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Section 1: 10-Q (10-Q SRCE 3RD QUARTER 2018)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

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

For the quarterly period ended September 30, 2018

OR

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

For the transition period from                     to                    

Commission file number 0-6233
395398135_corplogo3a02a11.jpg
(Exact name of registrant as specified in its charter)
INDIANA
 
35-1068133
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
100 North Michigan Street
 
 
South Bend, IN
 
46601
(Address of principal executive offices)
 
(Zip Code)
 
(574) 235-2000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes  o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No
Number of shares of common stock outstanding as of October 12, 2018 — 25,965,746 shares
 


Table of Contents

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EXHIBITS
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents



1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited - Dollars in thousands)
 
September 30,
2018
 
December 31,
2017
ASSETS
 

 
 

Cash and due from banks
$
68,362

 
$
73,635

Federal funds sold and interest bearing deposits with other banks
45,514

 
4,398

Investment securities available-for-sale
972,172

 
904,033

Other investments
28,159

 
25,953

Mortgages held for sale
11,149

 
13,123

Loans and leases, net of unearned discount:
 

 
 
Commercial and agricultural
1,062,907

 
929,997

Auto and light truck
562,546

 
496,816

Medium and heavy duty truck
271,601

 
296,935

Aircraft
836,458

 
844,657

Construction equipment
654,605

 
563,437

Commercial real estate
781,093

 
741,568

Residential real estate and home equity
523,391

 
526,122

Consumer
132,952

 
128,146

Total loans and leases
4,825,553

 
4,527,678

Reserve for loan and lease losses
(98,300
)
 
(94,883
)
Net loans and leases
4,727,253

 
4,432,795

Equipment owned under operating leases, net
137,492

 
139,581

Net premises and equipment
53,479

 
54,612

Goodwill and intangible assets
84,097

 
83,742

Accrued income and other assets
165,492

 
155,412

Total assets
$
6,293,169

 
$
5,887,284

 
 
 
 
LIABILITIES
 

 
 

Deposits:
 

 
 

Noninterest-bearing demand
$
1,151,573

 
$
1,064,271

Interest-bearing deposits:
 
 
 
Interest-bearing demand
1,606,462

 
1,554,898

Savings
822,246

 
863,588

Time
1,481,696

 
1,269,973

Total interest-bearing deposits
3,910,404

 
3,688,459

Total deposits
5,061,977

 
4,752,730

Short-term borrowings:
 

 
 

Federal funds purchased and securities sold under agreements to repurchase
124,630

 
205,834

Other short-term borrowings
166,077

 
8,761

Total short-term borrowings
290,707

 
214,595

Long-term debt and mandatorily redeemable securities
70,919

 
70,060

Subordinated notes
58,764

 
58,764

Accrued expenses and other liabilities
60,365

 
72,598

Total liabilities
5,542,732

 
5,168,747

 
 
 
 
SHAREHOLDERS’ EQUITY
 

 
 

Preferred stock; no par value
 

 
 

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

 

Common stock; no par value
 

 
 
Authorized 40,000,000 shares; issued 28,205,674 at September 30, 2018 and December 31, 2017
436,538

 
436,538

Retained earnings
383,943

 
339,959

Cost of common stock in treasury (2,239,928 shares at September 30, 2018 and 2,268,910 shares at December 31, 2017)
(54,369
)
 
(54,628
)
Accumulated other comprehensive loss
(15,675
)
 
(3,332
)
Total shareholders’ equity
750,437

 
718,537

Total liabilities and shareholders’ equity
$
6,293,169

 
$
5,887,284

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

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Table of Contents

1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Dollars in thousands, except per share amounts)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Interest income:
 

 
 

 
 

 
 

Loans and leases
$
59,961

 
$
50,429

 
$
172,172

 
$
143,345

Investment securities, taxable
4,873

 
3,048

 
13,869

 
9,932

Investment securities, tax-exempt
471

 
628

 
1,562

 
1,988

Other
391

 
325

 
1,196

 
935

Total interest income
65,696

 
54,430

 
188,799

 
156,200

Interest expense:
 

 
 

 
 

 
 

Deposits
9,405

 
5,186

 
24,286

 
13,431

Short-term borrowings
518

 
396

 
2,120

 
895

Subordinated notes
918

 
1,022

 
2,709

 
3,132

Long-term debt and mandatorily redeemable securities
493

 
597

 
1,621

 
1,925

Total interest expense
11,334

 
7,201

 
30,736

 
19,383

Net interest income
54,362

 
47,229

 
158,063

 
136,817

Provision for loan and lease losses
6,157

 
1,620

 
14,760

 
5,358

Net interest income after provision for loan and lease losses
48,205

 
45,609

 
143,303

 
131,459

Noninterest income:
 

 
 

 
 

 
 

Trust and wealth advisory
5,109

 
5,037

 
16,097

 
15,665

Service charges on deposit accounts
2,567

 
2,719

 
7,676

 
7,931

Debit card
3,377

 
2,983

 
9,907

 
8,719

Mortgage banking
925

 
1,486

 
2,882

 
3,737

Insurance commissions
1,580

 
1,429

 
5,025

 
4,506

Equipment rental
7,977

 
7,917

 
23,836

 
22,335

Gains (losses) on investment securities available-for-sale

 
1,007

 
(345
)
 
2,757

Other
2,525

 
3,014

 
7,812

 
7,385

Total noninterest income
24,060

 
25,592

 
72,890

 
73,035

Noninterest expense:
 

 
 

 
 

 
 

Salaries and employee benefits
23,164

 
22,016

 
69,391

 
64,073

Net occupancy
2,523

 
2,806

 
7,504

 
7,768

Furniture and equipment
5,769

 
5,363

 
16,942

 
15,264

Depreciation – leased equipment
6,580

 
6,565

 
19,692

 
18,541

Professional fees
1,883

 
1,765

 
5,628

 
4,514

Supplies and communication
1,635

 
1,316

 
4,687

 
3,911

FDIC and other insurance
855

 
693

 
2,267

 
1,889

Business development and marketing
1,663

 
1,199

 
4,921

 
4,352

Loan and lease collection and repossession
1,563

 
1,093

 
3,079

 
2,058

Other
1,707

 
1,644

 
4,665

 
4,314

Total noninterest expense
47,342

 
44,460

 
138,776

 
126,684

Income before income taxes
24,923

 
26,741

 
77,417

 
77,810

Income tax expense
5,035

 
9,559

 
16,449

 
27,753

Net income
$
19,888

 
$
17,182

 
$
60,968

 
$
50,057

Per common share:
 

 
 

 
 

 
 

Basic net income per common share
$
0.76

 
$
0.66

 
$
2.33

 
$
1.92

Diluted net income per common share
$
0.76

 
$
0.66

 
$
2.33

 
$
1.92

Cash dividends
$
0.25

 
$
0.19

 
$
0.71

 
$
0.56

Basic weighted average common shares outstanding
25,965,694

 
25,935,867

 
25,958,125

 
25,922,218

Diluted weighted average common shares outstanding
25,965,694

 
25,935,867

 
25,958,125

 
25,922,218

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

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1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - Dollars in thousands)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
19,888

 
$
17,182

 
$
60,968

 
$
50,057

Other comprehensive (loss) income:
 

 
 

 
 

 
 

Unrealized (depreciation) appreciation of available-for-sale securities
(4,294
)
 
(568
)
 
(15,657
)
 
2,932

Reclassification adjustment for realized (gains) losses included in net income

 
(1,007
)
 
345

 
(2,757
)
Income tax effect
1,034

 
591

 
3,687

 
(66
)
Other comprehensive (loss) income, net of tax
(3,260
)
 
(984
)
 
(11,625
)
 
109

Comprehensive income
$
16,628

 
$
16,198

 
$
49,343

 
$
50,166

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

1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited - Dollars in thousands, except per share amounts)
 
Preferred
Stock
 
Common
Stock
 
Retained
Earnings
 
Cost of
Common
Stock
in Treasury
 
Accumulated
Other
Comprehensive
Income (Loss), Net
 
Total
Balance at January 1, 2017
$

 
$
436,538

 
$
290,824

 
$
(56,056
)
 
$
1,344

 
$
672,650

Cumulative-effect adjustment

 

 
(65
)
 

 

 
$
(65
)
Balance at January 1, 2017, adjusted

 
436,538

 
290,759

 
(56,056
)
 
1,344

 
672,585

Net income

 

 
50,057

 

 

 
50,057

Other comprehensive income

 

 

 

 
109

 
109

Issuance of 61,265 common shares under stock based compensation awards

 

 
890

 
1,454

 

 
2,344

Cost of 900 shares of common stock acquired for treasury

 

 

 
(41
)
 

 
(41
)
Common stock dividend ($0.56 per share)

 

 
(14,557
)
 

 

 
(14,557
)
Balance at September 30, 2017
$

 
$
436,538

 
$
327,149

 
$
(54,643
)
 
$
1,453

 
$
710,497

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
$

 
$
436,538

 
$
339,959

 
$
(54,628
)
 
$
(3,332
)
 
$
718,537

Cumulative-effect adjustment

 

 
718

 

 
(718
)
 

Balance at January 1, 2018, adjusted

 
436,538

 
340,677

 
(54,628
)
 
(4,050
)
 
718,537

Net income

 

 
60,968

 

 

 
60,968

Other comprehensive loss

 

 


 

 
(11,625
)
 
(11,625
)
Issuance of 45,316 common shares under stock based compensation awards

 

 
762

 
1,076

 

 
1,838

Cost of 16,334 shares of common stock acquired for treasury

 

 

 
(817
)
 

 
(817
)
Common stock dividend ($0.71 per share)

 

 
(18,464
)
 

 

 
(18,464
)
Balance at September 30, 2018
$

 
$
436,538

 
$
383,943

 
$
(54,369
)
 
$
(15,675
)
 
$
750,437

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


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1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Dollars in thousands)
 
Nine Months Ended September 30,
 
2018
 
2017
Operating activities:
 

 
 

Net income
$
60,968

 
$
50,057

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Provision for loan and lease losses
14,760

 
5,358

Depreciation of premises and equipment
4,132

 
4,309

Depreciation of equipment owned and leased to others
19,692

 
18,541

Stock-based compensation
2,739

 
2,158

Amortization of investment securities premiums and accretion of discounts, net
2,863

 
4,206

Amortization of mortgage servicing rights
731

 
821

Deferred income taxes
(1,315
)
 
(4,230
)
Losses (gains) on investment securities available-for-sale
345

 
(2,757
)
Originations of loans held for sale, net of principal collected
(55,814
)
 
(75,387
)
Proceeds from the sales of loans held for sale
59,246

 
82,572

Net gain on sale of loans held for sale
(1,458
)
 
(2,336
)
Net (gain) loss on sale of other real estate and repossessions
(85
)
 
48

Change in interest receivable
(3,326
)
 
(2,863
)
Change in interest payable
3,797

 
1,293

Change in other assets
(8,691
)
 
(3,132
)
Change in other liabilities
(6,779
)
 
16,445

Other
551

 
3,499

Net change in operating activities
92,356

 
98,602

Investing activities:
 

 
 

Proceeds from sales of investment securities available-for-sale
11,737

 
2,927

Proceeds from maturities and paydowns of investment securities available-for-sale
115,520

 
133,541

Purchases of investment securities available-for-sale
(213,916
)
 
(181,752
)
Proceeds from liquidation of partnership investment
1,868

 
78

Net change in other investments
(2,206
)
 
(3,495
)
Loans sold or participated to others
14,310

 
13,049

Net change in loans and leases
(332,086
)
 
(269,881
)
Net change in equipment owned under operating leases
(17,603
)
 
(45,723
)
Purchases of premises and equipment
(2,938
)
 
(2,801
)
Proceeds from sales of other real estate and repossessions
4,691

 
2,761

Net change in investing activities
(420,623
)
 
(351,296
)
Financing activities:
 

 
 

Net change in demand deposits and savings accounts
97,524

 
60,332

Net change in time deposits
211,723

 
179,620

Net change in short-term borrowings
76,112

 
24,822

Proceeds from issuance of long-term debt

 
19,999

Payments on long-term debt
(1,559
)
 
(26,015
)
Stock issued under stock purchase plans
145

 
153

Acquisition of treasury stock
(817
)
 
(41
)
Cash dividends paid on common stock
(19,018
)
 
(15,056
)
Net change in financing activities
364,110

 
243,814

 
 
 
 
Net change in cash and cash equivalents
35,843

 
(8,880
)
Cash and cash equivalents, beginning of year
78,033

 
108,304

Cash and cash equivalents, end of period
$
113,876

 
$
99,424

Supplemental Information:
 

 
 

Non-cash transactions:
 

 
 

Loans transferred to other real estate and repossessed assets
$
8,558

 
$
7,656

Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan
583

 
1,426

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

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1ST SOURCE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.       Accounting Policies
1st Source Corporation is a bank holding company headquartered in South Bend, Indiana that provides, through its subsidiaries (collectively referred to as “1st Source” or “the Company”), a broad array of financial products and services.
Basis of Presentation – The accompanying unaudited consolidated financial statements reflect all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income, changes in shareholders’ equity, and cash flows for the periods presented. These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been omitted.
The Notes to the Consolidated Financial Statements appearing in 1st Source Corporation’s Annual Report on Form 10-K (2017 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements. The Consolidated Statement of Financial Condition at December 31, 2017 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation.
Use of Estimates in the Preparation of Financial Statements – Financial statements prepared in accordance with GAAP require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates.
Loans and Leases – Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs and net of unearned income. Interest income is accrued as earned based on unpaid principal balances. Origination fees and direct loan and lease origination costs are deferred, and the net amount amortized to interest income over the estimated life of the related loan or lease. Loan commitment fees are deferred and amortized into other income over the commitment period.
Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, net of unamortized deferred lease origination fees and costs and unearned income. Interest income on direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment.
The accrual of interest on loans and leases is discontinued when a loan or lease becomes contractually delinquent for 90 days, or when an individual analysis of a borrower’s credit worthiness indicates a credit should be placed on nonperforming status, except for residential mortgage loans and consumer loans that are well secured and in the process of collection. Residential mortgage loans are placed on nonaccrual at the time the loan is placed in foreclosure. When interest accruals are discontinued, interest credited to income in the current year is reversed and interest accrued in the prior year is charged to the reserve for loan and lease losses. However, in some cases, the Company may elect to continue the accrual of interest when the net realizable value of collateral is sufficient to cover the principal and accrued interest. When a loan or lease is classified as nonaccrual and the future collectability of the recorded loan or lease balance is doubtful, collections on interest and principal are applied as a reduction to principal outstanding. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured, which is typically evidenced by a sustained repayment performance of at least six months.
A loan or lease is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. Interest on impaired loans and leases, which are not classified as nonaccrual, is recognized on the accrual basis. The Company evaluates loans and leases exceeding $100,000 for impairment and establishes a specific reserve as a component of the reserve for loan and lease losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan or lease and the recorded investment in the loan or lease exceeds its fair value.
Loans and leases that have been modified and economic concessions have been granted to borrowers who have experienced financial difficulties are considered a troubled debt restructuring (TDR) and, by definition, are deemed an impaired loan. These concessions typically result from the Company’s loss mitigation activities and may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

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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.
Revenue Recognition
The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company’s principal source of revenue is interest income from loans and leases and investment securities. The Company also earns noninterest income from various banking and financial services offered primarily through 1st Source Bank (Bank) and its subsidiaries.
Interest Income – The largest source of revenue for the Company is interest income which is primarily recognized on an accrual basis according to nondiscretionary formulas in written contracts, such as loan and lease agreements or investment securities contracts.
Noninterest Income – The Company earns noninterest income through a variety of financial and transaction services provided to corporate and consumer clients such as trust and wealth advisory, deposit account, debit card, mortgage banking, insurance, and equipment rental services. Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed. In certain circumstances, noninterest income is reported net of associated expenses.
Note 2 — Recent Accounting Pronouncements
Intangibles - Internal-Use Software: In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contact with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. The guidance is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is assessing ASU 2018-15 and the impact on its accounting and disclosures.
Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” These amendments modify the disclosure requirements in Topic 820 as follows:
Removals: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements.
Modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.
Additions: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is assessing ASU 2018-13 and the impact on its disclosures.

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Share Based Payment Accounting: In June 2018, the FASB issued ASU No. 2018-07 “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” These amendments expand the scope of Topic 718, Compensation - Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The guidance is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company is assessing ASU 2018-07 and does not expect it to have a material impact on its accounting and disclosures.
Income Taxes: In March 2018, the FASB issued ASU 2018-05 “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118.” These amendments add SEC guidance to the FASB Accounting Standards Codification regarding the Tax Cuts and Jobs Act pursuant to the issuance of SAB 118. The amendments are effective upon addition to the FASB Codification. Disclosures related to the effect of the Tax Cuts and Jobs Act and the Company’s utilization of SAB 118 appear in Note 12 - Income Taxes.
Accumulated Other Comprehensive Income (Loss): In February 2018, the FASB issued ASU No. 2018-02 “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” These amendments provide financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The guidance is effective for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The amendments should be applied either in the period adopted or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company early adopted ASU 2018-02 on January 1, 2018 through a $0.72 million cumulative-effect adjustment from AOCI to increase retained earnings related to unrealized gains and losses on available-for-sale securities. No other income tax effects related to the application of the Tax Cuts and Jobs Act were reclassified from AOCI to retained earnings.
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 estimates that it will recognize a cumulative-effect adjustment to retained earnings of $0.30 million upon the adoption of ASU 2017-08 on January 1, 2019. This estimate could change due to changes in the security portfolio prior to the adoption date.
Simplifying the Test for Goodwill Impairment: In January 2017, the FASB issued ASU No. 2017-04 “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company has assessed ASU 2017-04 and does not expect it to have a material impact on its accounting and disclosures.
Measurement of Credit Losses on Financial Instruments: In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” The provisions of ASU 2016-13 were issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the financial assets.

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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. Early adoption is permitted.
In July 2018, the FASB issued amendments (ASU No. 2018-11) which provide entities with an additional (and optional) transition method to adopt the new lease standard. Under this new transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). The amendments in ASU 2018-11 also provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met. For entities that have not adopted Topic 842 before the issuance of ASU No. 2018-11, the effective date and transition requirements for the amendments related to separating components of a contract are the same as the effective date and transition requirements in ASU No. 2016-02.
The Company has an implementation team working through the provisions of ASU 2016-02 and ASU 2018-11 to assess the impact on its accounting, disclosures, processes, internal control over financial reporting, regulatory capital, risk-weighted assets, and the election of certain practical expedients. The Company is substantially complete with the evaluation of its lease population. It is expected that the Company will recognize discounted right of use assets and lease liabilities (estimated between $10 and $20 million) upon adoption on January 1, 2019. The estimates will change due to changes in the lease portfolio prior to the adoption date. The Company does not expect a material change to the timing of its expense recognition. Given the limited changes to lessor accounting, the Company does expect material changes to recognition or measurement. The Company has selected a third party software solution to assist with the accounting under the new standard.
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. In February 2018, the FASB issued ASU No. 2018-03 which includes technical corrections and improvements to clarify the guidance in ASU No. 2016-01. 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.

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Table of Contents

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. Additional disclosures related to revenue recognition appears in “Note 1. Accounting Policies.”
Note 3.       Investment Securities Available-For-Sale
The following table shows investment securities available-for-sale.
(Dollars in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
September 30, 2018
 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
542,814

 
$

 
$
(10,674
)
 
$
532,140

U.S. States and political subdivisions securities
 
90,762

 
119

 
(1,408
)
 
89,473

Mortgage-backed securities — Federal agencies
 
312,680

 
692

 
(8,774
)
 
304,598

Corporate debt securities
 
45,863

 

 
(608
)
 
45,255

Foreign government and other securities
 
700

 
6

 

 
706

Total debt securities available-for-sale
 
$
992,819

 
$
817

 
$
(21,464
)
 
$
972,172

 
 
 
 
 
 
 
 
 
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 debt securities available-for-sale
 
$
909,368

 
$
2,176

 
$
(7,511
)
 
$
904,033

At September 30, 2018 and 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).

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The following table shows the contractual maturities of investments in debt securities available-for-sale at September 30, 2018. 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
 
$
53,874

 
$
53,787

Due after one year through five years
 
608,962

 
596,960

Due after five years through ten years
 
17,303

 
16,827

Due after ten years
 

 

Mortgage-backed securities
 
312,680

 
304,598

Total debt securities available-for-sale
 
$
992,819

 
$
972,172

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
September 30, 2018
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and Federal agencies securities
 
$
381,245

 
$
(5,468
)
 
$
145,895

 
$
(5,206
)
 
$
527,140

 
$
(10,674
)
U.S. States and political subdivisions securities
 
47,212

 
(468
)
 
26,958

 
(940
)
 
74,170

 
(1,408
)
Mortgage-backed securities - Federal agencies
 
139,843

 
(3,159
)
 
125,847

 
(5,615
)
 
265,690

 
(8,774
)
Corporate debt securities
 
27,918

 
(212
)
 
17,336

 
(396
)
 
45,254

 
(608
)
Foreign government and other securities
 
100

 

 

 

 
100

 

Total debt securities available-for-sale
 
$
596,318

 
$
(9,307
)
 
$
316,036

 
$
(12,157
)
 
$
912,354

 
$
(21,464
)
 
 
 
 
 
 
 
 
 
 
 
 
 
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 debt securities available-for-sale
 
$
497,752

 
$
(2,841
)
 
$
184,736

 
$
(4,670
)
 
$
682,488

 
$
(7,511
)
The initial indication of potential other-than-temporary-impairment (OTTI) for debt securities is a decline in fair value below amortized cost. Quarterly, the impaired securities are analyzed on a qualitative and quantitative basis in determining OTTI. Declines in the fair value of debt securities available-for-sale below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. In estimating OTTI losses, the Company considers among other things, (i) the length of time and the extent to which fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.
At September 30, 2018, the Company does not have the intent to sell any of the debt securities available-for-sale in the table above and believes that it is more likely than not, that it will not have to sell any such securities before an anticipated recovery of cost. Primarily the unrealized losses on debt securities are due to increases in market rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover on all debt securities as they approach their maturity date or re-pricing date or if market yields for such investments decline. The Company does not believe any of the securities are impaired due to reasons of credit quality.
The following table shows the gross realized gains and losses from the securities available-for-sale portfolio, including marketable equity securities. Realized gains and losses of all securities are computed using the specific identification cost basis.
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(Dollars in thousands)
 
2018
 
2017
 
2018
 
2017
Gross realized gains
 
$

 
$
1,007

 
$
2

 
$
2,947

Gross realized losses
 

 

 
(347
)
 

OTTI losses
 

 

 

 
(190
)
Net realized gains (losses)
 
$

 
$
1,007

 
$
(345
)
 
$
2,757


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At September 30, 2018 and December 31, 2017, investment securities available-for-sale with carrying values of $267.16 million and $289.05 million, respectively, were pledged as collateral for security repurchase agreements and for other purposes.
Note 4.       Loan and Lease Financings
The Company evaluates loans and leases for credit quality at least annually but more frequently if certain circumstances occur (such as material new information which becomes available and indicates a potential change in credit risk). The Company uses two methods to assess credit risk: loan or lease credit quality grades and credit risk classifications. The purpose of the loan or lease credit quality grade is to document the degree of risk associated with individual credits as well as inform management of the degree of risk in the portfolio taken as a whole. Credit risk classifications are used to categorize loans by degree of risk and to designate individual or committee approval authorities for higher risk credits at the time of origination. Credit risk classifications include categories for: Acceptable, Marginal, Special Attention, Special Risk, Restricted by Policy, Regulated and Prohibited by Law.
All loans and leases, except residential real estate and home equity loans and consumer loans, are assigned credit quality grades on a scale from 1 to 12 with grade 1 representing superior credit quality. The criteria used to assign grades to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Company’s safety and soundness. Loans or leases graded 7 or weaker are considered “special attention” credits and, as such, relationships in excess of $100,000 are reviewed quarterly as part of management’s evaluation of the appropriateness of the reserve for loan and lease losses. Grade 7 credits are defined as “watch” and contain greater than average credit risk and are monitored to limit the exposure to increased risk; grade 8 credits are “special mention” and, following regulatory guidelines, are defined as having potential weaknesses that deserve management’s close attention. Credits that exhibit well-defined weaknesses and a distinct possibility of loss are considered “classified” and are graded 9 through 12 corresponding to the regulatory definitions of “substandard” (grades 9 and 10) and the more severe “doubtful” (grade 11) and “loss” (grade 12).
The following table shows the credit quality grades of the recorded investment in loans and leases, segregated by class.
 
 
Credit Quality Grades
(Dollars in thousands) 
 
1-6
 
7-12
 
Total
September 30, 2018
 
 

 
 

 
 

Commercial and agricultural
 
$
1,032,233

 
$
30,674

 
$
1,062,907

Auto and light truck
 
531,769

 
30,777

 
562,546

Medium and heavy duty truck
 
269,660

 
1,941

 
271,601

Aircraft
 
795,769

 
40,689

 
836,458

Construction equipment
 
633,357

 
21,248

 
654,605

Commercial real estate
 
765,084

 
16,009

 
781,093

Total
 
$
4,027,872

 
$
141,338

 
$
4,169,210

 
 
 
 
 
 
 
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


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Table of Contents

For residential real estate and home equity and consumer loans, credit quality is based on the aging status of the loan and by payment activity. The following table shows the recorded investment in residential real estate and home equity and consumer loans by performing or nonperforming status. Nonperforming loans are those loans which are on nonaccrual status or are 90 days or more past due.
(Dollars in thousands) 
 
Performing
 
Nonperforming
 
Total
September 30, 2018
 
 

 
 

 
 

Residential real estate and home equity
 
$
521,693

 
$
1,698

 
$
523,391

Consumer
 
132,718

 
234

 
132,952

Total
 
$
654,411

 
$
1,932

 
$
656,343

 
 
 
 
 
 
 
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

The following table shows the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.
(Dollars in thousands) 
 
Current
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due and Accruing
 
Total
Accruing 
Loans
 
Nonaccrual
 
Total
Financing
Receivables
September 30, 2018
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and agricultural
 
$
1,060,028

 
$
52

 
$

 
$

 
$
1,060,080

 
$
2,827

 
$
1,062,907

Auto and light truck
 
541,472

 
4,938

 
956

 

 
547,366

 
15,180

 
562,546

Medium and heavy duty truck
 
271,363

 
71

 

 

 
271,434

 
167

 
271,601

Aircraft
 
816,069

 
9,331

 

 

 
825,400

 
11,058

 
836,458

Construction equipment
 
649,451

 
1,467

 
544

 

 
651,462

 
3,143

 
654,605

Commercial real estate
 
778,975

 
111

 
160

 

 
779,246

 
1,847

 
781,093

Residential real estate and home equity
 
520,508

 
912

 
273

 
71

 
521,764

 
1,627

 
523,391

Consumer
 
131,545

 
996

 
177

 
55

 
132,773

 
179

 
132,952

Total
 
$
4,769,411

 
$
17,878

 
$
2,110

 
$
126

 
$
4,789,525

 
$
36,028

 
$
4,825,553

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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


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Table of Contents

The following table shows impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.
(Dollars in thousands) 
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Reserve
September 30, 2018
 
 

 
 

 
 

With no related reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 
$
2,694

 
$
2,694

 
$

Auto and light truck
 
14,827

 
14,827

 

Medium and heavy duty truck
 
167

 
167

 

Aircraft
 
2,286

 
2,286

 

Construction equipment
 
772

 
772

 

Commercial real estate
 
923

 
923

 

Residential real estate and home equity
 

 

 

Consumer
 

 

 

Total with no related reserve recorded
 
21,669

 
21,669

 

With a reserve recorded:
 
 

 
 

 
 

Commercial and agricultural
 

 

 

Auto and light truck
 
292

 
292

 
62

Medium and heavy duty truck
 

 

 

Aircraft
 
8,755

 
8,755

 
1,200

Construction equipment
 
2,282

 
2,282

 
471

Commercial real estate
 
790

 
790

 
76

Residential real estate and home equity
 
346

 
348

 
128

Consumer
 

 

 

Total with a reserve recorded
 
12,465

 
12,467

 
1,937

Total impaired loans
 
$
34,134

 
$
34,136

 
$
1,937

 
 
 
 
 
 
 
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


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Table of Contents

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by class.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
(Dollars in thousands) 
 
Average
Recorded
Investment
 
Interest
Income
 
Average
Recorded
Investment
 
Interest
Income
 
Average
Recorded
Investment
 
Interest
Income
 
Average
Recorded
Investment
 
Interest
Income
Commercial and agricultural
 
$
2,798

 
$

 
$
4,551

 
$

 
$
2,880

 
$

 
$
4,774

 
$
1

Auto and light truck
 
8,972

 

 
208

 

 
7,955

 

 
158

 

Medium and heavy duty truck
 
195

 

 
1,551

 

 
287

 

 
517

 

Aircraft
 
18,438

 

 
2,519

 
5

 
10,211

 
20

 
5,830

 
5

Construction equipment
 
2,157

 

 
949

 

 
1,476

 

 
1,084

 

Commercial real estate
 
1,534

 

 
2,881

 
2

 
2,496

 

 
3,168

 
2

Residential real estate and home equity
 
347

 
3

 
354

 
3

 
349

 
11

 
356

 
11

Consumer
 

 

 

 

 

 

 

 

Total
 
$
34,441

 
$
3

 
$
13,013

 
$
10

 
$
25,654

 
$
31

 
$
15,887

 
$
19

 
There were no loan and lease modifications classified as a troubled debt restructuring (TDR) during the three and nine months ended September 30, 2018. There were no loan and lease modifications classified as a TDR during the three months ended September 30, 2017 and one nonperforming modification classified as a TDR during the nine months ended September 30, 2017. The classification between nonperforming and performing is determined at the time of modification. Modification programs focus on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. Modifications do not result in the contractual forgiveness of principal or interest. There were no modifications during 2018 and one modification during 2017 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modification was immaterial.
There were no TDRs which had payment defaults within the twelve months following modification during the three and nine months ended September 30, 2018. There were no TDRs which had a payment default within the twelve months following modification during the three months ended September 30, 2017 and one nonperforming TDR which had a payment default within the twelve months following modification during the nine months ended September 30, 2017. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.
The following table shows the recorded investment of loans and leases classified as troubled debt restructurings as of September 30, 2018 and December 31, 2017.
(Dollars in thousands)
 
September 30,
2018
 
December 31,
2017
Performing TDRs
 
$
346

 
$
352

Nonperforming TDRs
 
33

 
537

Total TDRs
 
$
379

 
$
889

 
Note 5.       Reserve for Loan and Lease Losses
The reserve for loan and lease loss methodology has been consistently applied for several years, with enhancements instituted periodically. Reserve ratios are reviewed quarterly and revised periodically to reflect recent loss history and to incorporate current risks and trends which may not be recognized in historical data. As the historical charge-off analysis is updated, the Company reviews the look-back periods for each business loan portfolio. Furthermore, a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency is performed in order to review portfolio trends and other factors, including specific industry risks and economic conditions, which may have an impact on the reserves and reserve ratios applied to various portfolios. The Company adjusts the calculated historical based ratio as a result of the analysis of environmental factors, principally economic risk and concentration risk. Key economic factors affecting the portfolios are growth in gross domestic product, unemployment rates, housing market trends, commodity prices, inflation and global economic and political issues. Concentration risk is impacted primarily by geographic concentration in Northern Indiana and Southwestern Lower Michigan in the business banking and commercial real estate portfolios and by collateral concentration in the specialty finance portfolios and exposure to foreign markets by geographic risk.

16

Table of Contents

The reserve for loan and lease losses is maintained at a level believed to be appropriate by the Company to absorb probable losses inherent in the loan and lease portfolio. The determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable loan and lease losses related to specifically identified impaired loans and leases as well as probable losses in the remainder of the various loan and lease portfolios. For purposes of determining the reserve, the Company has segmented loans and leases into classes based on the associated risk within these segments. The Company has determined that eight classes exist within the loan and lease portfolio. The methodology for assessing the appropriateness of the reserve consists of several key elements, which include: specific reserves for impaired loans, formula reserves for each business lending division portfolio including percentage allocations for special attention loans and leases not deemed impaired, and reserves for pooled homogeneous loans and leases. The Company’s evaluation is based upon a continuing review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic and geopolitical events, all of which are subject to judgment and will change.

The following table shows the changes in the reserve for loan and lease losses, segregated by class, for the three months ended September 30, 2018 and 2017.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
Commercial and
agricultural
 
Auto and
light truck
 
Medium and
heavy duty truck
 
Aircraft
 
Construction
equipment
 
Commercial
real estate
 
Residential
real estate
and home
equity
 
Consumer
 
Total
September 30, 2018
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of period
 
$
18,631