
|
|
|
10,114
|
|
Accrued income and other assets (other real estate)
|
|
—
|
|
|
—
|
|
|
1,312
|
|
|
1,312
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,769
|
|
|
$
|
24,769
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans - collateral based
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,280
|
|
|
$
|
6,280
|
|
Accrued income and other assets (partnership investments)
|
|
—
|
|
|
—
|
|
|
1,032
|
|
|
1,032
|
|
Accrued income and other assets (mortgage servicing rights)
|
|
—
|
|
|
—
|
|
|
4,297
|
|
|
4,297
|
|
Accrued income and other assets (repossessions)
|
|
—
|
|
|
—
|
|
|
9,373
|
|
|
9,373
|
|
Accrued income and other assets (other real estate)
|
|
—
|
|
|
—
|
|
|
704
|
|
|
704
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,686
|
|
|
$
|
21,686
|
|
The following table 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
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
7,994
|
|
|
$
|
7,994
|
|
|
Collateral based measurements including appraisals, trade publications, and auction values
|
|
Discount for lack of marketability and current conditions
|
|
3% - 20%
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
4,349
|
|
|
7,187
|
|
|
Discounted cash flows
|
|
Constant prepayment rate (CPR)
|
|
8.6% - 20.7%
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
9.6% - 12.5%
|
|
|
|
|
|
|
|
|
|
|
|
Repossessions
|
|
10,114
|
|
|
10,493
|
|
|
Appraisals, trade publications and auction values
|
|
Discount for lack of marketability
|
|
3% - 10%
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate
|
|
1,312
|
|
|
1,441
|
|
|
Appraisals
|
|
Discount for lack of marketability
|
|
7% - 9%
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
6,280
|
|
|
$
|
6,280
|
|
|
Collateral based measurements including appraisals, trade publications, and auction values
|
|
Discount for lack of marketability and current conditions
|
|
0% - 100%
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
4,297
|
|
|
7,484
|
|
|
Discounted cash flows
|
|
Constant prepayment rate (CPR)
|
|
8.6% - 15.0%
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
9.6% - 12.5%
|
|
|
|
|
|
|
|
|
|
|
|
Repossessions
|
|
9,373
|
|
|
9,452
|
|
|
Appraisals, trade publications and auction values
|
|
Discount for lack of marketability
|
|
0% - 4%
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate
|
|
704
|
|
|
752
|
|
|
Appraisals
|
|
Discount for lack of marketability
|
|
0% - 16%
|
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
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
73,635
|
|
|
$
|
73,635
|
|
|
$
|
73,635
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Federal funds sold and interest bearing deposits with other banks
|
|
4,398
|
|
|
4,398
|
|
|
4,398
|
|
|
—
|
|
|
—
|
|
Investment securities, available-for-sale
|
|
904,033
|
|
|
904,033
|
|
|
27,971
|
|
|
873,197
|
|
|
2,865
|
|
Other investments
|
|
25,953
|
|
|
25,953
|
|
|
25,953
|
|
|
—
|
|
|
—
|
|
Mortgages held for sale
|
|
13,123
|
|
|
13,123
|
|
|
—
|
|
|
13,123
|
|
|
—
|
|
Loans and leases, net of reserve for loan and lease losses
|
|
4,432,795
|
|
|
4,428,848
|
|
|
—
|
|
|
—
|
|
|
4,428,848
|
|
Mortgage servicing rights
|
|
4,349
|
|
|
7,187
|
|
|
—
|
|
|
—
|
|
|
7,187
|
|
Interest rate swaps
|
|
5,167
|
|
|
5,167
|
|
|
—
|
|
|
5,167
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
4,752,730
|
|
|
$
|
4,745,111
|
|
|
$
|
3,482,757
|
|
|
$
|
1,262,354
|
|
|
$
|
—
|
|
Short-term borrowings
|
|
214,595
|
|
|
214,595
|
|
|
206,862
|
|
|
7,733
|
|
|
—
|
|
Long-term debt and mandatorily redeemable securities
|
|
70,060
|
|
|
67,857
|
|
|
—
|
|
|
67,857
|
|
|
—
|
|
Subordinated notes
|
|
58,764
|
|
|
57,103
|
|
|
—
|
|
|
57,103
|
|
|
—
|
|
Interest rate swaps
|
|
5,262
|
|
|
5,262
|
|
|
—
|
|
|
5,262
|
|
|
—
|
|
Off-balance-sheet instruments *
|
|
—
|
|
|
286
|
|
|
—
|
|
|
286
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
58,578
|
|
|
$
|
58,578
|
|
|
$
|
58,578
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Federal funds sold and interest bearing deposits with other banks
|
|
49,726
|
|
|
49,726
|
|
|
49,726
|
|
|
—
|
|
|
—
|
|
Investment securities, available-for-sale
|
|
850,467
|
|
|
850,467
|
|
|
28,366
|
|
|
818,595
|
|
|
3,506
|
|
Other investments and trading account securities
|
|
22,458
|
|
|
22,458
|
|
|
22,458
|
|
|
—
|
|
|
—
|
|
Mortgages held for sale
|
|
15,849
|
|
|
15,849
|
|
|
—
|
|
|
15,849
|
|
|
—
|
|
Loans and leases, net of reserve for loan and lease losses
|
|
4,099,528
|
|
|
4,107,079
|
|
|
—
|
|
|
—
|
|
|
4,107,079
|
|
Mortgage servicing rights
|
|
4,297
|
|
|
7,484
|
|
|
—
|
|
|
—
|
|
|
7,484
|
|
Interest rate swaps
|
|
6,621
|
|
|
6,621
|
|
|
—
|
|
|
6,621
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
4,333,760
|
|
|
$
|
4,332,744
|
|
|
$
|
3,277,108
|
|
|
$
|
1,055,636
|
|
|
$
|
—
|
|
Short-term borrowings
|
|
291,943
|
|
|
291,943
|
|
|
163,652
|
|
|
128,291
|
|
|
—
|
|
Long-term debt and mandatorily redeemable securities
|
|
74,308
|
|
|
73,149
|
|
|
—
|
|
|
73,149
|
|
|
—
|
|
Subordinated notes
|
|
58,764
|
|
|
51,031
|
|
|
—
|
|
|
51,031
|
|
|
—
|
|
Interest rate swaps
|
|
6,743
|
|
|
6,743
|
|
|
—
|
|
|
6,743
|
|
|
—
|
|
Off-balance-sheet instruments *
|
|
—
|
|
|
382
|
|
|
—
|
|
|
382
|
|
|
—
|
|
* Represents estimated cash outflows required to currently settle the obligations at current market rates.
The methodologies for estimating fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and due from banks, federal funds sold and interest bearing deposits with other banks, and other investments. The methodologies for other financial assets and financial liabilities are discussed below:
Loans and Leases
— For variable rate loans and leases that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values of other loans and leases are estimated using discounted cash flow analyses which use interest rates currently being offered for loans and leases with similar terms to borrowers of similar credit quality.
Deposits
— The fair values for all deposits other than time deposits are equal to the amounts payable on demand (the carrying value). Fair values of variable rate time deposits are equal to their carrying values. Fair values for fixed rate time deposits are estimated using discounted cash flow analyses using interest rates currently being offered for deposits with similar remaining maturities.
Short-Term Borrowings
— The carrying values of Federal funds purchased, securities sold under repurchase agreements, and other short-term borrowings, including the liability related to mortgage loans available for repurchase under GNMA optional repurchase programs, approximate their fair values.
Long-Term Debt and Mandatorily Redeemable Securities
— The fair values of long-term debt are estimated using discounted cash flow analyses, based on our current estimated incremental borrowing rates for similar types of borrowing arrangements. The carrying values of mandatorily redeemable securities are based on our current estimated cost of redeeming these securities which approximate their fair values.
Subordinated Notes
— Fair values are estimated based on calculated market prices of comparable securities.
Off-Balance-Sheet Instruments
— Contract and fair values for certain of our off-balance-sheet financial instruments (guarantees) are estimated based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Limitations
— Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other such factors.
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.
Note 22 — 1st Source Corporation (Parent Company Only) Financial Information
STATEMENTS OF FINANCIAL CONDITION
|
|
|
|
|
|
|
|
|
|
December 31
(Dollars in thousands)
|
|
2017
|
|
2016
|
ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
100,155
|
|
|
$
|
73,324
|
|
Short-term investments with bank subsidiary
|
|
500
|
|
|
500
|
|
Investment securities available-for-sale
(amortized cost of $0 at December 31, 2017 and $884 at December 31, 2016)
|
|
—
|
|
|
7,369
|
|
Investments in:
|
|
|
|
|
|
|
Bank subsidiaries
|
|
706,119
|
|
|
676,915
|
|
Non-bank subsidiaries
|
|
1
|
|
|
1,812
|
|
Other assets
|
|
2,696
|
|
|
4,013
|
|
Total assets
|
|
$
|
809,471
|
|
|
$
|
763,933
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
6,115
|
|
|
$
|
5,761
|
|
Long-term debt and mandatorily redeemable securities
|
|
22,942
|
|
|
21,228
|
|
Subordinated notes
|
|
58,764
|
|
|
58,764
|
|
Other liabilities
|
|
3,113
|
|
|
5,530
|
|
Total liabilities
|
|
90,934
|
|
|
91,283
|
|
Total shareholders’ equity
|
|
718,537
|
|
|
672,650
|
|
Total liabilities and shareholders’ equity
|
|
$
|
809,471
|
|
|
$
|
763,933
|
|
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
(Dollars in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Income:
|
|
|
|
|
|
|
|
|
|
Dividends from bank subsidiary
|
|
$
|
38,317
|
|
|
$
|
36,064
|
|
|
$
|
36,064
|
|
Dividends from non-bank subsidiary
|
|
958
|
|
|
—
|
|
|
—
|
|
Rental income from subsidiaries
|
|
2,354
|
|
|
2,363
|
|
|
2,342
|
|
Other
|
|
422
|
|
|
444
|
|
|
426
|
|
Investment securities and other investment gains
|
|
6,431
|
|
|
3,901
|
|
|
26
|
|
Total income
|
|
48,482
|
|
|
42,772
|
|
|
38,858
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Interest on subordinated notes
|
|
4,002
|
|
|
4,220
|
|
|
4,220
|
|
Interest on long-term debt and mandatorily redeemable securities
|
|
1,685
|
|
|
1,454
|
|
|
1,375
|
|
Interest on commercial paper and other short-term borrowings
|
|
17
|
|
|
20
|
|
|
30
|
|
Rent
|
|
2,070
|
|
|
1,739
|
|
|
1,737
|
|
Other
|
|
1,733
|
|
|
1,179
|
|
|
351
|
|
Total expenses
|
|
9,507
|
|
|
8,612
|
|
|
7,713
|
|
Income before income tax benefit and equity in undistributed income of subsidiaries
|
|
38,975
|
|
|
34,160
|
|
|
31,145
|
|
Income tax benefit
|
|
204
|
|
|
741
|
|
|
1,721
|
|
Income before equity in undistributed income of subsidiaries
|
|
39,179
|
|
|
34,901
|
|
|
32,866
|
|
Equity in undistributed income of subsidiaries:
|
|
|
|
|
|
|
|
|
|
Bank subsidiaries
|
|
28,872
|
|
|
22,569
|
|
|
24,289
|
|
Non-bank subsidiaries
|
|
—
|
|
|
316
|
|
|
331
|
|
Net income
|
|
$
|
68,051
|
|
|
$
|
57,786
|
|
|
$
|
57,486
|
|
Comprehensive income
|
|
$
|
63,375
|
|
|
$
|
52,575
|
|
|
$
|
54,634
|
|
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
(Dollars in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
68,051
|
|
|
$
|
57,786
|
|
|
$
|
57,486
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Equity (undistributed) distributed in excess of income of subsidiaries
|
|
(28,872
|
)
|
|
(22,885
|
)
|
|
(24,620
|
)
|
Depreciation of premises and equipment
|
|
2
|
|
|
4
|
|
|
9
|
|
Stock-based compensation
|
|
48
|
|
|
52
|
|
|
64
|
|
Realized/unrealized investment securities and other investment gains
|
|
(6,431
|
)
|
|
(3,901
|
)
|
|
(26
|
)
|
Change in trading account securities
|
|
—
|
|
|
—
|
|
|
205
|
|
Other
|
|
4,122
|
|
|
3,132
|
|
|
2,585
|
|
Net change in operating activities
|
|
36,920
|
|
|
34,188
|
|
|
35,703
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of investment securities
|
|
6,327
|
|
|
1,795
|
|
|
1,470
|
|
Net change in partnership investments
|
|
(62
|
)
|
|
2,903
|
|
|
423
|
|
Return of capital from subsidiaries
|
|
854
|
|
|
—
|
|
|
—
|
|
Net change in investing activities
|
|
7,119
|
|
|
4,698
|
|
|
1,893
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Net change in commercial paper
|
|
354
|
|
|
(2,281
|
)
|
|
(4,126
|
)
|
Proceeds from issuance of long-term debt and mandatorily redeemable securities
|
|
1,248
|
|
|
1,607
|
|
|
1,520
|
|
Payments on long-term debt and mandatorily redeemable securities
|
|
(667
|
)
|
|
(627
|
)
|
|
(712
|
)
|
Stock issued under stock purchase plans
|
|
153
|
|
|
120
|
|
|
149
|
|
Net proceeds from issuance of treasury stock
|
|
2,176
|
|
|
2,636
|
|
|
2,373
|
|
Acquisition of treasury stock
|
|
(41
|
)
|
|
(8,030
|
)
|
|
(9,970
|
)
|
Cash dividends paid on common stock
|
|
(20,431
|
)
|
|
(19,416
|
)
|
|
(18,126
|
)
|
Net change in financing activities
|
|
(17,208
|
)
|
|
(25,991
|
)
|
|
(28,892
|
)
|
Net change in cash and cash equivalents
|
|
26,831
|
|
|
12,895
|
|
|
8,704
|
|
Cash and cash equivalents, beginning of year
|
|
73,324
|
|
|
60,429
|
|
|
51,725
|
|
Cash and cash equivalents, end of year
|
|
$
|
100,155
|
|
|
$
|
73,324
|
|
|
$
|
60,429
|
|