Send us Feedback

1st Source (SRCE)
Analysis
SUMMARY
BULLS
BEARS
TOPICS
Data
DATA CENTRAL
STOCK CHART
Financials
SEC FILINGS
BALANCE
INCOME
CASH FLOW

 
Annual Reports

 
Quarterly Reports

  • 10-Q (Apr 25, 2013)
  • 10-Q (Oct 25, 2012)
  • 10-Q (Jul 26, 2012)
  • 10-Q (Apr 26, 2012)
  • 10-Q (Oct 20, 2011)
  • 10-Q (Jul 21, 2011)

 
8-K

 
Other

1st Source 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic
form10_q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
 
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
 
(Exact name of registrant as specified in its charter)

INDIANA
  
35-1068133
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
100 North Michigan Street
South Bend, IN
46614
(Address of principle 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).    o Yes        o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 
Large accelerated filer o
Accelerated filer x
 
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes   x   No
 
Number of shares of common stock outstanding as of April 15, 2011 – 24,303,656 shares

 
- 1 -
 


TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
 
Page
Item 1.
Financial Statements (Unaudited)
  
 
3
 
4
 
5
 
6
 
7
Item 2.
25
Item 3.
34
Item 4.
34
 
PART II. OTHER INFORMATION
 
Item 1.
34
Item 1A.
34
Item 2.
35
Item 3.
35
Item 4.
35
Item 5.
35
Item 6.
35
 
 
36
 
CERTIFICATIONS
    
     
Exhibit 31.1    
Exhibit 31.2    
Exhibit 32.1    
Exhibit 32.2    



1st SOURCE CORPORATION
            
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
            
(Unaudited - Dollars in thousands)
            
   
March 31,
    
December 31,
  
   
2011
    
2010
  
ASSETS
            
Cash and due from banks
   $ 57,271     $ 62,313  
Federal funds sold and
                
interest bearing deposits with other banks
     81,661       34,559  
Investment securities available-for-sale
                
(amortized cost of $927,522 and $952,101
                
at March 31, 2011 and December 31, 2010, respectively)
     942,221       969,018  
Other investments
     20,503       21,343  
Trading account securities
     146       138  
Mortgages held for sale
     5,467       32,599  
Loans and leases - net of unearned discount
                
Commercial and agricultural loans
     547,381       530,228  
Auto, light truck and environmental equipment
     416,957       396,500  
Medium and heavy duty truck
     156,022       162,824  
Aircraft financing
     601,480       614,357  
Construction equipment financing
     271,490       285,634  
Commercial real estate
     578,648       594,729  
Residential real estate
     386,290       390,951  
Consumer loans
     93,450       95,400  
Total loans and leases
     3,051,718       3,070,623  
Reserve for loan and lease losses
     (86,160 )     (86,874 )
Net loans and leases
     2,965,558       2,983,749  
Equipment owned under operating leases, net
     81,304       78,138  
Net premises and equipment
     36,024       33,881  
Goodwill and intangible assets
     88,650       88,955  
Accrued income and other assets
     133,571       140,588  
Total assets
     4,412,376       4,445,281  
                 
LIABILITIES
                
Deposits:
                
Noninterest bearing
   $ 513,315     $ 524,564  
Interest bearing
     3,095,692       3,098,181  
Total deposits
     3,609,007       3,622,745  
Short-term borrowings:
                
Federal funds purchased and securities
                
sold under agreements to repurchase
     112,914       136,028  
Other short-term borrowings
     19,239       19,961  
Total short-term borrowings
     132,153       155,989  
Long-term debt and mandatorily redeemable securities
     26,717       24,816  
Subordinated notes
     89,692       89,692  
Accrued expenses and other liabilities
     64,340       65,656  
Total liabilities
     3,921,909       3,958,898  
                 
SHAREHOLDERS' EQUITY
                
Preferred stock; no par value
                
Authorized 10,000,000 shares; none issued or outstanding
     -       -  
Common stock; no par value
                
Authorized 40,000,000 shares; issued 25,643,506 at March 31, 2011
                
and December 31, 2010
     346,535       350,282  
Retained earnings
     164,455       157,875  
Cost of common stock in treasury (1,339,860 shares at March 31, 2011 and
                
1,470,696 shares at December 31, 2010)
     (29,655 )     (32,284 )
Accumulated other comprehensive income
     9,132       10,510  
Total shareholders' equity
     490,467       486,383  
Total liabilities and shareholders' equity
   $ 4,412,376     $ 4,445,281  
                 
The accompanying notes are a part of the consolidated financial statements.
                



1st SOURCE CORPORATION
            
CONSOLIDATED STATEMENTS OF INCOME
            
(Unaudited - Dollars in thousands, except per share amounts)
            
   
Three Months Ended
  
   
March 31,
  
   
2011
    
2010
  
Interest income:
            
Loans and leases
   $ 41,299     $ 42,270  
Investment securities, taxable
     4,482       5,401  
Investment securities, tax-exempt
     1,186       1,467  
Other
     243       274  
Total interest income
     47,210       49,412  
                 
Interest expense:
                
Deposits
     8,355       12,405  
Short-term borrowings
     89       188  
Subordinated notes
     1,647       1,647  
Long-term debt and mandatorily redeemable securities
     259       270  
Total interest expense
     10,350       14,510  
                 
Net interest income
     36,860       34,902  
Provision for loan and lease losses
     2,198       4,388  
Net interest income after provision for
                
loan and lease losses
     34,662       30,514  
                 
Noninterest income:
                
Trust fees
     3,992       3,745  
Service charges on deposit accounts
     4,236       4,620  
Mortgage banking income
     444       777  
Insurance commissions
     1,142       1,465  
Equipment rental income
     6,038       6,745  
Other income
     2,971       2,689  
Investment securities and other investment gains
     130       881  
Total noninterest income
     18,953       20,922  
                 
Noninterest expense:
                
Salaries and employee benefits
     18,638       18,810  
Net occupancy expense
     2,320       2,487  
Furniture and equipment expense
     3,349       2,800  
Depreciation - leased equipment
     4,805       5,364  
Professional fees
     1,096       1,514  
Supplies and communication
     1,394       1,369  
FDIC and other insurance
     1,676       1,674  
Business development and marketing expense
     622       567  
Loan and lease collection and repossession expense
     1,324       1,106  
Other expense
     3,252       1,419  
Total noninterest expense
     38,476       37,110  
                 
Income before income taxes
     15,139       14,326  
Income tax expense
     4,531       4,647  
                 
Net income
     10,608       9,679  
Preferred stock dividends and discount accretion
     -       (1,711 )
Net income available to common shareholders
   $ 10,608     $ 7,968  
                 
Per common share
                
Basic net income per common share
   $ 0.43     $ 0.33  
Diluted net income per common share
   $ 0.43     $ 0.33  
Dividends
   $ 0.16     $ 0.15  
Basic weighted average common shares outstanding
     24,271,366       24,210,242  
Diluted weighted average common shares outstanding
     24,279,517       24,215,506  
                 
The accompanying notes are a part of the consolidated financial statements.
                



1st SOURCE CORPORATION
                                    
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                          
(Unaudited - Dollars in thousands, except per share amounts)
                                
                                     
                           
Cost of
    
Accumulated
  
                           
Common
    
Other
  
         
Preferred
    
Common
    
Retained
    
Stock
    
Comprehensive
  
   
Total
    
Stock
    
Stock
    
Earnings
    
in Treasury
    
Income (Loss), Net
  
Balance at January 1, 2010
   $ 570,320     $ 104,930     $ 350,269     $ 142,407     $ (32,380 )   $ 5,094  
Comprehensive Income, net of tax:
                                                
Net Income
     9,679       -       -       9,679       -       -  
Change in unrealized appreciation
                                                
of available-for-sale securities, net of tax
     1,578       -       -       -       -       1,578  
Reclassification adjustment for gains
                                                
included in net income, net of tax
     (174 )     -       -       -       -       (174 )
Total Comprehensive Income
     11,083       -       -       -       -       -  
Issuance of 182,934 common shares
                                                
under stock based compensation awards,
                                                
including related tax effects
     2,778       -       -       632       2,146       -  
Cost of 7,269 shares of common
                                                
stock acquired for treasury
     (114 )     -       -       -       (114 )     -  
Preferred stock discount accretion
     -       324       -       (324 )     -       -  
Preferred stock dividend (paid and/or accrued)
     (1,387 )     -       -       (1,387 )     -       -  
Common stock dividend ($0.15 per share)
     (3,626 )     -       -       (3,626 )     -       -  
Stock based compensation
     3       -       3       -       -       -  
Balance at March 31, 2010
   $ 579,057     $ 105,254     $ 350,272     $ 147,381     $ (30,348 )   $ 6,498  
                                                 
Balance at January 1, 2011
   $ 486,383     $ -     $ 350,282     $ 157,875     $ (32,284 )   $ 10,510  
Comprehensive Income, net of tax:
                                                
Net Income
     10,608       -       -       10,608       -       -  
Change in unrealized appreciation
                                                
of available-for-sale securities, net of tax
     (1,250 )     -       -       -       -       (1,250 )
Reclassification adjustment for gains
                                                
included in net income, net of tax
     (128 )     -       -       -       -       (128 )
Total Comprehensive Income
     9,230       -       -       -       -       -  
Issuance of 139,736 common shares
                                                
under stock based compensation awards,
                                                
including related tax effects
     2,666       -       -       (126 )     2,792       -  
Cost of 8,900 shares of common
                                                
stock acquired for treasury
     (163 )     -       -       -       (163 )     -  
Repurchase of common stock warrant
     (3,750 )     -       (3,750 )     -       -       -  
Common stock dividend ($0.16 per share)
     (3,902 )     -       -       (3,902 )     -       -  
Stock based compensation
     3       -       3       -       -       -  
Balance at March 31, 2011
   $ 490,467     $ -     $ 346,535     $ 164,455     $ (29,655 )   $ 9,132  
                                                 
The accompanying notes are a part of the consolidated financial statements.
                                  



1st SOURCE CORPORATION
            
CONSOLIDATED STATEMENTS OF CASH FLOWS
            
(Unaudited - Dollars in thousands)
            
   
Three Months Ended March 31,
  
   
2011
    
2010
  
Operating activities:
            
Net income
   $ 10,608     $ 9,679  
Adjustments to reconcile net income to net cash
                
provided (used) by operating activities:
                
Provision for loan and lease losses
     2,198       4,388  
Depreciation of premises and equipment
     873       1,182  
Depreciation of equipment owned and leased to others
     4,805       5,364  
Amortization of investment security premiums
                
and accretion of discounts, net
     485       668  
Amortization of mortgage servicing rights
     734       761  
Mortgage servicing asset impairment (recovery)
     5       (1 )
Deferred income taxes
     (297 )     948  
Investment securities and other investment gains
     (130 )     (881 )
Originations/purchases of loans held for sale, net of principal collected
     (25,343 )     (50,208 )
Proceeds from the sales of loans held for sale
     52,560       54,303  
Net gain on sale of loans held for sale
     (85 )     (512 )
Change in trading account securities
     (8 )     (5 )
Change in interest receivable
     (116 )     75  
Change in interest payable
     1,905       1,110  
Change in other assets
     6,701       (1,337 )
Change in other liabilities
     (2,083 )     8,573  
Other
     1,696       15  
Net change in operating activities
     54,508       34,122  
                 
Investing activities:
                
Proceeds from sales of investment securities
     66,989       71,579  
Proceeds from maturities of investment securities
     67,756       123,734  
Purchases of investment securities
     (110,522 )     (180,063 )
Net change in other investments
     840       1,403  
Loans sold or participated to others
     4,010       4,586  
Net change in loans and leases
     11,983       (22,348 )
Net change in equipment owned under operating leases
     (7,971 )     (586 )
Purchases of premises and equipment
     (3,047 )     (857 )
Net change in investing activities
     30,038       (2,552 )
                 
Financing activities:
                
Net change in demand deposits, NOW
                
accounts and savings accounts
     (33,730 )     (69,419 )
Net change in certificates of deposit
     19,992       (43,915 )
Net change in short-term borrowings
     (23,836 )     (8,964 )
Proceeds from issuance of long-term debt
     417       5,303  
Payments on long-term debt
     (114 )     (139 )
Net proceeds from issuance of treasury stock
     2,666       2,778  
Acquisition of treasury stock
     (163 )     (114 )
Repurchase of common stock warrant
     (3,750 )     -  
Cash dividends paid on preferred stock
     -       (1,387 )
Cash dividends paid on common stock
     (3,968 )     (3,690 )
Net change in financing activities
     (42,486 )     (119,547 )
                 
Net change in cash and cash equivalents
     42,060       (87,977 )
                 
Cash and cash equivalents, beginning of year
     96,872       210,102  
                 
Cash and cash equivalents, end of period
   $ 138,932     $ 122,125  
                 
Non-cash transactions:
                
Loans transferred to other real estate and repossessed assets
   $ 3,931     $ 4,242  
Common stock matching contribution to KSOP plan
     2,420       2,545  
                 
The accompanying notes are a part of the consolidated financial statements.
                

 

1ST SOURCE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.              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 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 (2010 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements.  The balance sheet at December 31, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  Certain amounts in the prior period consolidated financial statements have been reclassified to conform with the current year presentation.

Cash Flow – For purposes of the consolidated statements of cash flow, we consider 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.

Note 2.              Recent Accounting Pronouncements

Receivables:  In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-02 “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.”  ASU 2011-02 clarifies whether loan modifications constitute troubled debt restructuring.  In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties.  ASU 2011-02 is effective for the first interim and annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  We are assessing the impact of ASU 2011-02 on our financial condition, results of operations, and disclosures.

Business Combinations: In December 2010, the FASB issued ASU No. 2010-29 "Business Combinations (Topic 805) - Disclosure of Supplementary Pro Forma Information for Business Combinations."  If a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  ASU 2010-29 also expands the supplementary pro forma disclosures.  ASU 2010-29 was effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  ASU 2010-29 will only affect us if there are future business combinations.

Intangibles - Goodwill and Other:  In December 2010, the FASB issued ASU No. 2010-28 "Intangibles - Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts."  ASU 2010-28 affects all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative.  ASU 2010-28 was effective for fiscal years and interim periods within those years, beginning after December 15, 2010.  ASU 2010-28 did not have an impact on our financial condition, results of operations, or disclosures.
 

 
Note 3.              Investment Securities

Investment securities available-for-sale were as follows:
 
(Dollars in thousands)
  
Amortized
    
Gross
    
Gross
        
   
Cost
    
Unrealized Gains
    
Unrealized Losses
    
Fair Value
  
March 31, 2011
                        
U.S. Treasury and Federal agencies securities
   $ 434,510     $ 4,461     $ (1,328 )   $ 437,643  
U.S. States and political subdivisions securities
     120,814       4,153       (1,103 )     123,864  
Mortgage-backed securities – Federal agencies
     327,458       6,741       (441 )     333,758  
Corporate debt securities
     35,677       167       (249 )     35,595  
Foreign government and other securities
     6,717       23       (51 )     6,689  
Total debt securities
     925,176       15,545       (3,172 )     937,549  
Marketable equity securities
     2,346       2,329       (3 )     4,672  
Total investment securities available-for-sale
   $ 927,522     $ 17,874     $ (3,175 )   $ 942,221  
                                 
December 31, 2010
                                
U.S. Treasury and Federal agencies securities
   $ 442,612     $ 5,546     $ (849 )   $ 447,309  
U.S. States and political subdivisions securities
     147,679       4,381       (1,753 )     150,307  
Mortgage-backed securities – Federal agencies
     309,046       7,854       (232 )     316,668  
Corporate debt securities
     45,778       182       (345 )     45,615  
Foreign government and other securities
     5,732       18       (34 )     5,716  
Total debt securities
     950,847       17,981       (3,213 )     965,615  
Marketable equity securities
     1,254       2,152       (3 )     3,403  
Total investment securities available-for-sale
   $ 952,101     $ 20,133     $ (3,216 )   $ 969,018  
 
At March 31, 2011, the residential mortgage-backed securities we held consisted primarily of GNMA, FNMA and FHLMC pass-through certificates which are guaranteed by those respective agencies of the United States government (or Government Sponsored Enterprise, GSEs).

The contractual maturities of debt securities available-for-sale at March 31, 2011 are shown below.  Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
(Dollars in thousands)
            
   
Amortized Cost
    
Fair Value
  
Due in one year or less
   $ 40,341     $ 40,737  
Due after one year through five years
     437,823       442,361  
Due after five years through ten years
     108,324       110,481  
Due after ten years
     11,230       10,212  
Mortgage-backed securities
     327,458       333,758  
Total debt securities available-for-sale
   $ 925,176     $ 937,549  
 
The following table shows the gross realized gains and losses on sale of securities from the securities available-for-sale portfolio, including marketable equity securities.  Realized gains and losses on the sales of all securities are computed using the specific identification cost basis.  The gross gains and losses in the first three months of 2011 primarily reflect the sale of municipal, FHLB and FFCB debt securities.  The sale of municipal securities was to reduce credit risk exposure in certain states.  The action to sell agency securities was to improve future yield. There was no impact to other than temporary impairment (OTTI) as a result of the first quarter 2011 sales. The gross gains and losses in the first three months of 2010 reflect the disposition of FNMA and FHLMC debt securities.  There were no OTTI write-downs in 2011.


 
(Dollars in thousands)
  
Three Months Ended
  
   
March 31,
  
   
2011
    
2010
  
Gross realized gains
   $ 445     $ 292  
Gross realized losses
     (238 )     (12 )
Net realized gains (losses)
   $ 207     $ 280  
 
There were net gains of $8 thousand for the three months ended March 31, 2011 and net gains of $5 thousand recorded for the three months ended March 31, 2010 on $0.15 million in trading securities outstanding at March 31, 2011 and $0.14 million at December 31, 2010.

The following tables summarize our gross unrealized losses and fair value by investment category and age:
 
   
Less than 12 Months
    
12 months or Longer
    
Total
  
(Dollars in thousands)
  
Fair
    
Unrealized
    
Fair
    
Unrealized
    
Fair
    
Unrealized
  
   
Value
    
Losses
    
Value
    
Losses
    
Value
    
Losses
  
March 31, 2011
                                    
U.S. Treasury and Federal agencies securities
   $ 156,626     $ (1,328 )   $ -     $ -     $ 156,626     $ (1,328 )
U.S. States and political subdivisions securities
     7,447       (132 )     9,591       (971 )     17,038       (1,103 )
Mortgage-backed securities - Federal agencies
     36,872       (408 )     4,450       (33 )     41,322       (441 )
Corporate debt securities
     26,398       (249 )     -       -       26,398       (249 )
Foreign government and other securities
     2,962       (51 )     -       -       2,962       (51 )
Total debt securities
     230,305       (2,168 )     14,041       (1,004 )     244,346       (3,172 )
Marketable equity securities
     -       -       5       (3 )     5       (3 )
Total investment securities available-for-sale
   $ 230,305     $ (2,168 )   $ 14,046     $ (1,007 )   $ 244,351     $ (3,175 )
                                                 
December 31, 2010
                                                
U.S. Treasury and Federal agencies securities
   $ 158,497     $ (849 )   $ -     $ -     $ 158,497     $ (849 )
U.S. States and political subdivisions securities
     9,226       (246 )     9,055       (1,507 )     18,281       (1,753 )
Mortgage-backed securities - Federal agencies
     23,351       (213 )     4,887       (19 )     28,238       (232 )
Corporate debt securities
     26,407       (345 )     -       -       26,407       (345 )
Foreign government and other securities
     3,015       (34 )     -       -       3,015       (34 )
Total debt securities
     220,496       (1,687 )     13,942       (1,526 )     234,438       (3,213 )
Marketable equity securities
     -       -       5       (3 )     5       (3 )
Total investment securities available-for-sale
   $ 220,496     $ (1,687 )   $ 13,947     $ (1,529 )   $ 234,443     $ (3,216 )
 
The initial indication of OTTI for both debt and equity securities is a decline in fair value below amortized cost.  Quarterly, the impaired securities are analyzed on a qualitative and quantitative basis in determining OTTI.  Declines in the fair value of available-for-sale debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses.  The amount of impairment related to other factors is recognized in other comprehensive income.  In estimating OTTI impairment losses, we consider 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 we will not have to sell any such securities before a recovery of cost.

At March 31, 2011, we do not have the intent to sell any of the available-for-sale securities in the table above and believe that it is more likely than not that we will not have to sell any such securities before an anticipated recovery of cost.  The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased and market illiquidity on auction rate securities which are reflected in U.S. States and Political subdivisions securities.  The fair value is expected to recover on all debt securities as they approach their maturity date or repricing date or if market yields for such investments decline.  
 
 
 
We do not believe any of the securities are impaired due to reasons of credit quality.  Accordingly, as of March 31, 2011, we believe the impairments detailed in the table above are temporary and no impairment loss has been realized in our consolidated statements of income.

At March 31, 2011 and December 31, 2010, investment securities with carrying values of $256.64 million and $299.88 million, respectively, were pledged as collateral to secure government deposits, security repurchase agreements, and for other purposes.

Note 4.              Loan and Lease Financings

We evaluate loans and leases for credit quality on a monthly basis.  All loans and leases, except residential real estate loans and consumer loans, are assigned credit quality ratings on a scale from 1 to 12 with grade 1 representing superior credit quality.  The criteria used to assign quality ratings 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 Bank's safety and soundness.  Loans 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 adequacy of the reserve for loan and lease losses.  Grade 7 credits are defined as "watch" and contain greater than average credit risk and thus warrant timely follow-up to limit the Bank's exposure to increased risk; grade 8 credits are "special mention" and, following regulatory guidelines, are defined as having potential weaknesses that deserve management's close attention.  Credits that exhibit well-defined weaknesses and a distinct possibility of loss are considered ''classified'' and are graded 9 through 12 corresponding to the regulatory definitions of "substandard" (grades 9 and 10) and the more severe ''doubtful'' (grade 11) and ''loss'' (grade 12).

The table below presents the credit quality category of the recorded investment in loans and leases, segregated by class.
                   
(Dollars in thousands)
  
Grade:
  
      1-6       7-12    
Total
  
March 31, 2011
                      
Commercial and agricultural loans
   $ 504,137     $ 43,244     $ 547,381  
Auto, light truck,
                        
and environmental equipment
     412,155       4,802       416,957  
Medium and heavy duty truck
     135,750       20,272       156,022  
Aircraft financing
     546,740       54,740       601,480  
Construction equipment financing
     240,214       31,276       271,490  
Commercial real estate
     518,801       59,847       578,648  
Total
   $ 2,357,797     $ 214,181     $ 2,571,978  
                         
December 31, 2010
                        
Commercial and agricultural loans
   $ 483,603     $ 46,625     $ 530,228  
Auto, light truck,
                        
and environmental equipment
     389,774       6,726       396,500  
Medium and heavy duty truck
     143,431       19,393       162,824  
Aircraft financing
     555,106       59,251       614,357  
Construction equipment financing
     246,644       38,990       285,634  
Commercial real estate
     532,581       62,148       594,729  
Total
   $ 2,351,139     $ 233,133     $ 2,584,272  

 
- 10 -


The table below presents the recorded investment in residential real estate and consumer loans by performing or non-performing status.  Non-performing loans are those loans which are on nonaccrual status or are 90 days or more past due.
 
(Dollars in thousands)
                  
   
Performing
    
Nonperforming
    
Total
  
March 31, 2011
                  
Residential real estate
   $ 380,796     $ 5,494     $ 386,290  
Consumer
     92,882       568       93,450  
Total
   $ 473,678     $ 6,062     $ 479,740  
                         
December 31, 2010
                        
Residential real estate
   $ 385,729     $ 5,222     $ 390,951  
Consumer
     94,973       427       95,400  
Total
   $ 480,702     $ 5,649     $ 486,351  
 
The table below presents the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.
                               
Recorded
  
           
90 Days
               Total   
Investment
  
(Dollars in thousands)
  
30-59 Days
  
60-89 Days
  
or More
  
Total Past
          
 Financing
  
> 90 Days
  
   
Past Due
  
Past Due
  
Past Due
  
Due
  
Nonaccrual
  
Current
  
Receivables
  
and Accruing
  
March 31, 2011
                                  
Commercial and agricultural loans
   $ 498   $ 202   $ -   $ 700   $ 7,987   $ 538,694   $ 547,381   $ -  
Auto, light truck and
                                                  
environmental equipment
     726     216     -     942     2,825     413,190     416,957     -  
Medium and heavy duty truck
     51     -     -     51     4,662     151,309     156,022     -  
Aircraft financing
     5,297     713     -     6,010     15,945     579,525     601,480     -  
Construction equipment financing
     3,463     29     -     3,492     8,077     259,921     271,490     -  
Commercial real estate
     328     943     -     1,271     28,995     548,382     578,648     -  
Residential real estate
     2,477     595     434     3,506     5,060     377,724     386,290     434  
Consumer
     859     341     81     1,281     487     91,682     93,450     81  
Total
   $ 13,699   $ 3,039   $ 515   $ 17,253   $ 74,038   $ 2,960,427   $ 3,051,718   $ 515  
                                                   
December 31, 2010
                                                  
Commercial and agricultural loans
   $ 760   $ 22   $ -   $ 782   $ 8,083   $ 521,363   $ 530,228   $ -  
Auto, light truck and
                                                  
environmental equipment
     528     715     -     1,243     3,332     391,925     396,500     -  
Medium and heavy duty truck
     33     -     -     33     5,068     157,723     162,824     -  
Aircraft financing
     16,097     188     -     16,285     17,898     580,174     614,357     -  
Construction equipment financing
     1,254     601     -     1,855     8,575     275,204     285,634     -  
Commercial real estate
     759     94     -     853     26,622     567,254     594,729     -  
Residential real estate
     3,781     580     264     4,625     4,958     381,368     390,951     264  
Consumer
     1,152     531     98     1,781     329     93,290     95,400     98  
Total
   $ 24,364   $ 2,731   $ 362   $ 27,457   $ 74,865   $ 2,968,301   $ 3,070,623   $ 362  
 
As of March 31, 2011 and December 31, 2010, we had $7.36 million and $7.31 million, respectively of performing loans classified as troubled debt restructuring.
 
 
- 11 -
 
 
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 we update our historical charge-off analysis, we review the look-back periods for each business loan portfolio. Furthermore, we perform a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency 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. We adjust the calculated historical based ratio as a result of our analysis of environmental factors, principally economic risk and concentration risk. Key economic factors affecting our portfolios are growth in gross domestic product, unemployment rates, housing market trends, commodity prices and inflation. Concentration risk is impacted primarily by geographic concentration in Northern Indiana and Southwestern Lower Michigan in our business banking and commercial real estate portfolios and by collateral concentration in our specialty finance portfolios.

The reserve for loan and lease losses is maintained at a level believed to be adequate by management to absorb probable losses inherent in the loan and lease portfolio.  The determination of the reserve requires significant judgment reflecting management’s best estimate of probable loan and lease losses related to specifically identified loans and leases as well as probable losses in the remainder of the various loan and lease portfolios.  For purposes of determining the reserve, we have segmented our loans and leases into classes based on the associated risks within these segments.  We have determined that eight classes exist within our loan and lease portfolio.  The methodology for assessing the appropriateness of the reserve consists of several key elements, which include: specific reserves for impaired loans, percentage allocations for special attention loans and leases (classified loans and leases and internal watch list credits) without specific reserves, formula reserves for each business lending division portfolio, and reserves for pooled homogeneous loans and leases.  Management’s evaluation is based upon a continuing review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic and geopolitical events, all of which are subject to judgment and will change.

 
- 12 -


Changes in the reserve for loan and lease losses, segregated by class, for the three months ended March 31, 2011 and 2010 are shown below.

   Commercial     Auto, light     Medium                          
   and  
 truck and
   and      
Construction
                  
(Dollars in thousands)
agricultural
 
environmental
  
heavy duty
  
Aircraft
  
equipment
  
Commercial
  
Residential
  
Consumer
      
 
loans
  
equipment
  
 truck
  
financing
  
financing
  
real estate
  
real estate
  
loans
  
Total
  
March 31, 2011
                                    
Reserve for loan and lease losses
                                    
Balance, beginning of period
 $ 20,544   $ 7,542   $ 5,768   $ 29,811   $ 8,439   $ 11,177   $ 2,518   $ 1,075   $ 86,874  
Charge-offs
   422     68     -     1,098     585     1,231     34     595     4,033  
Recoveries
   124     45     1     674     35     105     3     134     1,121  
Net charge-offs (recoveries)
   298     23     (1 )   424     550     1,126     31     461     2,912  
Provision (recovery of provision)
   (3,941 )   405     (704 )   1,516     (1,091 )   5,484     55     474     2,198  
Balance, end of period
 $ 16,305   $ 7,924   $ 5,065   $ 30,903   $ 6,798   $ 15,535   $ 2,542   $ 1,088   $ 86,160  
Ending balance: individually
                                                      
evaluated for impairment
 $ 4,025   $ 308   $ 171   $ 2,174   $ 47   $ 1,348   $ -   $ -   $ 8,073  
Ending balance: collectively
                                                      
evaluated for impairment
 $ 12,280   $ 7,616   $ 4,894   $ 28,729   $ 6,751   $ 14,187   $ 2,542   $ 1,088   $