lkfn10q.htm
 
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2015

OR

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

For the transition period from ____________ to _____________

LAKELAND FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 

 
Indiana
0-11487
35-1559596
(State or Other Jurisdiction
(Commission File Number)
(IRS Employer
of Incorporation or Organization)
 
Identification No.)


202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581-1387
(Address of Principal Executive Offices)(Zip Code)

(574) 267-6144
(Registrant’s Telephone Number, Including Area Code)

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.    Yes X      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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes X      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 _      Accelerated filer X       Non-accelerated filer  _  (do not check if a smaller reporting company)   Smaller reporting company _

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  _     No X

Number of shares of common stock outstanding at October 31, 2015:  16,636,069


 
 

 


TABLE OF CONTENTS
   
Page
     
PART I. FINANCIAL INFORMATION
 
   
     
Item 1.
Financial Statements
 
 
Consolidated Balance Sheets — September 30, 2015 and December 31, 2014
1
 
Consolidated Statements of Income — three months and nine months ended September 30, 2015 and 2014
2
 
Consolidated Statements of Comprehensive Income — three months and nine months ended September 30, 2015 and 2014
3
 
Consolidated Statements of Shareholders’ Equity — nine months ended September 30, 2015 and 2014
4
 
Consolidated Statements of Cash Flows — nine months ended September 30, 2015 and 2014
5
 
Notes to the Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
36
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
49
Item 4.
Controls and Procedures
49
     
PART II. OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
50
Item 1A.
Risk Factors
50
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
50
Item 3.
Defaults Upon Senior Securities
50
Item 4.
Mine Safety Disclosures
50
Item 5.
Other Information
50
Item 6.
Exhibits
51
     
SIGNATURES
52
     




 
 

 

ITEM 1. FINANCIAL STATEMENTS


CONSOLIDATED BALANCE SHEETS (in thousands except share data)
 
September 30,
 
December 31,
 
2015
 
2014
 
(Unaudited)
   
ASSETS
     
Cash and due from banks
 $86,586
 
 $75,381
Short-term investments
11,485
 
15,257
  Total cash and cash equivalents
98,071
 
90,638
       
Securities available for sale (carried at fair value)
477,699
 
475,911
Real estate mortgage loans held for sale
3,132
 
1,585
       
Loans, net of allowance for loan losses of $44,694 and $46,262
2,927,586
 
2,716,058
       
Land, premises and equipment, net
44,013
 
41,983
Bank owned life insurance
67,693
 
66,612
Federal Reserve and Federal Home Loan Bank stock
7,668
 
9,413
Accrued interest receivable
9,330
 
8,662
Goodwill
4,970
 
4,970
Other assets
26,088
 
27,452
  Total assets
 $3,666,250
 
 $3,443,284
       
LIABILITIES AND STOCKHOLDERS' EQUITY
     
       
LIABILITIES
     
Noninterest bearing deposits
 $630,789
 
 $579,495
Interest bearing deposits
2,516,745
 
2,293,625
  Total deposits
3,147,534
 
2,873,120
       
Short-term borrowings
     
  Federal funds purchased
0
 
500
  Securities sold under agreements to repurchase
80,414
 
54,907
  Other short-term borrowings
0
 
105,000
    Total short-term borrowings
80,414
 
160,407
       
Long-term borrowings
34
 
35
Subordinated debentures
30,928
 
30,928
Accrued interest payable
3,712
 
2,946
Other liabilities
16,928
 
14,463
    Total liabilities
3,279,550
 
3,081,899
       
STOCKHOLDERS' EQUITY
     
Common stock:  90,000,000 shares authorized, no par value
     
 16,636,069 shares issued and 16,540,957 outstanding as of September 30, 2015
     
 16,550,324 shares issued and 16,465,621 outstanding as of December 31, 2014
98,216
 
96,121
Retained earnings
285,792
 
263,345
Accumulated other comprehensive income
5,035
 
3,830
Treasury stock, at cost (2015 - 95,112 shares, 2014 - 84,703 shares)
(2,432)
 
(2,000)
  Total stockholders' equity
386,611
 
361,296
  Noncontrolling interest
89
 
89
  Total equity
386,700
 
361,385
    Total liabilities and equity
 $3,666,250
 
 $3,443,284

The accompanying notes are an integral part of these consolidated financial statements.


 
1

 

CONSOLIDATED STATEMENTS OF INCOME (unaudited - in thousands except share and per share data)
     
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
NET INTEREST INCOME
             
Interest and fees on loans
             
  Taxable
 $27,981
 
 $26,713
 
 $81,553
 
 $78,317
  Tax exempt
 116
 
 125
 
 350
 
 348
Interest and dividends on securities
             
  Taxable
 2,009
 
 2,075
 
 6,459
 
 6,114
  Tax exempt
 844
 
 820
 
 2,515
 
 2,455
Interest on short-term investments
 16
 
 12
 
 43
 
 31
    Total interest income
 30,966
 
 29,745
 
 90,920
 
 87,265
               
Interest on deposits
 3,973
 
 3,424
 
 11,551
 
 9,946
Interest on borrowings
             
  Short-term
 43
 
 96
 
 138
 
 351
  Long-term
 239
 
 260
 
 756
 
 769
    Total interest expense
 4,255
 
 3,780
 
 12,445
 
 11,066
               
NET INTEREST INCOME
 26,711
 
 25,965
 
 78,475
 
 76,199
               
Provision for loan losses
 0
 
 0
 
 0
 
 0
               
NET INTEREST INCOME AFTER PROVISION FOR
             
  LOAN LOSSES
 26,711
 
 25,965
 
 78,475
 
 76,199
               
NONINTEREST INCOME
             
Wealth advisory fees
 1,103
 
 1,030
 
 3,393
 
 3,046
Investment brokerage fees
 405
 
 699
 
 1,208
 
 2,739
Service charges on deposit accounts
 2,806
 
 2,474
 
 7,753
 
 6,973
Loan, insurance and service fees
 2,147
 
 1,972
 
 5,616
 
 5,187
Merchant card fee income
 485
 
 407
 
 1,332
 
 1,137
Bank owned life insurance income
 221
 
 372
 
 956
 
 1,082
Other income
 455
 
 881
 
 2,090
 
 2,442
Mortgage banking income
 280
 
 264
 
 1,020
 
 508
Net securities gains/(losses)
 0
 
 (228)
 
 42
 
 (224)
  Total noninterest income
 7,902
 
 7,871
 
 23,410
 
 22,890
               
NONINTEREST EXPENSE
             
Salaries and employee benefits
 9,854
 
 9,856
 
 29,021
 
 29,310
Net occupancy expense
 919
 
 872
 
 2,918
 
 2,885
Equipment costs
 870
 
 812
 
 2,699
 
 2,346
Data processing fees and supplies
 1,950
 
 1,557
 
 5,655
 
 4,541
Corporate and business development
 780
 
 726
 
 2,284
 
 2,052
FDIC insurance and other regulatory fees
 521
 
 481
 
 1,518
 
 1,446
Professional fees
 694
 
 705
 
 2,111
 
 2,241
Other expense
 1,619
 
 1,651
 
 4,643
 
 4,713
  Total noninterest expense
 17,207
 
 16,660
 
 50,849
 
 49,534
               
INCOME BEFORE INCOME TAX EXPENSE
 17,406
 
 17,176
 
 51,036
 
 49,555
Income tax expense
 5,841
 
 5,665
 
 16,955
 
 16,820
NET INCOME
 $11,565
 
 $11,511
 
 $34,081
 
 $32,735
               
BASIC WEIGHTED AVERAGE COMMON SHARES
 16,629,378
 
 16,547,551
 
 16,610,689
 
 16,531,411
BASIC EARNINGS PER COMMON SHARE  $0.70    $0.70    $2.05    $1.98 
DILUTED WEIGHTED AVERAGE COMMON SHARES 16,847,983    16,775,770    16,808,833    16,769,079 
 DILUTED EARNINGS PER COMMON SHARE $0.69    $0.69    $2.03    $1.95 

The accompanying notes are an integral part of these consolidated financial statements.

 
2

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited - in thousands)
       
     
Three months ended September 30,
 
Nine months ended September 30,
     
2015
 
2014
 
2015
 
2014
Net income
 $11,565
 
 $11,511
 
 $34,081
 
 $32,735
Other comprehensive income (loss)
             
 
Change in securities available for sale:
             
   
Unrealized holding gain (loss) on securities available for sale
             
   
  arising during the period
 3,764
 
 (1,573)
 
 2,196
 
 7,979
   
Reclassification adjustment for (gains) losses included in net income
0
 
228
 
(42)
 
224
   
Net securities gain (loss) activity during the period
 3,764
 
 (1,345)
 
 2,154
 
 8,203
   
Tax effect
 (1,488)
 
 551
 
 (884)
 
 (3,241)
   
Net of tax amount
 2,276
 
 (794)
 
 1,270
 
 4,962
 
Defined benefit pension plans:
             
   
Net gain (loss) on defined benefit pension plans
0
 
0
 
 (276)
 
64
   
Amortization of net actuarial loss
 61
 
 49
 
 183
 
 148
   
Net gain (loss) activity during the period
 61
 
49
 
 (93)
 
212
   
Tax effect
 (24)
 
 (20)
 
 28
 
 (93)
   
Net of tax amount
 37
 
 29
 
 (65)
 
 119
                   
   
Total other comprehensive income (loss), net of tax
 2,313
 
 (765)
 
 1,205
 
 5,081
                   
Comprehensive income
 $13,878
 
 $10,746
 
 $35,286
 
 $37,816

The accompanying notes are an integral part of these consolidated financial statements.






 
3

 























CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited - in thousands except share and per share data)
             
Accumulated
         
             
Other
     
Total
 
 
Common Stock
 
Retained
 
Comprehensive
 
Treasury
 
Stockholders'
 
 
Shares
 
Stock
 
Earnings
 
Income (Loss)
 
Stock
 
Equity
 
                         
                         
Balance at January 1, 2014
 16,377,449
 
 $93,249
 
 $233,108
 
 $(2,494)
 
 $(1,988)
 
 $321,875
 
Comprehensive income:
                       
  Net income
       
 32,735
         
 32,735
 
 Other comprehensive income (loss), net of tax
           
 5,081
     
 5,081
 
  Cash dividends declared, $0.61 per share
       
 (10,092)
         
 (10,092)
 
  Treasury shares purchased under deferred
                       
    directors' plan
 (11,042)
 
 427
         
 (427)
 
 0
 
  Treasury stock sold and distributed under deferred
                       
    directors' plan
 25,031
 
 (432)
         
 432
     
  Stock activity under equity compensation plans
 72,358
 
(6)
             
 (6)
 
  Stock based compensation expense
   
 2,267
             
 2,267
 
Balance at September 30, 2014
 16,463,796
 
 $95,505
 
 $255,751
 
 $2,587
 
 $(1,983)
 
 $351,860
 
                         
Balance at January 1, 2015
 16,465,621
 
 $96,121
 
 $263,345
 
 $3,830
 
 $(2,000)
 
 $361,296
 
Comprehensive income:
                       
  Net income
       
 34,081
         
 34,081
 
 Other comprehensive income (loss), net of tax
           
 1,205
     
 1,205
 
  Cash dividends declared, $0.70 per share
       
 (11,634)
         
 (11,634)
 
  Treasury shares purchased under deferred
                       
    directors' plan
 (10,409)
 
 432
         
 (432)
 
 0
 
  Stock activity under equity compensation plans
 85,745
 
 (138)
             
 (138)
 
  Stock based compensation expense
   
 1,801
             
 1,801
 
Balance at September 30, 2015
 16,540,957
 
 $98,216
 
 $285,792
 
 $5,035
 
 $(2,432)
 
 $386,611
 

The accompanying notes are an integral part of these consolidated financial statements.












 
4

 










CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands)
Nine Months Ended September 30
2015
 
2014
Cash flows from operating activities:
     
Net income
 $34,081
 
 $32,735
Adjustments to reconcile net income to net cash from operating
     
      activities:
     
  Depreciation
 2,848
 
 2,507
  Net gain on sale of other real estate owned
 (27)
 
 (85)
  Amortization of loan servicing rights
 416
 
 392
  Loans originated for sale
 (58,035)
 
 (38,682)
  Net gain on sales of loans
 (1,299)
 
 (826)
  Proceeds from sale of loans
 57,224
 
 39,254
  Net loss on sales of premises and equipment
 8
 
 11
  Net (gain) loss on sales and calls of securities available for sale
 (42)
 
 224
  Net securities amortization
 3,446
 
 4,199
  Stock based compensation expense
 1,801
 
 2,267
  Earnings on life insurance
 (956)
 
 (1,082)
  Tax benefit of stock option exercises
 (126)
 
 (36)
  Net change:
     
    Interest receivable and other assets
 65
 
 (1,664)
    Interest payable and other liabilities
 3,703
 
 436
      Total adjustments
 9,026
 
 6,915
        Net cash from operating activities
 43,107
 
 39,650
       
Cash flows from investing activities:
     
  Proceeds from sale of securities available for sale
 7,787
 
 13,766
  Proceeds from maturities, calls and principal paydowns of
     
    securities available for sale
 59,403
 
 44,562
  Purchases of securities available for sale
 (70,228)
 
 (58,655)
  Purchase of life insurance
 (260)
 
 (157)
  Proceeds from loans sold to others
 0
 
 4,307
  Net increase in total loans
 (212,329)
 
 (174,553)
  Proceeds from sales of land, premises and equipment
 699
 
 6
  Purchases of land, premises and equipment
 (5,585)
 
 (3,712)
  Proceeds from redemption of Federal Home Loan Bank stock
 1,745
 
 0
  Proceeds from sales of other real estate
 878
 
 1,326
  Distribution from life insurance
 0
 
 778
        Net cash from investing activities
 (217,890)
 
 (172,332)
       
Cash flows from financing activities:
     
  Net increase in total deposits
 274,414
 
 343,604
  Net decrease in short-term borrowings
 (79,993)
 
 (193,298)
  Payments on long-term borrowings
 (1)
 
 (2)
  Common dividends paid
 (11,621)
 
 (10,079)
  Preferred dividends paid
 (13)
 
 (13)
  Payments related to equity incentive plans
 (138)
 
 (6)
  Purchase of treasury stock
 (432)
 
 (427)
        Net cash from financing activities
 182,216
 
 139,779
Net change in cash and cash equivalents
 7,433
 
 7,097
Cash and cash equivalents at beginning of the period
 90,638
 
 63,105
Cash and cash equivalents at end of the period
 $98,071
 
 $70,202
Cash paid during the period for:
     
    Interest
 $11,679
 
 $11,235
    Income taxes
 15,416
 
 16,535
Supplemental non-cash disclosures:
     
    Loans transferred to other real estate owned
 801
 
 1,011

The accompanying notes are an integral part of these consolidated financial statements.


 
5

 

NOTE 1. BASIS OF PRESENTATION

This report is filed for Lakeland Financial Corporation (the “Company”) and its wholly owned subsidiaries, Lake City Bank (the “Bank”) and LCB Risk Management, a captive insurance company. Also included in this report is the Bank’s wholly owned subsidiary, LCB Investments II, Inc. (“LCB Investments”), which manages a portion of the Bank’s investment portfolio.  LCB Investments also owns LCB Funding, Inc. (“LCB Funding”), a real estate investment trust.  All significant inter-company balances and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and are unaudited. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ending September 30, 2015 are not necessarily indicative of the results that may be expected for any subsequent reporting periods, including the year ending December 31, 2015. The Company’s 2014 Annual Report on Form 10-K should be read in conjunction with these statements.

NOTE 2. SECURITIES

Information related to the fair value and amortized cost of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) is provided in the tables below.


     
Gross
 
Gross
   
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(dollars in thousands)
Cost
 
Gain
 
Losses
 
Value
September 30, 2015
             
  U.S. Treasury securities
 $987
 
 $34
 
 $0
 
 $1,021
  Agency residential mortgage-backed securities
361,571
 
8,763
 
(643)
 
369,691
  State and municipal securities
104,057
 
3,396
 
(466)
 
106,987
    Total
 $466,615
 
 $12,193
 
 $(1,109)
 
 $477,699
               
December 31, 2014
             
  U.S. Treasury securities
 $986
 
 $18
 
 $0
 
 $1,004
  Agency residential mortgage-backed securities
366,596
 
7,178
 
(1,679)
 
372,095
  State and municipal securities
99,399
 
3,857
 
(444)
 
102,812
    Total
 $466,981
 
 $11,053
 
 $(2,123)
 
 $475,911

Information regarding the fair value and amortized cost of available for sale debt securities by maturity as of September 30, 2015 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without a prepayment penalty.


 
Amortized
 
Fair
(dollars in thousands)
Cost
 
Value
Due in one year or less
 $2,273
 
 $2,293
Due after one year through five years
20,576
 
21,310
Due after five years through ten years
46,325
 
48,214
Due after ten years
35,870
 
36,191
 
105,044
 
108,008
Mortgage-backed securities
361,571
 
369,691
  Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 $466,615
 
 $477,699


 
6

 

Securities proceeds, gross gains and gross losses are presented below.


 
Nine months ended September 30,
 
Three months ended September 30,
(dollars in thousands)
2015
 
2014
 
2015
 
2014
Sales of securities available for sale
             
  Proceeds
 $7,787
 
 $13,766
 
 $0
 
 $13,766
  Gross gains
42
 
3
 
0
 
3
  Gross losses
0
 
231
 
0
 
231


The Company sold two securities with a total book value of $7.7 million and a total fair value of $7.8 million during the first nine months of 2015.  The Company sold twelve securities with a total book value of $14.0 million and a total fair value of $13.8 million during the first nine months of 2014.

Purchase premiums or discounts are recognized in interest income using the interest method over the terms of the securities or over the estimated lives of mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date.

Securities with carrying values of $178.9 million and $202.4 million were pledged as of September 30, 2015 and December 31, 2014, as collateral for deposits of public funds, securities sold under agreements to repurchase, borrowings from the Federal Home Loan Bank and for other purposes as permitted or required by law.

Information regarding securities with unrealized losses as of September 30, 2015 and December 31, 2014 is presented below. The tables divide the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.


 
Less than 12 months
 
12 months or more
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(dollars in thousands)
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
September 30, 2015
                     
Agency residential mortgage-backed
                     
  securities
 $28,944
 
 $(204)
 
 $26,970
 
 $(439)
 
 $55,914
 
 $(643)
State and municipal securities
17,941
 
(200)
 
7,919
 
(266)
 
25,860
 
(466)
  Total temporarily impaired
 $46,885
 
 $(404)
 
 $34,889
 
 $(705)
 
 $81,774
 
 $(1,109)
                       
December 31, 2014
                     
Agency residential mortgage-backed
                     
  securities
 $33,420
 
 $(148)
 
 $102,512
 
 $(1,531)
 
 $135,932
 
 $(1,679)
State and municipal securities
2,458
 
(28)
 
16,391
 
(416)
 
18,849
 
(444)
  Total temporarily impaired
 $35,878
 
 $(176)
 
 $118,903
 
 $(1,947)
 
 $154,781
 
 $(2,123)






 
7

 









The total number of securities with unrealized losses as of September 30, 2015 and December 31, 2014 is presented below.


 
Less than
 
12 months
   
 
12 months
 
or more
 
Total
September 30, 2015
         
Agency residential mortgage-backed securities
12
 
8
 
20
State and municipal securities
35
 
12
 
47
  Total temporarily impaired
47
 
20
 
67
           
December 31, 2014
         
Agency residential mortgage-backed securities
9
 
27
 
36
State and municipal securities
8
 
29
 
37
  Total temporarily impaired
17
 
56
 
73
 

 
The following factors are considered in determining whether or not the impairment of these securities is other-than-temporary. In making this determination, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer, as well as the underlying fundamentals of the relevant market and the outlook for such market in the near future.  Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income.  Credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings. As of September 30, 2015 and December 31, 2014, ninety-nine percent of the securities in the Company’s portfolio are backed by the U.S. government, government agencies, government sponsored agencies or are A-rated or better, except for certain non-local or local municipal securities, which are not rated. For the government, government-sponsored agency and municipal securities, management did not believe that there would be credit losses or that full principal would not be received. Management considered the unrealized losses on these securities to be primarily interest rate driven and does not expect material losses given current market conditions unless the securities are sold. However, at this time management does not have the intent to sell, and it is more likely than not that the Company will not be required to sell these securities before the recovery of their amortized cost basis.













 
8

 












NOTE 3. LOANS


 
September 30,
December 31,
(dollars in thousands)
2015
2014
Commercial and industrial loans:
           
  Working capital lines of credit loans
 $593,780
 20.0
 %
 $544,043
 19.7
 %
  Non-working capital loans
 577,536
 19.4
 
 491,330
 17.8
 
    Total commercial and industrial loans
 1,171,316
 39.4
 
 1,035,373
 37.5
 
             
Commercial real estate and multi-family residential loans:
           
  Construction and land development loans
 176,945
 6.0
 
 156,636
 5.7
 
  Owner occupied loans
 409,004
 13.8
 
 403,154
 14.6
 
  Nonowner occupied loans
 417,790
 14.1
 
 394,458
 14.3
 
  Multifamily loans
 93,075
 3.1
 
 71,811
 2.6
 
    Total commercial real estate and multi-family residential loans
 1,096,814
 36.9
 
 1,026,059
 37.1
 
             
Agri-business and agricultural loans:
           
  Loans secured by farmland
155,106
 5.2
 
137,407
 5.0
 
  Loans for agricultural production
93,964
 3.2
 
136,380
 4.9
 
    Total agri-business and agricultural loans
249,070
 8.4
 
273,787
 9.9
 
             
Other commercial loans
 82,976
 2.8
 
 75,715
 2.7
 
  Total commercial loans
 2,600,176
 87.5
 
 2,410,934
 87.3
 
             
Consumer 1-4 family mortgage loans:
           
  Closed end first mortgage loans
 154,019
 5.2
 
 145,167
 5.3
 
  Open end and junior lien loans
 160,485
 5.4
 
 150,220
 5.4
 
  Residential construction and land development loans
 8,445
 0.3
 
 6,742
 0.2
 
  Total consumer 1-4 family mortgage loans
 322,949
 10.9
 
 302,129
 10.9
 
             
Other consumer loans
 49,169
 1.7
 
 49,541
 1.8
 
  Total consumer loans
 372,118
 12.5
 
 351,670
 12.7
 
  Subtotal
 2,972,294
 100.0
 %
 2,762,604
 100.0
 %
Less:  Allowance for loan losses
 (44,694)
   
 (46,262)
   
           Net deferred loan fees
 (14)
   
 (284)
   
Loans, net
 $2,927,586
   
 $2,716,058
   


The recorded investment in loans does not include accrued interest.

The Company had $151,000 in residential real estate loans in process of foreclosure as of September 30, 2015.





 
9

 









NOTE 4. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

The following tables present the activity in the allowance for loan losses by portfolio segment for the three-month periods ended September 30, 2015 and 2014:

     
Commercial
                       
     
Real Estate
                       
 
Commercial
 
and
 
Agri-business
     
Consumer
           
 
and
 
Multifamily
 
and
 
Other
 
1-4 Family
 
Other
       
(dollars in thousands)
Industrial
 
Residential
 
Agricultural
 
Commercial
 
Mortgage
 
Consumer
 
Unallocated
 
Total
Three Months Ended September 30, 2015
                       
Beginning balance, July 1
 $22,360
 
 $13,112
 
 $1,881
 
 $358
 
 $3,473
 
 $392
 
 $3,240
 
 $44,816
  Provision for loan losses
(88)
 
(235)
 
103
 
11
 
14
 
(13)
 
208
 
0
  Loans charged-off
(2)
 
0
 
0
 
0
 
(152)
 
(74)
 
0
 
(228)
  Recoveries
43
 
14
 
5
 
0
 
21
 
23
 
0
 
106
    Net loans charged-off
41
 
14
 
5
 
0
 
(131)
 
(51)
 
0
 
(122)
Ending balance
 $22,313
 
 $12,891
 
 $1,989
 
 $369
 
 $3,356
 
 $328
 
 $3,448
 
 $44,694
                               

     
Commercial
                       
     
Real Estate
                       
 
Commercial
 
and
 
Agri-business
     
Consumer
           
 
and
 
Multifamily
 
and
 
Other
 
1-4 Family
 
Other
       
(dollars in thousands)
Industrial
 
Residential
 
Agricultural
 
Commercial
 
Mortgage
 
Consumer
 
Unallocated
 
Total
Three Months Ended September 30, 2014
                           
Beginning balance, July 1
 $20,922
 
 $15,975
 
 $1,404
 
 $234
 
 $3,275
 
 $487
 
 $3,308
 
 $45,605
  Provision for loan losses
919
 
(1,275)
 
(34)
 
76
 
179
 
68
 
67
 
0
  Loans charged-off
(147)
 
0
 
0
 
0
 
(60)
 
(62)
 
0
 
(269)
  Recoveries
291
 
670
 
5
 
0
 
59
 
26
 
0
 
1,051
    Net loans charged-off
144
 
670
 
5
 
0
 
(1)
 
(36)
 
0
 
782
Ending balance
 $21,985
 
 $15,370
 
 $1,375
 
 $310
 
 $3,453
 
 $519
 
 $3,375
 
 $46,387
                               

The following tables present the activity in the allowance for loan losses by portfolio segment for the nine-month periods ended September 30, 2015 and 2014:

     
Commercial
                       
     
Real Estate
                       
 
Commercial
 
and
 
Agri-business
     
Consumer
           
 
and
 
Multifamily
 
and
 
Other
 
1-4 Family
 
Other
       
(dollars in thousands)
Industrial
 
Residential
 
Agricultural
 
Commercial
 
Mortgage
 
Consumer
 
Unallocated
 
Total
Nine Months Ended September 30, 2015
                       
Beginning balance, January 1
 $22,785
 
 $14,153
 
 $1,790
 
 $276
 
 $3,459
 
 $483
 
 $3,316
 
 $46,262
  Provision for loan losses
240
 
(856)
 
184
 
215
 
149
 
(64)
 
132
 
0
  Loans charged-off
(878)
 
(459)
 
0
 
(122)
 
(292)
 
(180)
 
0
 
(1,931)
  Recoveries
166
 
53
 
15
 
0
 
40
 
89
 
0
 
363
    Net loans charged-off
(712)
 
(406)
 
15
 
(122)
 
(252)
 
(91)
 
0
 
(1,568)
Ending balance
 $22,313
 
 $12,891
 
 $1,989
 
 $369
 
 $3,356
 
 $328
 
 $3,448
 
 $44,694

     
Commercial
                       
     
Real Estate
                       
 
Commercial
 
and
 
Agri-business
     
Consumer
           
 
and
 
Multifamily
 
and
 
Other
 
1-4 Family
 
Other
       
(dollars in thousands)
Industrial
 
Residential
 
Agricultural
 
Commercial
 
Mortgage
 
Consumer
 
Unallocated
 
Total
Nine Months Ended September 30, 2014
                           
Beginning balance, January 1
 $21,005
 
 $18,557
 
 $1,682
 
 $391
 
 $3,045
 
 $608
 
 $3,509
 
 $48,797
  Provision for loan losses
1,296
 
(1,334)
 
(323)
 
(81)
 
587
 
(11)
 
(134)
 
0
  Loans charged-off
(660)
 
(2,553)
 
0
 
0
 
(282)
 
(180)
 
0
 
(3,675)
  Recoveries
344
 
701
 
16
 
0
 
102
 
102
 
0
 
1,265
    Net loans charged-off
(316)
 
(1,852)
 
16
 
0
 
(180)
 
(78)
 
0
 
(2,410)
Ending balance
 $21,985
 
 $15,371
 
 $1,375
 
 $310
 
 $3,452
 
 $519
 
 $3,375
 
 $46,387


 
10

 


The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2015 and December 31, 2014:


     
Commercial
                       
     
Real Estate
                       
 
Commercial
 
and
 
Agri-business
     
Consumer
           
 
and
 
Multifamily
 
and
 
Other
 
1-4 Family
 
Other
       
(dollars in thousands)
Industrial
 
Residential
 
Agricultural
 
Commercial
 
Mortgage
 
Consumer
 
Unallocated
 
Total
September 30, 2015
                             
Allowance for loan losses:
                             
  Ending allowance balance attributable to loans:
                           
    Individually evaluated for impairment
 $3,129
 
 $783
 
 $0
 
 $0
 
 $333
 
 $59
 
 $0
 
 $4,304
    Collectively evaluated for impairment
19,184
 
12,108
 
1,989
 
369
 
3,023
 
269
 
3,448
 
40,390
Total ending allowance balance
 $22,313
 
 $12,891
 
 $1,989
 
 $369
 
 $3,356
 
 $328
 
 $3,448
 
 $44,694
                               
Loans:
                             
  Loans individually evaluated for impairment
 $9,140
 
 $10,530
 
 $472
 
 $0
 
 $2,434
 
 $90
 
 $0
 
 $22,666
  Loans collectively evaluated for impairment
1,162,373
 
1,085,215
 
248,678
 
82,971
 
321,393
 
48,984
 
0
 
2,949,614
Total ending loans balance
 $1,171,513
 
 $1,095,745
 
 $249,150
 
 $82,971
 
 $323,827
 
 $49,074
 
 $0
 
 $2,972,280
                               
     
Commercial
                       
     
Real Estate
                       
 
Commercial
 
and
 
Agri-business
     
Consumer
           
 
and
 
Multifamily
 
and
 
Other
 
1-4 Family
 
Other
       
(dollars in thousands)
Industrial
 
Residential
 
Agricultural
 
Commercial
 
Mortgage
 
Consumer
 
Unallocated
 
Total
December 31, 2014
                             
Allowance for loan losses:
                             
  Ending allowance balance attributable to loans:
                           
    Individually evaluated for impairment
 $3,306
 
 $1,531
 
 $14
 
 $15
 
 $482
 
 $73
 
 $0
 
 $5,421
    Collectively evaluated for impairment
19,479
 
12,622
 
1,776
 
261
 
2,977
 
410
 
3,316
 
40,841
Total ending allowance balance
 $22,785
 
 $14,153
 
 $1,790
 
 $276
 
 $3,459
 
 $483
 
 $3,316
 
 $46,262
                               
Loans:
                             
  Loans individually evaluated for impairment
 $14,702
 
 $13,005
 
 $486
 
 $30
 
 $3,614
 
 $127
 
 $0
 
 $31,964
  Loans collectively evaluated for impairment
1,020,897
 
1,011,858
 
273,388
 
75,684
 
299,189
 
49,340
 
0
 
2,730,356
Total ending loans balance
 $1,035,599
 
 $1,024,863
 
 $273,874
 
 $75,714
 
 $302,803
 
 $49,467
 
 $0
 
 $2,762,320







 
11

 



























The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2015:


 
Unpaid
     
Allowance for
 
Principal
 
Recorded
 
Loan Losses
(dollars in thousands)
Balance
 
Investment
 
Allocated
With no related allowance recorded:
         
  Commercial and industrial loans:
         
    Working capital lines of credit loans
 $20
 
 $20
 
 $0
    Non-working capital loans
2,431
 
665
 
0
  Commercial real estate and multi-family residential loans:
         
    Owner occupied loans
2,441
 
2,261
 
0
    Nonowner occupied loans
5,272
 
5,276
 
0
  Agri-business and agricultural loans:
         
    Loans secured by farmland
971
 
472
 
0
  Consumer 1-4 family loans:
         
    Closed end first mortgage loans
535
 
383
 
0
    Open end and junior lien loans
128
 
128
 
0
  Other consumer loans
3
 
3
 
0
With an allowance recorded:
         
  Commercial and industrial loans:
         
    Working capital lines of credit loans
1,916
 
1,915
 
822
    Non-working capital loans
8,732
 
6,540
 
2,307
  Commercial real estate and multi-family residential loans:
         
    Construction and land development loans
340
 
339
 
40
    Owner occupied loans
2,684
 
2,654
 
743
  Consumer 1-4 family mortgage loans:
         
    Closed end first mortgage loans
1,999
 
1,923
 
333
  Other consumer loans
87
 
87
 
59
Total
 $27,559
 
 $22,666
 
 $4,304




 
12

 







The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2014:


 
Unpaid
     
Allowance for
 
Principal
 
Recorded
 
Loan Losses
(dollars in thousands)
Balance
 
Investment
 
Allocated
With no related allowance recorded:
         
  Commercial and industrial loans:
         
    Working capital lines of credit loans
 $21
 
 $21
 
 $0
    Non-working capital loans
1,673
 
279
 
0
  Commercial real estate and multi-family residential loans:
         
    Construction and land development loans
526
 
526
 
0
    Owner occupied loans
554
 
374
 
0
    Nonowner occupied loans
3,030
 
3,036
 
0
  Agri-business and agricultural loans:
         
    Loans secured by farmland
603
 
283
 
0
  Consumer 1-4 family loans:
         
    Closed end first mortgage loans
724
 
712
 
0
    Open end and junior lien loans
317
 
317
 
0
    Residential construction loans
129
 
129
 
0
  Other consumer loans
1
 
1
 
0
With an allowance recorded:
         
  Commercial and industrial loans:
         
    Working capital lines of credit loans
1,409
 
1,408
 
837
    Non-working capital loans
15,557
 
12,994
 
2,469
  Commercial real estate and multi-family residential loans:
         
    Construction and land development loans
449
 
448
 
107
    Owner occupied loans
5,298
 
5,297
 
1,213
    Nonowner occupied loans
3,324
 
3,324
 
211
  Agri-business and agricultural loans:
         
    Loans secured by farmland
381
 
203
 
14
  Other commercial loans
30
 
30
 
15
  Consumer 1-4 family mortgage loans:
         
    Closed end first mortgage loans
2,505
 
2,375
 
474
    Open end and junior lien loans
81
 
81
 
8
  Other consumer loans
126
 
126
 
73
Total
 $36,738
 
 $31,964
 
 $5,421








 
13

 









The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended September 30, 2015:


 
 
         
Cash Basis
 
Average
 
Interest
 
Interest
 
Recorded
 
Income
 
Income
(dollars in thousands)
Investment
 
Recognized
 
Recognized
With no related allowance recorded:
         
  Commercial and industrial loans:
         
    Working capital lines of credit loans
 $                     20
 
 $                       0
 
 $                       0
    Non-working capital loans
709
 
1
 
1
  Commercial real estate and multi-family residential loans:
   
    Owner occupied loans
2,442
 
0
 
0
    Nonowner occupied loans
5,404
 
26
 
27
  Agri-business and agricultural loans:
         
    Loans secured by farmland
474
 
0
 
0
  Consumer 1-4 family loans:
         
    Closed end first mortgage loans
415
 
0
 
0
    Open end and junior lien loans
130
 
0
 
0
  Other consumer loans
5
 
0
 
0
With an allowance recorded:
         
  Commercial and industrial loans:
         
    Working capital lines of credit loans
1,202
 
3
 
4
    Non-working capital loans
6,092
 
47
 
43
  Commercial real estate and multi-family residential loans:
   
    Construction and land development loans
351
 
4
 
2
    Owner occupied loans
2,682
 
0
 
0
  Consumer 1-4 family mortgage loans:
         
    Closed end first mortgage loans
2,125
 
15
 
14
  Other consumer loans
99
 
1
 
2
Total
 $             22,150
 
 $                     97
 
 $                     93
           

 
14

 











The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended September 30, 2014:


         
Cash Basis
 
Average
 
Interest
 
Interest
 
Recorded
 
Income
 
Income
(dollars in thousands)
Investment
 
Recognized
 
Recognized
With no related allowance recorded:
         
  Commercial and industrial loans:
         
    Working capital lines of credit loans
 $22
 
 $0
 
 $0
    Non-working capital loans
290
 
0
 
0
  Commercial real estate and multi-family residential loans:
         
    Construction and land development loans
533
 
0
 
0
    Owner occupied loans
160
 
0
 
0
    Nonowner occupied loans
327
 
0
 
0
  Agri-business and agricultural loans:
         
    Loans secured by farmland
284
 
0
 
0
  Consumer 1-4 family loans:
         
    Closed end first mortgage loans
695
 
0
 
0
    Open end and junior lien loans
286
 
0
 
0
    Residential construction loans
135
 
0
 
0
  Other consumer loans
1
 
0
 
0
With an allowance recorded:
         
  Commercial and industrial loans:
         
    Working capital lines of credit loans
1,680
 
22
 
18
    Non-working capital loans
13,662
 
127
 
126
  Commercial real estate and multi-family residential loans:
         
    Construction and land development loans
1,679
 
7
 
5
    Owner occupied loans
3,241
 
26
 
29
    Nonowner occupied loans
6,485
 
35
 
36
  Agri-business and agricultural loans:
         
    Loans secured by farmland
203
 
0
 
0
  Consumer 1-4 family mortgage loans:
         
    Closed end first mortgage loans
2,568
 
17
 
17
    Open end and junior lien loans
48
 
0
 
0
  Other consumer loans
89
 
1
 
1
Total
 $32,388
 
 $235
 
 $232



 
15

 











The following table presents loans individually evaluated for impairment by class of loans as of and for the nine-month period ended September 30, 2015:


         
Cash Basis
 
Average
 
Interest
 
Interest
 
Recorded
 
Income
 
Income
(dollars in thousands)
Investment
 
Recognized
 
Recognized
With no related allowance recorded:
         
  Commercial and industrial loans:
         
    Working capital lines of credit loans
 $                     21
 
 $                       0
 
 $                       0
    Non-working capital loans
613
 
2
 
2
  Commercial real estate and multi-family residential loans:
    Construction and land development loans
175
 
0
 
0
    Owner occupied loans
1,950
 
0
 
0
    Nonowner occupied loans
4,504
 
80
 
83
  Agri-business and agricultural loans:
         
    Loans secured by farmland
412
 
0
 
0
  Consumer 1-4 family loans:
         
    Closed end first mortgage loans
301
 
0
 
0
    Open end and junior lien loans
238
 
0
 
0
    Residential construction loans
14
 
0
 
0
  Other consumer loans
3
 
0
 
0
With an allowance recorded:
         
  Commercial and industrial loans:
         
    Working capital lines of credit loans
1,069
 
19
 
18
    Non-working capital loans
9,443
 
281
 
290
  Commercial real estate and multi-family residential loans:
    Construction and land development loans
391
 
12
 
11
    Owner occupied loans
3,695
 
21
 
22
    Nonowner occupied loans
1,090
 
0
 
0
  Agri-business and agricultural loans:
         
    Loans secured by farmland
67
 
0
 
0
  Other commercial loans
3
 
0
 
0
  Consumer 1-4 family mortgage loans:
         
    Closed end first mortgage loans
2,608
 
48
 
44
    Open end and junior lien loans
23
 
0
 
0
  Other consumer loans
110
 
3
 
4
Total
 $             26,730
 
 $                  466
 
 $                  474
           

 
16

 












The following table presents loans individually evaluated for impairment by class of loans as of and for the nine-month period ended September 30, 2014:


         
Cash Basis
 
Average
 
Interest
 
Interest
 
Recorded
 
Income
 
Income
(dollars in thousands)
Investment
 
Recognized
 
Recognized
With no related allowance recorded:
         
  Commercial and industrial loans:
         
    Working capital lines of credit loans
 $186
 
 $1
 
 $1
    Non-working capital loans
133
 
0
 
0
  Commercial real estate and multi-family residential loans:
         
    Construction and land development loans
178
 
0
 
0
    Owner occupied loans
215
 
0
 
0
    Nonowner occupied loans
341
 
0
 
0
  Agri-business and agricultural loans:
         
    Loans secured by farmland
226
 
0
 
0
  Consumer 1-4 family loans:
         
    Closed end first mortgage loans
691
 
0
 
0
    Open end and junior lien loans
170
 
0
 
0
    Residential construction loans
141
 
0
 
0
  Other consumer loans
1
 
0
 
0
With an allowance recorded:
         
  Commercial and industrial loans:
         
    Working capital lines of credit loans
1,893
 
55
 
47
    Non-working capital loans
13,762
 
387
 
388
  Commercial real estate and multi-family residential loans:
         
    Construction and land development loans
2,341
 
37
 
36
    Owner occupied loans
2,956
 
45
 
43
    Nonowner occupied loans
8,507
 
104
 
105
  Agri-business and agricultural loans:
         
    Loans secured by farmland
411
 
0
 
0
  Consumer 1-4 family mortgage loans:
         
    Closed end first mortgage loans
2,740
 
50
 
53
    Open end and junior lien loans
66
 
0
 
0
  Other consumer loans
87
 
1
 
1
Total
 $35,045
 
 $680
 
 $674





 
17

 





The following table presents the aging of the recorded investment in past due loans as of September 30, 2015 by class of loans:

     
30-89
 
Greater than
           
 
Loans Not
 
Days
 
90 Days
     
Total
   
(dollars in thousands)
Past Due
 
Past Due
 
Past Due
 
Nonaccrual
 
Past Due
 
Total
  Commercial and industrial loans:
                     
    Working capital lines of credit loans
 $591,700
 
 $0
 
 $0
 
 $1,566
 
 $1,566
 
 $593,266
    Non-working capital loans
574,413
 
252
 
0
 
3,582
 
3,834
 
578,247
  Commercial real estate and multi-family
                     
  residential loans:
                     
    Construction and land development loans
176,615
 
0
 
0
 
0
 
0
 
176,615
    Owner occupied loans
403,775
 
0
 
0
 
4,915
 
4,915
 
408,690
    Nonowner occupied loans
414,336
 
0
 
0
 
3,115
 
3,115
 
417,451
    Multifamily loans
92,989
 
0
 
0
 
0
 
0
 
92,989
  Agri-business and agricultural loans:
                     
    Loans secured by farmland
154,639
 
0
 
0
 
471
 
471
 
155,110
    Loans for agricultural production
93,937
 
103
 
0
 
0
 
103
 
94,040
  Other commercial loans
82,971
 
0
 
0
 
0
 
0
 
82,971
  Consumer 1-4 family mortgage loans:
                     
    Closed end first mortgage loans
151,857
 
1,367
 
0
 
512
 
1,879
 
153,736
    Open end and junior lien loans
161,375
 
163
 
0
 
128
 
291
 
161,666
    Residential construction loans
8,425
 
0
 
0
 
0
 
0
 
8,425
  Other consumer loans
48,951
 
103
 
0
 
20
 
123
 
49,074
Total
 $2,955,983
 
 $1,988
 
$0
 
 $14,309
 
 $16,297
 
 $2,972,280

The following table presents the aging of the recorded investment in past due loans as of December 31, 2014 by class of loans:


     
30-89
 
Greater than
           
 
Loans Not
 
Days
 
90 Days
     
Total
   
(dollars in thousands)
Past Due
 
Past Due
 
Past Due
 
Nonaccrual
 
Past Due
 
Total
  Commercial and industrial loans:
                     
    Working capital lines of credit loans
 $543,613
 
 $0
 
 $0
 
 $632
 
 $632
 
 $544,245
    Non-working capital loans
487,655
 
0
 
101
 
3,598
 
3,699
 
491,354
  Commercial real estate and multi-family
                     
  residential loans:
                     
    Construction and land development loans
155,711
 
0
 
0
 
526
 
526
 
156,237
    Owner occupied loans
399,028
 
800
 
0
 
3,049
 
3,849
 
402,877
    Nonowner occupied loans
390,394
 
31
 
0
 
3,629
 
3,660
 
394,054
    Multi-family loans
71,695
 
0
 
0
 
0
 
0
 
71,695
  Agri-business and agricultural loans:
                     
    Loans secured by farmland
136,923
 
0
 
0
 
485
 
485
 
137,408
    Loans for agricultural production
136,466
 
0
 
0
 
0
 
0
 
136,466
  Other commercial loans
75,684
 
0
 
0
 
30
 
30
 
75,714
  Consumer 1-4 family mortgage loans:
                     
    Closed end first mortgage loans
142,615
 
1,198
 
20
 
1,051
 
2,269
 
144,884
    Open end and junior lien loans
150,551
 
235
 
9
 
398
 
642
 
151,193
    Residential construction loans
6,597
 
0
 
0
 
129
 
129
 
6,726
  Other consumer loans
49,308
 
108
 
0
 
51
 
159
 
49,467
Total
 $2,746,240
 
 $2,372
 
 $130
 
 $13,578
 
 $16,080
 
 $2,762,320



 
18

 
Troubled Debt Restructurings:

Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $2.5 million and $3.4 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2015 and December 31, 2014. The Company is not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring.


 
September 30
 
December 31,
(dollars in thousands)
2015
 
2014
Accruing troubled debt restructured loans
 $7,605
 
 $16,492
Nonaccrual troubled debt restructured loans
 10,934
 
 9,161
Total troubled debt restructured loans
 $18,539
 
 $25,653
           Certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal.

During the quarter ending September 30, 2015, there were renewal terms offered to one borrower under financial duress with a previously identified troubled debt restructured loan which did not require additional compensation or consideration, and the terms offered would not have been readily available in the marketplace for a loan bearing a similar risk profile. In this instance, it was determined that a concession had been granted. The loan to the borrower is for a commercial and industrial working capital loan with a recorded investment of $2.5 million.  This concession is not included in the table below.

During the quarter ending June 30, 2015, there were renewal terms offered to two borrowers under financial duress which did not require additional compensation or consideration, and the terms offered would not have been readily available in the marketplace for loans bearing similar risk profiles. In these instances, it was determined that a concession had been granted. It is difficult to quantify the concessions granted due to an absence of readily available market terms to be used for comparison. These loans were both commercial and industrial working capital loans with recorded investments of $379,000 and $185,000, respectively.

During the quarter ending March 31, 2015, there were renewal terms offered to one borrower under financial duress which did not require additional compensation or consideration, and the terms offered would not have been readily available in the marketplace for loans bearing similar risk profiles. In this instance, it was determined that a concession had been granted. It is difficult to quantify the concession granted due to an absence of readily available market terms to be used for comparison. The loan to the borrower is for a commercial real estate building where the collateral value and cash flows from the company occupying the building did not support the loan with a recorded investment of $788,000.

The following table presents loans, not previously discussed, by class modified as new troubled debt restructurings that occurred during the three month period ending September 30, 2015:


 
All Modifications
 
Modified Repayment Terms
     
Pre-Modification
 
Post-Modification
     
Extension
     
Outstanding
 
Outstanding
     
Period or
 
Number of
 
Recorded
 
Recorded
 
Number of
 
Range
(dollars in thousands)
Loans
 
Investment
 
Investment
 
Loans
 
(in months)
Troubled Debt Restructurings
                 
Consumer 1-4 family loans:
                 
  Closed end first mortgage loans
 1
 
 $65
 
 $65
 
 1
 
 208
Total
1
 
 $65
 
 $65
 
1
 
208


 
19

 





The following table presents loans, not previously discussed, by class modified as new troubled debt restructurings that occurred during the nine month period ending September 30, 2015:


 
All Modifications
 
Modified Repayment Terms
     
Pre-Modification
 Post-Modification
 
     
Outstanding
 Outstanding
 
Period or
 
Number of
Recorded
Recorded
Number of
Range
(dollars in thousands)
Loans
Investment
Investment
Loans
(in months)
Troubled Debt Restructurings
                 
Commercial and industrial loans:
               
  Working capital lines of credit loans
              2
 
 $                  564
 
 $                     564
       
  Non-working capital loans
              1
 
                     783
 
                        783
 
              1
 
12
Commercial real estate and multi-
               
  family residential loans:
                 
  Owner occupied loans
              2
 
                     855
 
                        855
 
              1
 
6
Consumer 1-4 family loans:
                 
  Closed end first mortgage loans
              1
 
                       65
 
                          78
 
              1
 
208
Total
6
 
 $               2,267
 
 $                  2,280
 
3
 
6-208
                   


 

For the three month period ending September 30, 2015, the commercial and industrial troubled debt restructurings described above decreased the allowance for loan losses by $68,000, the commercial real estate and multi-family residential loan troubled debt restructurings increased the allowance for loan losses by $9,000 and the consumer 1-4 family loan troubled debt restructuring described above increased the allowance by $13,000.  For the nine month period ending September 30, 2015, the commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $102,000, the commercial real estate and multi-family residential loan troubled debt restructurings decreased the allowance for loan losses by $13,000 and the consumer 1-4 family loan troubled debt restructuring increased the allowance by $11,000.

No charge-offs resulted from any troubled debt restructurings described above during the three and nine month period ending September 30, 2015.

During the nine months ending September 30, 2014 certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal.

During the quarter ending June 30, 2014 one loan previously identified as a troubled debt restructure was rewritten under terms that are not readily available in the marketplace.  Terms in the current loan agreement include an amortization period that exceeds those of similar type loans for a borrower enduring financial hardship.  This concession was granted without additional compensation.  This loan had a balance of $173,000 as of June 30, 2014.

During the quarter ending March 31, 2014, there were restructure terms offered to one borrower under financial duress which did not require additional compensation or consideration, and the terms offered would not have been readily available in the marketplace for loans bearing similar risk profiles. In this instance, it was determined that a concession had been granted. It is difficult to quantify the concession granted due to an absence of readily available market terms to be used for comparison. The restructure was granted to a borrower engaged in retail sales where the collateral and cash flow did not support the loan with a recorded investment of $159,000.

An additional concession was granted to a borrower with a previously restructured loan.  The new concession includes further forgiveness of principal if the terms of the restructured loan are met during the life of the loan. This borrower had a recorded investment of $2.7 million as of March 31, 2014.

 
20

 
The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ending September 30, 2014:

 
All Modifications
   
Modified Repayment Terms
     
Pre-Modification
 
Post-Modification
       
Extension
     
Outstanding
 
Outstanding
       
Period or
 
Number of
 
Recorded
 
Recorded
   
Number of
 
Range
(dollars in thousands)
Loans
 
Investment
 
Investment
   
Loans
 
(in months)
Troubled Debt Restructurings
                   
  Owner occupied loans
 1
 
 $929
 
 $1,000
   
 1
 
 24
Total
1
 
 $929
 
 $1,000
   
1
 
24

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ending September 30, 2014:

 
All Modifications
 
Interest Rate Reductions
 
Modified Repayment Terms
     
Pre-Modification
 
Post-Modification
                 
Extension
     
Outstanding
 
Outstanding
     
Interest at
 
Interest at
     
Period or
 
Number of
 
Recorded
 
Recorded
 
Number of
 
Pre-Modification
 
Post-Modification
 
Number of
 
Range
(dollars in thousands)
Loans
 
Investment
 
Investment
 
Loans
 
Rate
 
Rate
 
Loans
 
(in months)
Troubled Debt Restructurings
                             
Commercial and industrial loans:
                             
  Non-working capital loans
 2
 
 $433
 
 $433
 
0
 
 $0
 
 $0
 
 2
 
12-15
Commercial real estate and multi-
                             
  family residential loans:
                             
  Owner occupied loans
 3
 
 2,639
 
 2,710
 
 1
 
 89
 
 95
 
 2
 
12-24
Total
5
 
 $3,072
 
 $3,143
 
1
 
 $89
 
 $95
 
4
 
12-24

For the quarter ending September 30, 2014, the commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $74,000 and the commercial real estate and multi-family residential loan troubled debt restructuring described above increased the allowance for loan losses by $53,000.  For the nine month period ending September 30, 2014, the commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $211,000 and the commercial real estate and multi-family residential loan troubled debt restructuring described above increased the allowance for loan losses by $152,000.

No charge-offs resulted from any of the troubled debt restructurings described above during the three-month and nine-month periods ending September 30, 2014.

There were no troubled debt restructurings that had payment defaults within the twelve months following modification during the three or nine month periods ended September 30, 2015 and the three month or nine-month periods ended September 30, 2014.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $150,000.

The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 
21

 

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be Pass rated loans with the exception of consumer troubled debt restructurings which are evaluated and listed with Substandard commercial grade loans and consumer nonaccrual loans which are evaluated individually and listed with Not Rated loans. Loans listed as Not Rated are consumer loans or commercial loans with consumer characteristics included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status. As of September 30, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

     
Special
         
Not
   
(dollars in thousands)
Pass
 
Mention
 
Substandard
 
Doubtful
 
Rated
 
Total
  Commercial and industrial loans:
                     
    Working capital lines of credit loans
 $552,709
 
 $32,373
 
 $8,184
 
 $0
 
 $0
 
 $593,266
    Non-working capital loans
528,158
 
35,536
 
11,911
 
0
 
2,642
 
578,247
  Commercial real estate and multi-
                     
    family residential loans:
                     
    Construction and land development loans
172,372
 
2,009
 
2,234
 
0
 
0
 
176,615
    Owner occupied loans
376,411
 
22,632
 
9,647
 
0
 
0
 
408,690
    Nonowner occupied loans
404,063
 
8,158
 
5,230
 
0
 
0
 
417,451
    Multifamily loans
92,989
 
0
 
0
 
0
 
0
 
92,989
  Agri-business and agricultural loans:
                     
    Loans secured by farmland
154,638
 
0
 
472
 
0
 
0
 
155,110
    Loans for agricultural production
94,040
 
0
 
0
 
0
 
0
 
94,040
  Other commercial loans
82,966
 
0
 
0
 
0
 
5
 
82,971
  Consumer 1-4 family mortgage loans:
                     
    Closed end first mortgage loans
43,051
 
126
 
1,906
 
0
 
108,653
 
153,736
    Open end and junior lien loans
8,230
 
0
 
1,625
 
0
 
151,811
 
161,666
    Residential construction loans
0
 
0
 
0
 
0
 
8,425
 
8,425
  Other consumer loans
14,080
 
0
 
61
 
0
 
34,933
 
49,074
Total
 $2,523,707
 
 $100,834
 
 $41,270
 
 $0
 
 $306,469
 
 $2,972,280



 
22

 


As of December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

     
Special
         
Not
   
(dollars in thousands)
Pass
 
Mention
 
Substandard
 
Doubtful
 
Rated
 
Total
  Commercial and industrial loans:
                     
    Working capital lines of credit loans
 $504,806
 
 $28,485
 
 $10,343
 
 $611
 
 $0
 
 $544,245
    Non-working capital loans
436,735
 
31,781
 
20,324
 
0
 
2,514
 
491,354
  Commercial real estate and multi-
                     
    family residential loans:
                     
    Construction and land
                     
      development loans
150,442
 
1,033
 
4,762
 
0
 
0
 
156,237
    Owner occupied loans
369,520
 
20,960
 
12,397
 
0
 
0
 
402,877
    Nonowner occupied loans
375,702
 
12,512
 
5,840
 
0
 
0
 
394,054
    Multi-family loans
71,695
 
0
 
0
 
0
 
0
 
71,695
  Agri-business and agricultural loans:
                     
    Loans secured by farmland
136,923
 
0
 
485
 
0
 
0
 
137,408
    Loans for agricultural production
136,466
 
0
 
0
 
0
 
0
 
136,466
  Other commercial loans
75,680
 
0
 
30
 
0
 
4
 
75,714
  Consumer 1-4 family mortgage loans:
                     
    Closed end first mortgage loans
39,156
 
0
 
2,199
 
0
 
103,529
 
144,884
    Open end and junior lien loans
8,400
 
291
 
2,015
 
0
 
140,487
 
151,193
    Residential construction loans
0
 
0
 
0
 
0
 
6,726
 
6,726
  Other consumer loans
15,879
 
290
 
75
 
0
 
33,223
 
49,467
Total
 $2,321,404
 
 $95,352
 
 $58,470
 
 $611
 
 $286,483
 
 $2,762,320

NOTE 5.  FAIR VALUE DISCLOSURES

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
     
Level 1
  
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
   
Level 2
  
Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
   
Level 3
 
Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Securities:  Securities available for sale are valued primarily by a third party pricing service. The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). These models utilize the market approach with standard inputs that include, but are not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.  For certain municipal securities that are not rated and observable inputs about the specific issuer are not available, fair values are estimated using observable data from other municipal securities presumed to be similar or other market data on other non-rated municipal securities (Level 3 inputs).

 
23

 
The Company’s Controlling Department, which is responsible for all accounting and SEC compliance, and the Company’s Treasury Department, which is responsible for investment portfolio management and asset/liability modeling, are the two areas that determine the Company’s valuation policies and procedures. Both of these areas report directly to the Executive Vice President and Chief Financial Officer of the Company. For assets or liabilities that may be considered for Level 3 fair value measurement on a recurring basis, these two departments and the Executive Vice President and Chief Financial Officer determine the appropriate level of the assets or liabilities under consideration. If there are assets or liabilities that are determined to be Level 3 by this group, the Risk Management Committee of the Company and the Audit Committee of the Board of Directors are made aware of such assets at their next scheduled meeting.

Securities pricing is obtained from a third party pricing service and is tested at least annually against prices from another third party provider and reviewed with a market value price tolerance variance of +/-3%, an individual security market value tolerance of +/-$50,000 and an aggregate market value tolerance of +/-$500,000 for all securities. If any securities fall outside any of these tolerance thresholds, they are reviewed in more detail to determine why the variance exists. Changes in market value are reviewed monthly in aggregate yield by security type and any material differences are reviewed to determine why they exist. At least annually, the pricing methodology of the pricing service is received and reviewed to support the fair value levels used by the Company. A detailed pricing evaluation is requested and reviewed on any security determined to be fair valued using unobservable inputs by the pricing service.

Mortgage banking derivatives:  The fair value of mortgage banking derivatives are based on observable market data as of the measurement date (Level 2).

Interest rate swap derivatives:  Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair value of interest rate swap derivatives is determined by pricing or valuation models using observable market data as of the measurement date (Level 2).

Impaired loans:  Impaired loans with specific allocations of the allowance for loan losses are generally based on the fair value of the underlying collateral if repayment is expected solely from the collateral. Fair value is determined using several methods. Generally, the fair value of real estate is based on appraisals by qualified third party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company’s management routinely applies internal discount factors to the value of appraisals used in the fair value evaluation of impaired loans. The deductions to the appraisals take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. Commercial real estate is generally discounted from its appraised value by 0-50% with the higher discounts applied to real estate that is determined to have a thin trading market or to be specialized collateral. In addition to real estate, the Company’s management evaluates other types of collateral as follows: (a) raw and finished inventory is discounted from its cost or book value by 35-65%, depending on the marketability of the goods; (b) finished goods are generally discounted by 30-60%, depending on the ease of marketability, cost of transportation or scope of use of the finished good; (c) work in process inventory is typically discounted by 50-100%, depending on the length of manufacturing time, types of components used in the completion process, and the breadth of the user base; (d) equipment is valued at a percentage of depreciated book value or recent appraised value, if available, and is typically discounted at 30-70% after various considerations including age and condition of the equipment, marketability, breadth of use, and whether the equipment includes unique components or add-ons; and (e) marketable securities are discounted by 10-30%, depending on the type of investment, age of valuation report and general market conditions. This methodology is based on a market approach and typically results in a Level 3 classification of the inputs for determining fair value.

Mortgage servicing rights:  As of September 30, 2015 the fair value of the Company’s Level 3 servicing assets for residential mortgage loans was $3.3 million, none of which are currently impaired and therefore are carried at amortized cost.  These residential mortgage loans have a weighted average interest rate of 3.97%, a weighted average maturity of 19 years and are secured by homes generally within the Company’s market area, which is primarily Northern Indiana.  A valuation model is used to estimate fair value, which is based on an income approach.  The inputs used include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees, and float income.  The most significant assumption used to value mortgage servicing rights is prepayment rate.  Prepayment rates are estimated based on published industry consensus prepayment rates.  The most significant unobservable assumption is the discount rate.  At September 30, 2015, the constant prepayment speed (PSA) used was 189 and the discount rate used was 9.4%.  At December 31, 2014, the PSA used was 212 and the discount rate used was 9.4%.

 
24

 
Other real estate owned:  Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property and are reviewed by the Company’s internal appraisal officer.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable properties used to determine value.  Such adjustments are usually significant and result in a Level 3 classification.   In addition, the Company’s management may apply discount factors to the appraisals to take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions.  In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Real estate mortgage loans held for sale:  Real estate mortgage loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors, and result in a Level 2 classification.

















 
25

 

The table below presents the balances of assets measured at fair value on a recurring basis:

 
September 30, 2015
 
Fair Value Measurements Using
 
Assets
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
at Fair Value
Assets
             
U.S. Treasury securities
 $           1,021
 
 $                     0
 
 $                    0
 
 $             1,021
Mortgage-backed securities
0
 
369,691
 
0
 
369,691
State and municipal securities
0
 
106,180
 
807
 
106,987
Total Securities
1,021
 
475,871
 
807
 
477,699
Mortgage banking derivative
0
 
283
 
0
 
283
Interest rate swap derivative
0
 
2,592
 
0
 
2,592
Total assets
 $           1,021
 
 $         478,746
 
 $               807
 
 $        480,574
               
Liabilities
             
Mortgage banking derivative
0
 
61
 
0
 
61
Interest rate swap derivative
0
 
2,646
 
0
 
2,646
Total liabilities
 $                   0
 
 $             2,707
 
 $                    0
 
 $             2,707
               
               
 
December 31, 2014
 
Fair Value Measurements Using
 
Assets
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
at Fair Value
Assets
             
U.S. Treasury securities
 $             1,004
 
 $                      0
 
 $                     0
 
 $              1,004
Mortgage-backed securities
0
 
372,095
 
0
 
372,095
State and municipal securities
0
 
101,962
 
850
 
102,812
Total Securities
1,004
 
474,057
 
850
 
475,911
Mortgage banking derivative
0
 
96
 
0
 
96
Interest rate swap derivative
0
 
1,191
 
0
 
1,191
Total assets
 $             1,004
 
 $           475,344
 
 $                 850
 
 $          477,198
               
Liabilities
             
Mortgage banking derivative
0
 
11
 
0
 
11
Interest rate swap derivative
0
 
1,242
 
0
 
1,242
Total liabilities
 $                    0
 
 $               1,253
 
 $                     0
 
 $              1,253
               

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2015 and there were no transfers between Level 1 and Level 2 during 2014.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2015 and 2014:

 
State and Municipal Securities
(dollars in thousands)
2015
 
2014
Balance of recurring Level 3 assets at January 1
 $             850
 
 $               975
  Changes in fair value of securities
     
    included in other comprehensive income
(3)
 
11
  Principal payments
(40)
 
(125)
Balance of recurring Level 3 assets at September 30
 $             807
 
 $               861
       

 
26

 
The state and municipal securities measured at fair value included below are non-rated Indiana municipal revenue bonds and are not actively traded.

Quantitative Information about Level 3 Fair Value Measurements
             
Range of
 
Fair Value at
         
Inputs
(dollars in thousands)
9/30/2015
 
Valuation Technique
 
Unobservable Input
 
(Average)
               
State and municipal securities
 $              807
 
Price to type, par, call
 
Discount to benchmark index
 
0-5%
             
(2.24%)
               
Quantitative Information about Level 3 Fair Value Measurements
             
Range of
 
Fair Value at
         
Inputs
(dollars in thousands)
12/31/2014
 
Valuation Technique
 
Unobservable Input
 
(Average)
               
State and municipal securities
 $                850
 
Price to type, par, call
 
Discount to benchmark index
 
0-6%
             
(2.49%)
               

The primary methodology used in the fair value measurement of the Company’s state and municipal securities classified as Level 3 is a discount to the AAA municipal benchmark index. Significant increases or (decreases) in this index as well as the degree to which the security differs in ratings, coupon, call and duration will result in a higher or (lower) fair value measurement for those securities that are not callable. For those securities that are continuously callable, a slight premium to par is used.

The table below presents the balances of assets measured at fair value on a nonrecurring basis:

 
September 30,  2015
 
Fair Value Measurements Using
 
Assets
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
at Fair Value
Assets
             
Impaired loans:
             
  Commercial and industrial loans:
             
    Working capital lines of credit loans
 $                 0
 
 $                 0
 
 $         1,059
 
 $         1,059
    Non-working capital loans
0
 
0
 
2,223
 
2,223
  Commercial real estate and multi-family
             
  residential loans:
             
    Construction and land development loans
0
 
0
 
300
 
300
    Owner occupied loans
0
 
0
 
1,911
 
1,911
  Consumer 1-4 family mortgage loans:
             
    Closed end first mortgage loans
0
 
0
 
235
 
235
  Other consumer loans
0
 
0
 
8
 
8
Total impaired loans
 $                 0
 
 $                 0
 
 $         5,736
 
 $         5,736
Other real estate owned
                     0
 
                     0
 
                  75
 
                  75
Total assets
 $                 0
 
 $                 0
 
 $         5,811
 
 $         5,811
               




 
27

 



 
December 31, 2014
 
Fair Value Measurements Using
 
Assets
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
at Fair Value
Assets
         
Impaired loans:
             
  Commercial and industrial loans:
             
    Working capital lines of credit loans
 $                  0
 
 $                  0
 
 $              531
 
 $              531
    Non-working capital loans
0
 
0
 
2,257
 
2,257
  Commercial real estate and multi-family
             
  residential loans:
             
    Construction and land development loans
0
 
0
 
341
 
341
    Owner occupied loans
0
 
0
 
4,084
 
4,084
    Nonowner occupied loans
0
 
0
 
3,113
 
3,113
  Agri-business and agricultural loans:
             
    Loans secured by farmland
0
 
0
 
189
 
189
  Other commercial loans
0
 
0
 
15
 
15
  Consumer 1-4 family mortgage loans:
             
    Closed end first mortgage loans
0
 
0
 
399
 
399
    Residential construction loans
0
 
0
 
73
 
73
  Other consumer loans
0
 
0
 
29
 
29
Total impaired loans
 $                  0
 
 $                  0
 
 $         11,031
 
 $         11,031
Other real estate owned
                     0
 
                     0
 
                   75
 
                   75
Total assets
 $                  0
 
 $                  0
 
 $         11,106
 
 $         11,106
               

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at September 30, 2015:

(dollars in thousands)
 
Fair Value
 
Valuation Methodology
 
Unobservable Inputs
 
Average
 
Range of Inputs
Impaired loans:
                   
  Commercial and industrial
 
 $     3,282
 
Collateral based
 
Discount to reflect
 
39%
 
(7% - 100%)
       
measurements
 
current market conditions
       
           
and ultimate collectability
       
Impaired loans:
                   
  Commercial real estate
 
        2,211
 
Collateral based
 
Discount to reflect
 
26%
 
(2% - 89%)
       
measurements
 
current market conditions
       
           
and ultimate collectability
       
Impaired loans:
                   
  Consumer 1-4 family mortgage
 
            235
 
Collateral based
 
Discount to reflect
 
30%
 
(20% - 40%)
       
measurements
 
current market conditions
       
           
and ultimate collectability
       
Impaired loans:
                   
  Other consumer
 
                8
 
Collateral based
 
Discount to reflect
 
53%
   
       
measurements
 
current market conditions
       
           
and ultimate collectability
       
                     
Other real estate owned
 
              75
 
Appraisals
 
Discount to reflect
 
49%
   
           
current market conditions
       
                     


 
28

 

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2014:

(dollars in thousands)
 
Fair Value
 
Valuation Methodology
 
Unobservable Inputs
 
Average
 
Range of Inputs
Impaired loans:
                   
  Commercial and industrial
 
 $       2,788
 
Collateral based
 
Discount to reflect
 
40%
 
(11% - 68%)
       
measurements
 
current market conditions
       
           
and ultimate collectability
       
Impaired loans:
                   
  Commercial real estate
 
          7,538
 
Collateral based
 
Discount to reflect
 
25%
 
(6% - 50%)
       
measurements
 
current market conditions
       
           
and ultimate collectability
       
Impaired loans:
                   
  Agri-business and agricultural
 
             189
 
Collateral based
 
Discount to reflect
 
7%
   
       
measurements
 
current market conditions
       
           
and ultimate collectability
       
                     
Impaired loans:
                   
  Other commercial
 
               15
 
Collateral based
 
Discount to reflect
 
50%
   
       
measurements
 
current market conditions
       
           
and ultimate collectability
       
                     
Impaired loans:
                   
  Consumer 1-4 family mortgage
 
             472
 
Collateral based
 
Discount to reflect
 
32%
 
(3% - 77%)
       
measurements
 
current market conditions
       
           
and ultimate collectability
       
Impaired loans:
                   
  Other consumer
 
               29
 
Collateral based
 
Discount to reflect
 
43%
 
(33% - 50%)
       
measurements
 
current market conditions
       
           
and ultimate collectability
       
                     
Other real estate owned
 
               75
 
Appraisals
 
Discount to reflect
 
49%
   
           
current market conditions
       
                     

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $8.7 million, with a valuation allowance of $3.0 million at September 30, 2015, resulting in a net increase in the provision for loan losses of $800,000 in the three months ended September 30, 2015, and a net reduction in the provision for loan losses of $500,000 in the nine months ended September 30, 2015.  At September 30, 2014, impaired loans had a gross carrying amount of $16.5 million, with a valuation allowance of $4.2 million, resulting in a net increase in the provision for loan losses of $100,000 in the three months ended September 30, 2014, and a net reduction in the provision for loan losses of $2.1 million for the nine months ended September 30, 2014.

Other real estate owned measured at fair value less costs to sell, at both September 30, 2015 and September 30, 2014, had a net carrying amount of $75,000, which is made up of the outstanding balance of $147,000, net of a valuation allowance of $72,000, all of which was written down during 2012.



 
29

 




The following table contains the estimated fair values and the related carrying values of the Company’s financial instruments. Items which are not financial instruments are not included.

 
September 30, 2015
 
Carrying
 
Estimated Fair Value
(dollars in thousands)
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
                 
 Cash and cash equivalents
 $    98,071
 
 $    98,071
 
 $               0
 
 $              0
 
 $    98,071
 Securities available for sale
477,699
 
1,021
 
475,871
 
807
 
477,699
 Real estate mortgages held for sale
3,132
 
0
 
3,203
 
0
 
3,203
 Loans, net
2,927,586
 
0
 
0
 
2,914,190
 
2,914,190
 Federal Home Loan Bank stock
4,248
 
N/A
 
N/A
 
N/A
 
N/A
 Federal Reserve Bank stock
3,420
 
N/A
 
N/A
 
N/A
 
N/A
 Accrued interest receivable
9,330
 
8
 
1,976
 
7,346
 
9,330
Financial Liabilities:
                 
 Certificates of deposit
(1,056,484)
 
0
 
1,061,877
 
0
 
1,061,877
 All other deposits
(2,091,050)
 
(2,091,050)
 
0
 
0
 
(2,091,050)
 Securities sold under agreements
                 
  to repurchase
(80,414)
 
0
 
(80,414)
 
0
 
(80,414)
 Long-term borrowings
(34)
 
0
 
(38)
 
0
 
(38)
 Subordinated debentures
(30,928)
 
0
 
0
 
(31,218)
 
(31,218)
 Standby letters of credit
(350)
 
0
 
0
 
(350)
 
(350)
 Accrued interest payable
(3,712)
 
(176)
 
(3,533)
 
(3)
 
(3,712)
                   
                   
 
December 31, 2014
 
Carrying
 
Estimated Fair Value
(dollars in thousands)
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
                 
 Cash and cash equivalents
 $      90,638
 
 $      90,638
 
 $               0
 
 $              0
 
 $      90,638
 Securities available for sale
475,911
 
1,004
 
474,057
 
850
 
475,911
 Real estate mortgages held for sale
1,585
 
0
 
1,612
 
0
 
1,612
 Loans, net
2,716,058
 
0
 
0
 
2,698,767
 
2,698,767
 Federal Home Loan Bank stock
5,993
 
N/A
 
N/A
 
N/A
 
N/A
 Federal Reserve Bank stock
3,420
 
N/A
 
N/A
 
N/A
 
N/A
 Accrued interest receivable
8,662
 
3
 
2,312
 
6,347
 
8,662
Financial Liabilities:
                 
 Certificates of deposit
(870,590)
 
0
 
(876,953)
 
0
 
(876,953)
 All other deposits
(2,002,530)
 
(2,002,530)
 
0
 
0
 
(2,002,530)
 Securities sold under agreements
                 
  to repurchase
(54,907)
 
0
 
(54,907)
 
0
 
(54,907)
 Federal funds purchased
(500)
 
0
 
(500)
 
0
 
(500)
 Other short-term borrowings
(105,000)
 
0
 
(105,001)
 
0
 
(105,001)
 Long-term borrowings
(35)
 
0
 
(40)
 
0
 
(40)
 Subordinated debentures
(30,928)
 
0
 
0
 
(31,212)
 
(31,212)
 Standby letters of credit
(379)
 
0
 
0
 
(379)
 
(379)
 Accrued interest payable
(2,946)
 
(109)
 
(2,834)
 
(3)
 
(2,946)
                   

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Cash and cash equivalents - The carrying amount of cash and cash equivalents approximate fair value and are classified as Level 1.

 
30

 
Loans, net – Fair values of loans, excluding loans held for sale, are estimated as follows:  For variable rate loans, fair values are based on carrying values resulting in a Level 3 classification.  Fair values for other loans are estimated using discounted cash flow analyses, using current market rates applied to the estimated life of the loan resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously.  The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Federal Home Loan Bank stock and Federal Reserve Bank stock– It is not practical to determine the fair value of Federal Home Loan Bank stock and Federal Reserve Bank stock due to restrictions placed on its transferability.

Certificates of deposit - Fair values of certificates of deposit are estimated using discounted cash flow analyses using current market rates applied to the estimated life resulting in a Level 2 classification.

All other deposits- The fair values for all other deposits other than certificates of deposit are equal to the amount payable on demand (the carrying value) resulting in a Level 1 classification.

Securities sold under agreements to repurchase – The carrying amount of borrowings under repurchase agreements approximates their fair values resulting in a Level 2 classification.

Federal funds purchased – The carrying amount of federal funds purchased approximates their fair values resulting in a Level 2 classification.

Other short-term borrowings – The fair value of other short-term borrowings is estimated using discounted cash flow analysis based on current borrowing rates resulting in a Level 2 classification.

Long-term borrowings – The fair value of long-term borrowings is estimated using discounted cash flow analyses based on current borrowing rates resulting in a Level 2 classification.

Subordinated debentures - The fair value of subordinated debentures is based on the rates currently available to the Company with similar term and remaining maturity and credit spread resulting in a Level 3 classification.

Standby letters of credit – The fair value of off-balance sheet items is based on the current fees and costs that would be charged to enter into or terminate such arrangements resulting in a Level 3 classification.

Accrued interest receivable/payable – The carrying amounts of accrued interest approximates fair value resulting in a Level 1, Level 2 or Level 3 classification which is consistent with its associated asset/liability.

NOTE 6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase represent collateralized borrowings with customers located primarily within the Company’s service area. These repurchase liabilities are not covered by federal deposit insurance and are secured by securities owned. The Company retains the right to substitute similar type securities and has the right to withdraw all excess collateral applicable to the repurchase liabilities whenever the collateral values are in excess of the related repurchase liabilities. However, as a means of mitigating market risk, the Company maintains excess collateral to cover normal changes in the repurchase liability by monitoring daily usage. The Company maintains control of the securities through the use of third-party safekeeping arrangements.

Securities sold under agreements to repurchase of $80.4 million and $54.9 million, which mature on demand, are secured by mortgage-backed securities with a carrying amount of $91.6 million and $94.2 million at September 30, 2015 and December 31, 2014.  Additional information concerning recognition of these liabilities is disclosed in Note 8.




 
31

 






NOTE 7. EMPLOYEE BENEFIT PLANS

Components of net periodic benefit cost:



 
Nine Months Ended September 30,
 
Three Months Ended September 30,
 
Pension Benefits
 
SERP Benefits
 
Pension Benefits
 
SERP Benefits
(dollars in thousands)
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Interest cost
 $    77
 
 $    90
 
 $    34
 
 $    38
 
 $    25
 
 $    30
 
 $    11
 
 $    13
Expected return on plan assets
(104)
 
(94)
 
(57)
 
(55)
 
(34)
 
(31)
 
(18)
 
(19)
Recognized net actuarial (gain) loss
121
 
88
 
62
 
60
 
40
 
29
 
21
 
20
  Net pension expense (benefit)
 $    94
 
 $    84
 
 $    39
 
 $    43
 
 $    31
 
 $    28
 
 $    14
 
 $    14
                               


The Company previously disclosed in its financial statements for the year ended December 31, 2014 that it expected to contribute $318,000 to its pension plan and $110,000 to its Supplemental Executive Retirement Plan (“SERP”) in 2015.  The Company has contributed $238,000 to its pension plan and $110,000 to its SERP as of September 30, 2015.  The Company expects to contribute $80,000 to its pension plan during the remainder of 2015.  The Company does not expect to make any additional contributions to its SERP during the remainder of 2015.

NOTE 8. OFFSETTING ASSETS AND LIABILITIES

The following tables summarize gross and net information about financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to an enforceable master netting arrangement at September 30, 2015 and December 31, 2014.

 
September 30, 2015
     
Gross
 
Net Amounts
           
 
Gross
 
Amounts
 
of Assets
 
Gross Amounts Not
   
 
Amounts of
 
Offset in the
 
presented in
 
Offset in the Statement
   
 
Recognized
 
Statement of
 
the Statement
 
of Financial Position
   
 
Assets/
 
Financial
 
of Financial
 
Financial
 
Cash Collateral
   
(dollars in thousands)
Liabilities
 
Position
 
Position
 
Instruments
 
Received
 
Net Amount
Assets
                     
Interest Rate Swap Derivatives
 $2,592
 
 $0
 
 $2,592
 
 $0
 
 $0
 
 $2,592
  Total Assets
 $2,592
 
 $0
 
 $2,592
 
 $0
 
 $0
 
 $2,592
Liabilities
                     
Interest Rate Swap Derivatives
 $2,646
 
 $0
 
 $2,646
 
 $0
 
 $(2,460)
 
 $186
Repurchase Agreements
 80,414
 
 0
 
 80,414
 
 (80,414)
 
 0
 
 0
  Total Liabilities
 $83,060
 
 $0
 
 $83,060
 
 $(80,414)
 
 $(2,460)
 
 $186
                       
                       
 
December 31, 2014
     
Gross
 
Net Amounts
           
 
Gross
 
Amounts
 
of Assets
 
Gross Amounts Not
   
 
Amounts of
 
Offset in the
 
presented in
 
Offset in the Statement
   
 
Recognized
 
Statement of
 
the Statement
 
of Financial Position
   
 
Assets/
 
Financial
 
of Financial
 
Financial
 
Cash Collateral
   
(dollars in thousands)
Liabilities
 
Position
 
Position
 
Instruments
 
Received
 
Net Amount
Assets
                     
Interest Rate Swap Derivatives
 $1,191
 
 $0
 
 $1,191
 
 $0
 
 $0
 
 $1,191
  Total Assets
 $1,191
 
 $0
 
 $1,191
 
 $0
 
 $0
 
 $1,191
Liabilities
                     
Interest Rate Swap Derivatives
 $1,242
 
 $0
 
 $1,242
 
 $0
 
 $(1,242)
 
 $0
Repurchase Agreements
 54,907
 
 0
 
 54,907
 
 (54,907)
 
 0
 
 0
  Total Liabilities
 $56,149
 
 $0
 
 $56,149
 
 $(54,907)
 
 $(1,242)
 
 $0

 
32

 
If an event of default occurs causing an early termination of an interest rate swap derivative, any early termination amount payable to one party by the other party may be reduced by set-off against any other amount payable by the one party to the other party.  If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions.

NOTE 9. EARNINGS PER SHARE

Basic earnings per common share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options, stock awards and warrants, none of which were antidilutive.


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Weighted average shares outstanding for basic earnings per common share
 16,629,378
 
 16,547,551
 
 16,610,689
 
 16,531,411
Dilutive effect of stock options, awards and warrants
 218,605
 
 228,219
 
 198,144
 
 237,668
Weighted average shares outstanding for diluted earnings per common share
 16,847,983
 
 16,775,770
 
 16,808,833
 
 16,769,079
               
Basic earnings per common share
 $0.70
 
 $0.70
 
 $2.05
 
 $1.98
Diluted earnings per common share
 $0.69
 
 $0.69
 
 $2.03
 
 $1.95

NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for the nine months ended September 30, 2015 and the year ended December 31, 2014:

 
Unrealized
       
 
Gains and
       
 
Losses on
 
Defined
   
 
Available-
 
Benefit
   
 
for-Sales
 
Pension
   
(dollars in thousands)
Securities
 
Items
 
Total
Balance at December 31, 2014
 $5,467
 
 $(1,637)
 
 $3,830
Other comprehensive income before reclassification
1,295
 
(175)
 
1,120
Amounts reclassified from accumulated other comprehensive income (loss)
(25)
 
110
 
85
    Net current period other comprehensive income
1,270
 
(65)
 
1,205
Balance at September 30, 2015
 $6,737
 
 $(1,702)
 
 $5,035


 
Unrealized
       
 
Gains and
       
 
Losses on
 
Defined
   
 
Available-
 
Benefit
   
 
for-Sales
 
Pension
   
(dollars in thousands)
Securities
 
Items
 
Total
Balance at December 31, 2013
 $(1,138)
 
 $(1,356)
 
 $(2,494)
Other comprehensive income before reclassification
6,471
 
(399)
 
6,072
Amounts reclassified from accumulated other comprehensive income (loss)
134
 
118
 
252
    Net current period other comprehensive income
6,605
 
(281)
 
6,324
Balance at December 31, 2014
 $5,467
 
 $(1,637)
 
 $3,830



 
33

 





Reclassifications out of accumulated comprehensive income for the three months ended September 30, 2015 are as follows:


Details about
 
Amount
 
Affected Line Item
Accumulated Other
 
Reclassified From
 
in the Statement
Comprehensive
 
Accumulated Other
 
Where Net
Income Components
 
Comprehensive Income
 
Income is Presented
         
(dollars in thousands)
       
Unrealized gains and losses on available-for-sale securities
 
 $0
 
Net securities gains (losses)
Tax effect
 
0
 
Income tax expense
   
0
 
Net of tax
Amortization of defined benefit pension items
 
(61)
 
Salaries and employee benefits
Tax effect
 
25
 
Income tax expense
   
(36)
 
Net of tax
Total reclassifications for the period
 
 $(36)
 
Net of tax

Reclassifications out of accumulated comprehensive income for the three months ended September 30, 2014 are as follows:


Details about
 
Amount
 
Affected Line Item
Accumulated Other
 
Reclassified From
 
in the Statement
Comprehensive
 
Accumulated Other
 
Where Net
Income Components
 
Comprehensive Income
 
Income is Presented
         
(dollars in thousands)
       
Unrealized gains and losses on available-for-sale securities
 
 $(228)
 
Net securities gains (losses)
Tax effect
 
90
 
Income tax expense
   
(138)
 
Net of tax
Amortization of defined benefit pension items
 
(49)
 
Salaries and employee benefits
Tax effect
 
20
 
Income tax expense
   
(29)
 
Net of tax
Total reclassifications for the period
 
 $(167)
 
Net of tax

Reclassifications out of accumulated comprehensive income for the nine months ended September 30, 2015 are as follows:


Details about
 
Amount
 
Affected Line Item
Accumulated Other
 
Reclassified From
 
in the Statement
Comprehensive
 
Accumulated Other
 
Where Net
Income Components
 
Comprehensive Income
 
Income is Presented
         
(dollars in thousands)
       
Unrealized gains and losses on available-for-sale securities
 
 $42
 
Net securities gains (losses)
Tax effect
 
(17)
 
Income tax expense
   
25
 
Net of tax
Amortization of defined benefit pension items
 
(183)
 
Salaries and employee benefits
Tax effect
 
73
 
Income tax expense
   
(110)
 
Net of tax
Total reclassifications for the period
 
 $(85)
 
Net of tax


 
34

 

Reclassifications out of accumulated comprehensive income for the nine months ended September 30, 2014 are as follows:


Details about
 
Amount
 
Affected Line Item
Accumulated Other
 
Reclassified From
 
in the Statement
Comprehensive
 
Accumulated Other
 
Where Net
Income Components
 
Comprehensive Income
 
Income is Presented
         
(dollars in thousands)
       
Unrealized gains and losses on available-for-sale securities
 
 $(224)
 
Net securities gains (losses)
Tax effect
 
90
 
Income tax expense
   
(134)
 
Net of tax
Amortization of defined benefit pension items
 
(148)
 
Salaries and employee benefits
Tax effect
 
60
 
Income tax expense
   
(88)
 
Net of tax
Total reclassifications for the period
 
 $(222)
 
Net of tax

NOTE 11.  NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Management is evaluating the impact of adopting this new accounting standard on our financial statements.

NOTE 12. SUBSEQUENT EVENTS

There were no subsequent events that would have a material impact on the financial statements presented in this Form 10-Q.

NOTE 13. RECLASSIFICATIONS

Certain amounts appearing in the financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassification had no effect on net income or stockholders’ equity as previously reported.







 
35

 














ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

OVERVIEW

Net income in the first nine months of 2015 was $34.1 million, up 4.1% from $32.7 million for the comparable period of 2014.  Diluted income per common share was $2.03 in the first nine months of 2015, up 4.1% from $1.95 in the comparable period of 2014.  Return on average total assets was 1.29% in the first nine months of 2015 versus 1.33% in the comparable period of 2014.  The equity to average assets ratio was 10.55% in the first nine months of 2015 versus 10.29% in the comparable period of 2014.

Net income in the third quarter of 2015 was $11.6 million, up 0.5% from $11.5 million for the comparable period of 2014.  Diluted income per common share was $0.69 in the third quarter of 2015, unchanged from $0.69 in the comparable period of 2014.  Return on average total assets was 1.26% in the third quarter of 2015 versus 1.36% in the comparable period of 2014.  The equity to average assets ratio was 10.46% in the third quarter of 2015 versus 10.39% in the comparable period of 2014.

Total assets were $3.666 billion as of September 30, 2015 versus $3.443 billion as of December 31, 2014, an increase of $223.0 million, or 6.5%. This increase was primarily due to a $210.0 million increase in total loans.

CRITICAL ACCOUNTING POLICIES

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and the valuation and other-than-temporary impairment of investment securities.

Allowance for Loan Losses

The Company maintains an allowance for loan losses to provide for probable incurred credit losses. Loan losses are charged against the allowance when management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for loan losses is taken based on management’s ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the loan loss allowance is conducted monthly. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control.

The level of loan loss provision is influenced by growth in the overall loan portfolio, emerging market risk, emerging concentration risk, commercial loan focus and large credit concentration, new industry lending activity, general economic conditions and historical loss analysis. In addition, management gives consideration to changes in the allocation for specific watch list credits in determining the appropriate level of the loan loss provision. Furthermore, management’s overall view on credit quality is a factor in the determination of the provision.

The determination of the appropriate allowance is inherently subjective, as it requires significant estimates by management. The Company has an established process to determine the adequacy of the allowance for loan losses that generally includes consideration of the following factors: changes in the nature and volume of the loan portfolio, overall portfolio quality and current economic conditions that may affect the borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. With respect to specific allocation levels for individual credits, management considers the amounts and timing of expected future cash flows and the current valuation of collateral as the primary measures. Management also considers trends in adversely classified loans based upon an ongoing review of those credits. With respect to pools of similar loans, allocations are assigned based upon historical experience unless the rate of loss is expected to be greater than historical losses as noted below. A detailed analysis is performed on loans that are classified but determined not to be impaired which incorporates probability of default with a loss given default scenario to develop non-specific allocations for the loan pool. These allocations may be adjusted based on the other factors cited above. An appropriate level of general allowance for pooled loans is determined after considering the following: application of historical loss percentages, emerging market risk, commercial loan focus and large credit concentration, new industry lending activity and general economic conditions. It is also possible that the following could affect the overall process: social, political, economic and terrorist events or activities. All of these factors are susceptible to change, which may be significant. As a result of this detailed process, the allowance results in two forms of allocations, specific and general. These two components represent the total allowance for loan losses deemed adequate to cover probable losses inherent in the loan portfolio.

 
36

 
Commercial loans are subject to a dual standardized grading process administered by the credit administration function. These grade assignments are performed independent of each other and a consensus is reached by credit administration and the loan review officer. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that indicate the loan is impaired. Considerations with respect to specific allocations for these individual credits include, but are not limited to, the following: (a) does the customer’s cash flow or net worth appear insufficient to repay the loan; (b) is there adequate collateral to repay the loan; (c) has the loan been criticized in a regulatory examination; (d) is the loan impaired; (e) are there other reasons where the ultimate collectability of the loan is in question; or (f) are there unique loan characteristics that require special monitoring.

Allocations are also applied to categories of loans considered not to be individually impaired, but for which the rate of loss is expected to be consistent with or greater than historical averages. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values. In addition, general allocations are made for other pools of loans, including non-classified loans. These general pooled loan allocations are performed for portfolio segments of commercial and industrial, commercial real estate and multi-family, agri-business and agricultural, other commercial, consumer 1-4 family mortgage and other consumer loans, and loans within certain industry categories believed to present unique risk of loss. General allocations of the allowance are primarily made based on a three-year historical average for loan losses for these portfolios, subjectively adjusted for economic factors and portfolio trends.

Due to the imprecise nature of estimating the allowance for loan losses, the Company’s allowance for loan losses includes an unallocated component. The unallocated component of the allowance for loan losses incorporates the Company’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as the level of classified credits, economic uncertainties, industry trends impacting specific portfolio segments, broad portfolio quality trends and trends in the composition of the Company’s large commercial loan portfolio and related large dollar exposures to individual borrowers.

Valuation and Other-Than-Temporary Impairment of Investment Securities

The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models, which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Different judgments and assumptions used in pricing could result in different estimates of value. The fair value of certain securities is determined using unobservable inputs, primarily observable inputs of similar securities.

At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with current accounting guidance. Impairment is other-than-temporary if the decline in the fair value of the security is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received.

Significant judgments are required in determining impairment, which includes making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates.

We consider the following factors when determining other-than-temporary impairment for a security or investment:

 
·
the length of time and the extent to which the market value has been less than amortized cost;
 
·
the financial condition and near-term prospects of the issuer;
 
·
the underlying fundamentals of the relevant market and the outlook for such market for the near future; and
 
·
our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in market value.

If, in management’s judgment, other-than-temporary impairment exists, the cost basis of the security will be written down to the computed net present value, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings (as if the loss had been realized in the period of other-than-temporary impairment). In addition, discount accretion will be discontinued on any bond that meets one or both of the following: (1) the rating by S&P, Moody’s or Fitch decreases to below “A” and/or (2) the cash flow analysis on a security indicates that, under any scenario modeled by the third party, there is a potential to not receive the full amount invested in the security.

 
37

 
RESULTS OF OPERATIONS

Overview

Selected income statement information for the three months and nine months ended September 30, 2015 and 2014 is presented in the following table:


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2015
 
2014
 
2015
 
2014
Income Statement Summary:
             
Net interest income
 $26,711
 
 $25,965
 
 $78,475
 
 $76,199
Provision for loan losses
0
 
0
 
0
 
0
Noninterest income
7,902
 
7,871
 
23,410
 
22,890
Noninterest expense
17,207
 
16,660
 
50,849
 
49,534
Other Data:
             
Efficiency ratio
49.71%
 
49.24%
 
49.91%
 
49.99%
Dilutive EPS
 $0.69
 
 $0.69
 
 $2.03
 
 $1.95
Tangible capital ratio
10.47%
 
10.40%
 
10.47%
 
10.40%
Net charge-offs(recoveries) to average loans
0.02%
 
(0.12)%
 
0.07%
 
0.12%
Net interest margin
3.16%
 
3.31%
 
3.21%
 
3.34%
Noninterest income to total revenue
22.83%
 
23.26%
 
22.98%
 
23.10%

Net Income

Net income was $34.1 million in the first nine months of 2015, an increase of $1.3 million, or 4.1%, versus net income of $32.7 million in the first nine months of 2014. Net interest income increased $2.3 million, or 3.0%, to $78.5 million versus $76.2 million in the first nine months of 2014. Net interest income increased primarily due to a 7.2% increase in average earning assets.  Significantly affecting average earning assets during 2015 was an increase of 8.4% in the commercial loan portfolio, which reflects our continuing strategic focus on commercial lending.  The net interest margin was 3.21% in the first nine months of 2015 versus 3.34% in 2014. The lower margin reflected a decline in loan yields, and a modest increase in the cost of funds offset by increased security yields.

Net income was $11.6 million in the third quarter of 2015, an increase of $54,000, or 0.5%, versus net income of $11.5 million in the third quarter of 2014. Net interest income increased $746,000, or 2.9%, to $26.7 million versus $26.0 million in the third quarter of 2014. Net interest income increased primarily due to a 7.5% increase in average earning assets, driven by an increase of 8.9% in the commercial loan portfolio.  The net interest margin was 3.16% in the third quarter of 2015 versus 3.31% in 2014. The lower margin reflected a decline in loan yields and a modest increase in funding costs.







 
38

 









Net Interest Income

The following tables set forth consolidated information regarding average balances and rates:


 
Nine Months Ended September 30,
 
 
2015
   
2014
 
 
Average
 
Interest
 
Yield (1)/
   
Average
 
Interest
 
Yield (1)/
 
(fully tax equivalent basis, dollars in thousands)
Balance
 
Income
 
Rate
   
Balance
 
Income
 
Rate
 
Earning assets
                         
  Loans:
                         
    Taxable (2)(3)
 $2,831,339
 
 $81,553
 
 3.85
%
 
 $2,611,722
 
 $78,317
 
 4.01
%
    Tax exempt (1)
 12,740
 
 521
 
 5.47
   
 11,800
 
 522
 
 5.91
 
  Investments: (1)
                         
    Available for sale
 474,876
 
 10,254
 
 2.89
   
 474,809
 
 9,837
 
 2.77
 
  Short-term investments
 5,195
 
 3
 
 0.08
   
 5,239
 
 3
 
 0.08
 
  Interest bearing deposits
 9,260
 
 40
 
 0.58
   
 4,913
 
 28
 
 0.76
 
Total earning assets
 $3,333,410
 
 $92,371
 
 3.71
%
 
 $3,108,483
 
 $88,707
 
 3.82
%
Less:  Allowance for loan losses
 (45,490)
           
 (46,886)
         
Nonearning Assets
                         
  Cash and due from banks
 100,022
           
 73,007
         
  Premises and equipment
 43,091
           
 39,842
         
  Other nonearning assets
 114,324
           
 112,290
         
Total assets
 $3,545,357
           
 $3,286,736
         
                           
Interest bearing liabilities
                         
  Savings deposits
 $230,253
 
 $338
 
 0.20
%
 
 $236,342
 
 $389
 
 0.22
%
  Interest bearing checking accounts
 1,226,863
 
 3,637
 
 0.40
   
 1,150,904
 
 3,423
 
 0.40
 
  Time deposits:
                         
    In denominations under $100,000
 284,260
 
 2,533
 
 1.19
   
 279,890
 
 2,380
 
 1.14
 
    In denominations over $100,000
 712,663
 
 5,043
 
 0.95
   
 603,135
 
 3,754
 
 0.83
 
  Miscellaneous short-term borrowings
 77,722
 
 138
 
 0.24
   
 151,786
 
 351
 
 0.31
 
  Long-term borrowings and
                         
    subordinated debentures
 30,962
 
 756
 
 3.26
   
 30,964
 
 769
 
 3.32
 
Total interest bearing liabilities
 $2,562,723
 
 $12,445
 
 0.65
%
 
 $2,453,021
 
 $11,066
 
 0.60
%
Noninterest bearing liabilities
                         
  Demand deposits
 590,030
           
 480,356
         
  Other liabilities
 18,587
           
 15,241
         
Stockholders' equity
 374,017
           
 338,118
         
Total liabilities and stockholders' equity
 $3,545,357
           
 $3,286,736
         
                           
Interest Margin Recap
                         
Interest income/average earning assets
   
92,371
 
 3.71
       
88,707
 
 3.82
 
Interest expense/average earning assets
   
12,445
 
 0.50
       
11,066
 
 0.48
 
Net interest income and margin
   
 $79,926
 
 3.21
%
     
 $77,641
 
 3.34
%


(1)
Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2015 and 2014. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses.
(2)
Loan fees, which are immaterial in relation to total taxable loan interest income for the nine months ended September 30, 2015 and 2014, are included as taxable loan interest income.
(3)
Nonaccrual loans are included in the average balance of taxable loans.
 
 

 
39

 
 
Three Months Ended September 30,
 
 
2015
   
2014
 
 
Average
 
Interest
 
Yield (1)/
   
Average
 
Interest
 
Yield (1)/
 
(fully tax equivalent basis, dollars in thousands)
Balance
 
Income
 
Rate
   
Balance
 
Income
 
Rate
 
Earning assets
                         
  Loans:
                         
    Taxable (2)(3)
 $2,910,663
 
 $27,981
 
 3.81
%
 
 $2,671,249
 
 $26,713
 
 3.97
%
    Tax exempt (1)
 12,496
 
 170
 
 5.40
   
 13,418
 
 186
 
 5.49
 
  Investments: (1)
                         
    Available for sale
 471,641
 
 3,269
 
 2.75
   
 476,643
 
 3,320
 
 2.76
 
  Short-term investments
 5,836
 
 1
 
 0.07
   
 4,987
 
 1
 
 0.08
 
  Interest bearing deposits
 8,809
 
 15
 
 0.68
   
 6,126
 
 11
 
 0.71
 
Total earning assets
 $3,409,445
 
 $31,436
 
 3.66
%
 
 $3,172,423
 
 $30,231
 
 3.78
%
Less:  Allowance for loan losses
 (44,751)
           
 (45,994)
         
Nonearning Assets
                         
  Cash and due from banks
 117,986
           
 73,481
         
  Premises and equipment
 44,240
           
 40,098
         
  Other nonearning assets
 113,849
           
 111,466
         
Total assets
 $3,640,769
           
 $3,351,474
         
                           
Interest bearing liabilities
                         
  Savings deposits
 $234,360
 
 $115
 
 0.19
%
 
 $230,635
 
 $125
 
 0.22
%
  Interest bearing checking accounts
 1,221,190
 
 1,225
 
 0.40
   
 1,159,009
 
 1,167
 
 0.40
 
  Time deposits:
                         
    In denominations under $100,000
 279,734
 
 846
 
 1.20
   
 277,719
 
 791
 
 1.13
 
    In denominations over $100,000
 756,206
 
 1,787
 
 0.94
   
 650,281
 
 1,341
 
 0.82
 
  Miscellaneous short-term borrowings
 83,015
 
 43
 
 0.21
   
 137,372
 
 96
 
 0.28
 
  Long-term borrowings and
                         
    subordinated debentures
 30,962
 
 239
 
 3.06
   
 30,963
 
 260
 
 3.33
 
Total interest bearing liabilities
 $2,605,467
 
 $4,255
 
 0.65
%
 
 $2,485,979
 
 $3,780
 
 0.60
%
Noninterest bearing liabilities
                         
  Demand deposits
 634,982
           
 501,594
         
  Other liabilities
 19,455
           
 15,747
         
Stockholders' equity
 380,865
           
 348,154
         
Total liabilities and stockholders' equity
 $3,640,769
           
 $3,351,474
         
                           
Interest Margin Recap
                         
Interest income/average earning assets
   
31,436
 
 3.66
       
30,231
 
 3.78
 
Interest expense/average earning assets
   
4,255
 
 0.50
       
3,780
 
 0.47
 
Net interest income and margin
   
 $27,181
 
 3.16
%
     
 $26,451
 
 3.31
%

(1)
Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2015 and 2014. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses.
(2)
Loan fees, which are immaterial in relation to total taxable loan interest income for the three months ended September 30, 2015 and 2014, are included as taxable loan interest income.
(3)
Nonaccrual loans are included in the average balance of taxable loans.
 
 
Net interest income increased $2.3 million, or 3.0%, for the nine months ended September 30, 2015 compared with the first nine months of 2014. The increased level of net interest income during the first nine months of 2015 compared with the first nine months of 2014 was largely driven by an increase in net earning assets of $224.9 million as well as a deceleration in the amortization of premiums on agency mortgage-backed securities.  The deceleration was primarily the result of rising long-term mortgage interest rates which have reduced prepayments in the loans underlying the securities.  Average loans outstanding increased $220.6 million during the nine months ended September 30, 2015 compared with the same period of 2014, with most of the growth being in commercial loans.  The tax equivalent net interest margin was 3.21% for the first nine months of 2015 compared to 3.34% during the first nine months of 2014.  The yield on earning assets totaled 3.71% during the nine months ended September 30, 2015 compared to 3.82% in the same period of 2014 while the cost of funds (expressed as a percentage of average earning assets) totaled 0.50% during the first nine months of 2015 compared to 0.48% in the same period of 2014.  Net interest income increased $746,000, or 2.9%, for the third quarter of 2015 compared to the third quarter of 2014.  The increase was driven by an increase in net earning assets.  The tax equivalent net interest margin was 3.16% for the third quarter of 2015 compared to 3.31% during the third quarter of 2014.

Average earning assets increased by $237.0 million for the three months ended September 30, 2015 compared with the same period of 2014.  Average loans outstanding increased $238.5 million during the three months ended September 30, 2015 compared with the same period of 2014, with most of the growth being in commercial loans.  During the three months ended September 30, 2015, earning assets yields declined by 12 basis points and interest bearing liabilities increased by 5 basis points due primarily to lower loan yields on new and renewed loans increased time deposit rates.

 
40

 
Provision for Loan Losses

No provisions for loan loss expense were recorded during the nine month and three month periods ended September 30, 2015 and 2014.  The allowance for loan losses at September 30, 2015 represented 1.50% of the loan portfolio, versus 1.67% at December 31, 2014 and 1.72% at September 30, 2014.  Factors impacting the decision not to record a provision in the first nine months of 2015 included the stabilization or improvement in key loan quality metrics including strong reserve coverage of nonperforming loans, a decrease in historical loss percentages, stable economic conditions in the Company’s markets and sustained signs of improvement in borrower performance and future prospects. In addition, management gave consideration to changes in the allocation for specific watch list credits in determining the appropriate level of the loan loss provision. Management’s overall view on current credit quality was also a factor in the determination of the provision for loan losses. The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions and other factors that may influence the assessment of the collectability of loans.

Noninterest Income

Noninterest income categories for the nine-month and three-month periods ended September 30, 2015 and 2014 are shown in the following tables:


 
Nine Months Ended
 
September 30,
         
Percent
(dollars in thousands)
2015
 
2014
 
Change
Wealth advisory fees
 $3,393
 
 $3,046
 
 11.4
%
Investment brokerage fees
 1,208
 
 2,739
 
 (55.9)
 
Service charges on deposit accounts
 7,753
 
 6,973
 
 11.2
 
Loan, insurance and service fees
 5,616
 
 5,187
 
 8.3
 
Merchant card fee income
 1,332
 
 1,137
 
 17.2
 
Bank owned life insurance
 956
 
 1,082
 
 (11.6)
 
Other income
 2,090
 
 2,442
 
 (14.4)
 
Mortgage banking income
 1,020
 
 508
 
 100.8
 
Net securities gains (losses)
 42
 
 (224)
 
 (118.8)
 
  Total noninterest income
 $23,410
 
 $22,890
 
 2.3
%
Noninterest income to total revenue
22.98%
 
23.10%
     
             
             
 
Three Months Ended
 
September 30,
         
Percent
(dollars in thousands)
2015
 
2014
 
Change
Wealth advisory fees
 $1,103
 
 $1,030
 
 7.1
%
Investment brokerage fees
 405
 
 699
 
 (42.1)
 
Service charges on deposit accounts
 2,806
 
 2,474
 
 13.4
 
Loan, insurance and service fees
 2,147
 
 1,972
 
 8.9
 
Merchant card fee income
 485
 
 407
 
 19.2
 
Bank owned life insurance
 221
 
 372
 
 (40.6)
 
Other income
 455
 
 881
 
 (48.4)
 
Mortgage banking income
 280
 
 264
 
 6.1
 
Net securities gains (losses)
 0
 
 (228)
 
 NA
 
  Total noninterest income
 $7,902
 
 $7,871
 
 0.4
%
Noninterest income to total revenue
22.83%
 
23.26%
     


 
41

 
The Company’s noninterest income increased 2.3% to $23.4 million for the first nine months of 2015 versus $22.9 million for the same period of 2014.  Noninterest income increased 0.4% for three month period ending September 30, 2015 versus the same period of 2014.  Noninterest income for first nine months of 2015 and three month period ending September 30, 2015 were positively impacted by increases in mortgage banking income due to higher production volumes, as well as increases in merchant card fees, service charges on deposit accounts, wealth advisory fees and loan, insurance and service fees.  The increases were driven by higher fees on commercial deposit accounts as well as fees related to new wealth advisory client relationships.  In addition, many wealth advisory fees are performance based and have been positively impacted by rising financial markets.  Offsetting these increases was a decrease in investment brokerage fees driven by lower production volumes and the Company modifying product mix in order to provide a more consistent revenue stream by focusing less on front end income loaded products.

Noninterest Expense

Noninterest expense categories for the nine-month and three-month periods ended September 30, 2015 and 2014 are shown in the following tables:


 
Nine Months Ended
 
September 30,
         
Percent
(dollars in thousands)
2015
 
2014
 
Change
Salaries and employee benefits
 $29,021
 
 $29,310
 
 (1.0)
%
Net occupancy expense
 2,918
 
 2,885
 
 1.1
 
Equipment costs
 2,699
 
 2,346
 
 15.0
 
Data processing fees and supplies
 5,655
 
 4,541
 
 24.5
 
Corporate and business development
 2,284
 
 2,052
 
 11.3
 
FDIC insurance and other regulatory fees
 1,518
 
 1,446
 
 5.0
 
Professional fees
 2,111
 
 2,241
 
 (5.8)
 
Other expense
 4,643
 
 4,713
 
 (1.5)
 
  Total noninterest expense
 $50,849
 
 $49,534
 
 2.7
%
             
             
             
 
Three Months Ended
 
September 30,
         
Percent
(dollars in thousands)
2015
 
2014
 
Change
Salaries and employee benefits
 $9,854
 
 $9,856
 
 0.0
%
Net occupancy expense
 919
 
 872
 
 5.4
 
Equipment costs
 870
 
 812
 
 7.1
 
Data processing fees and supplies
 1,950
 
 1,557
 
 25.2
 
Corporate and business development
 780
 
 726
 
 7.4
 
FDIC insurance and other regulatory fees
 521
 
 481
 
 8.3
 
Professional fees
 694
 
 705
 
 (1.6)
 
Other expense
 1,619
 
 1,651
 
 (1.9)
 
  Total noninterest expense
 $17,207
 
 $16,660
 
 3.3
%

The Company’s noninterest expense increased $1.3 million and $547,000, respectively, in the nine-month and three-month periods ended September 30, 2015 versus the same periods in 2014.  Salaries and employee benefits decreased by $289,000 and $2,000, respectively.  The decrease in salary and employee benefits was driven by lower employee benefit costs including lower incentive-based compensation accruals and lower commissions paid on investment brokerage fees as a result of lower production.  Data processing fees increased by $1.1 million and $393,000, respectively, due to increased technology and software related expenditures with the Company’s core processor which are volume and product driven to enhance the delivery of electronic banking channels and enhance commercial product solutions.  Equipment costs increased $353,000 and $58,000, respectively, driven by higher depreciation expenses primarily due to branch upgrades and expansion.  Professional fees decreased by $130,000 and $11,000, respectively, driven by lower legal fees.  Corporate and business development expense increased due to higher advertising and marketing expenses.  The Company’s efficiency ratio was 49.9% and 49.7%, respectively, for the nine-month and three-month periods ended September 30, 2015 compared to 50.0% and 49.2% for the comparable periods in 2014.

 
42

 
Income Taxes

Income tax expense increased $135,000 and $176,000, respectively, in the nine month and three month periods ended September 30, 2015, compared to the same period in 2014.  The combined state franchise tax expense and the federal income tax expense, as a percentage of income before income tax expense, was 33.2% and 33.6%, respectively, in the nine month and three month periods ended September 30, 2015, compared to 33.9% and 33.0% for the comparable periods of 2014.  Income tax expense for the first quarter of 2014 was impacted by a $431,000 provision for state income tax due to a revaluation of the Company’s state deferred tax items.  During the first quarter of 2014, the Indiana legislature approved new tax rates for financial institutions.  The tax rate, currently 7.5%, is scheduled to drop to 6.5% for 2017.  The new legislation further reduces the rate to 4.9%, phased-in beginning in 2019.  The lowering of future rates reduces the benefit that will be provided by the Company’s existing net deferred tax asset items thereby requiring the non-cash income tax expense adjustment in 2014.

FINANCIAL CONDITION

Overview

Total assets of the Company were $3.666 billion as of September 30, 2015, an increase of $223.0 million, or 6.5%, when compared to $3.443 billion as of December 31, 2014.  Total loans increased by $210.0 million, or 7.6%, to $2.972 billion at September 30, 2015 from $2.762 billion at December 31, 2014.  Funding for the loan growth came from a $274.4 million increase in deposits offset by an $80.0 million decrease in short-term borrowings.

Uses of Funds

Total Cash and Cash Equivalents

Total cash and cash equivalents increased by $7.4 million, or 8.2%, to $98.1 million at September 30, 2015, from $90.6 million at December 31, 2014.

Investment Portfolio

The amortized cost and the fair value of securities as of September 30, 2015 and December 31, 2014 were as follows:


 
September 30, 2015
 
December 31, 2014
 
Amortized
 
Fair
 
Amortized
 
Fair
(dollars in thousands)
Cost
 
Value
 
Cost
 
Value
  U.S. Treasury securities
 $987
 
 $1,021
 
 $986
 
 $1,004
  Agency residential mortgage-backed securities
 361,571
 
 369,691
 
 366,596
 
 372,095
  State and municipal securities
 104,057
 
 106,987
 
 99,399
 
 102,812
    Total
 $466,615
 
 $477,699
 
 $466,981
 
 $475,911


At September 30, 2015 and December 31, 2014, there were no holdings of securities of any one issuer, other than the U.S. government, government agencies and government sponsored agencies, in an amount greater than 10% of stockholders’ equity.

Purchases of securities available for sale totaled $70.2 million in the first nine months of 2015.  Paydowns from prepayments and scheduled payments of $48.2 million were received in the first nine months of 2015, and the amortization of premiums, net of the accretion of discounts, was $3.4 million.  Sales of securities totaled $7.8 million in the first nine months of 2015.  Maturities and calls of securities totaled $11.2 million in the first nine months of 2015.  No other-than-temporary impairment was recognized in the first nine months of 2015. The investment portfolio is managed to provide for an appropriate balance between, liquidity, credit risk and investment return and to limit the Company’s exposure to risk to an acceptable level.  The Company does not trade or invest in or sponsor certain unregistered investment companies defined as hedge funds and private equity funds in the so called “Volcker Rule” of the Dobb-Frank Wall Street Reform and Consumer Protection Act.

 
43

 

Real Estate Mortgage Loans HFS

Real estate mortgage loans held-for-sale increased by $1.5 million, or 97.6%, to $3.1 million at September 30, 2015, from $1.6 million at December 31, 2014.  The balance of this asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market.  The Company generally sells all of the mortgage loans it originates on the secondary market.  Proceeds from sales totaled $57.2 million in the first nine months of 2015 compared to $39.3 million in the first nine months of 2014.

Loan Portfolio

The loan portfolio by class as of September 30, 2015 and December 31, 2014 is summarized as follows:


             
Current
 
September 30,
December 31,
Period
(dollars in thousands)
2015
2014
Change
Commercial and industrial loans
 $1,171,316
 39.4
 %
 $1,035,373
 35.6
 %
 $135,943
Commercial real estate and multi-family residential loans
 1,096,814
 36.9
 
 1,026,059
 38.9
 
 70,755
Agri-business and agricultural loans
249,070
 8.4
 
273,787
 10.0
 
 (24,717)
Other commercial loans
 82,976
 2.8
 
 75,715
 2.8
 
 7,261
Consumer 1-4 family mortgage loans
 322,949
 10.9
 
 302,129
 10.9
 
 20,820
Other consumer loans
 49,169
 1.7
 
 49,541
 1.8
 
 (372)
  Subtotal
 2,972,294
 100.0
 %
 2,762,604
 100.0
 %
 209,690
Less:  Allowance for loan losses
 (44,694)
   
 (46,262)
   
 1,568
           Net deferred loan fees
 (14)
   
 (284)
   
 270
Loans, net
 $2,927,586
   
 $2,716,058
   
 $211,528

Total loans, excluding real estate mortgage loans held for sale, increased by $209.7 million to $2.972 billion at September 30, 2015 from $2.763 billion at December 31, 2014.  The increase was concentrated in the commercial and commercial real estate categories and reflected the Company’s long standing strategic plan that is focused on expanding and growing the commercial lending business throughout our market areas.  The increase was partially offset by seasonal declines in agri-business loans.

The following table summarizes the Company’s non-performing assets as of September 30, 2015 and December 31, 2014:


 
September 30,
 
December 31,
(dollars in thousands)
2015
 
2014
Nonaccrual loans including nonaccrual troubled debt restructured loans
 $14,308
 
 $13,577
Loans past due over 90 days and still accruing
 0
 
 130
Total nonperforming loans
 $14,308
 
 $13,707
Other real estate owned
 231
 
 284
Repossessions
 0
 
 9
Total nonperforming assets
 $14,539
 
 $14,000
       
Impaired loans including troubled debt restructurings
 $22,660
 
 $31,957
       
Nonperforming loans to total loans
0.48%
 
0.50%
Nonperforming assets to total assets
0.40%
 
0.41%
       
Performing troubled debt restructured loans
 $7,605
 
 $16,492
Nonperforming troubled debt restructured loans (included in nonaccrual loans)
 10,934
 
 9,160
Total troubled debt restructured loans
 $18,539
 
 $25,652

Total nonperforming assets increased by $539,000, or 3.9%, to $14.5 million during the nine-month period ended September 30, 2015.  The increase in nonperforming assets primarily resulted from placing six commercial credits on nonaccrual status.  Offsetting the increase in nonperforming assets was the removal of two loans from nonaccrual status.

 
44

 
Net charge-offs totaled $122,000 in the third quarter of 2015, versus net recoveries of $782,000 during the third quarter of 2014 and net charge-offs of $861,000 during the second quarter of 2015.

A loan is impaired when full payment under the original loan terms is not expected.  Impairment for smaller loans that are similar in nature and which are not in nonaccrual or troubled debt restructured status, such as residential mortgage, consumer, and credit card loans, is determined based on the class of loans and impairment is determined on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows or at the fair value of collateral if repayment is expected solely from the collateral.

Total impaired loans decreased by $9.3 million, or 29.1%, to $22.7 million at September 30, 2015 from $32.0 million at December 31, 2014.  The decrease in the impaired loans category was primarily due to the removal of a $5.8 million commercial loan from impaired status due to improved condition.  The loan was previously accounted for as a troubled debt restructuring.  Additional decreases in the impaired loans category were from payments received and charge-offs on several impaired commercial credits.

Loans are charged against the allowance for loan losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb probable incurred credit losses relating to specifically identified loans based on an evaluation of the loans by management, as well as other probable incurred losses inherent in the loan portfolio. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to repay. Management also considers trends in adversely classified loans based upon a monthly review of those credits. An appropriate level of general allowance is determined after considering the following factors:  application of historical loss percentages, emerging market risk, commercial loan focus and large credit concentrations, new industry lending activity and current economic conditions. Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified loans:  Substandard, Doubtful and Loss. The regulations also contain a Special Mention category. Special Mention is defined as loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as Substandard, Doubtful or Loss but do possess credit deficiencies or potential weaknesses deserving management’s close attention. The Company’s policy is to establish a specific allowance for loan losses for any assets where management has identified conditions or circumstances that indicate an asset is impaired. If an asset or portion thereof is classified as a loss, the Company’s policy is to either establish specified allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount.

At September 30, 2015, the allowance for loan losses was 1.50% of total loans outstanding, versus 1.67% of total loans outstanding at December 31, 2014.  At September 30, 2015, management believed the allowance for loan losses was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions do not continue to improve, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the allowance for loan losses. The process of identifying probable credit losses is a subjective process. Therefore, the Company maintains a general allowance to cover probable incurred credit losses within the entire portfolio. The methodology management uses to determine the adequacy of the loan loss reserve includes the considerations below.

The Company has a relatively high percentage of commercial and commercial real estate loans, most of which are extended to small or medium-sized businesses from a wide variety of industries. Generally, this type of lending has more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area.

As of September 30, 2015, on the basis of management’s review of the loan portfolio, the Company had 77 credits totaling $142.8 million on the classified loan list versus 92 credits totaling $155.6 million on December 31, 2014. As of September 30, 2015, the Company had $100.8 million of assets classified as Special Mention, $41.3 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $95.4 million, $58.5 million, $611,000 and $0, respectively at December 31, 2014.

Allowance estimates are developed by management after taking into account actual loss experience adjusted for current economic conditions. The Company has regular discussions regarding this methodology with regulatory authorities.  Allowance estimates are considered a prudent measurement of the risk in the Company’s loan portfolio and are applied to individual loans based on loan type. In accordance with current accounting guidance, the allowance is provided for losses that have been incurred as of the balance sheet date and is based on past events and current economic conditions and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions.  For a more thorough discussion of the allowance for loan losses methodology see the Critical Accounting Policies section of this Item 2.

 
45

 
The allowance for loan losses decreased 3.4%, or $1.6 million, from $46.3 million at December 31, 2014 to $44.7 million at September 30, 2015.  Pooled loan allocations decreased from $40.8 million at December 31, 2014 to $40.4 million at September 30, 2015, which was primarily due to management’s view of current credit quality and the current economic environment.  Impaired loan allocations decreased $1.1 million from $5.4 million at December 31, 2014 to $4.3 million at September 30, 2015 due primarily to a charge-off loan that was specifically reserved for prior to September 30, 2015, as well as decreases in the allocations of existing impaired loans and reductions to the impaired loans category.  The unallocated component of the allowance for loan losses was $3.4 million at September 30, 2015 and $3.3 million at December 31, 2014.  While general trends in the overall economy and credit quality were stable or favorable, the Company believes that the unallocated component is appropriate given the uncertainty that exists regarding near term economic conditions.

Most of the Company’s loan growth has been concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits. Management has historically considered growth and portfolio composition when determining loan loss allocations. Management believes that it is prudent to continue to provide for loan losses in a manner consistent with its historical approach due to the loan growth described above and current economic conditions.

Economic conditions in the Company’s markets have generally continued to improve and stabilize, and management is cautiously optimistic that the recovery is positively impacting its borrowers.  While the Company has seen indications of improved economic conditions in its markets, including commercial real estate activity and manufacturing growth, they are not wide spread or particularly strong improvements.  The Company’s continued growth strategy promotes diversification among industries as well as continued focus on enforcement of a strong credit environment and an aggressive position in loan work-out situations. Although the Company believes that historical industry-specific issues in the Company’s markets have improved, the economic environment impacting the Company’s entire geographic footprint will continue to present challenges.

Sources of Funds

The following table summarizes deposits and borrowings as of September 30, 2015 and December 31, 2014:


         
Current
 
September 30,
 
December 31,
 
Period
(dollars in thousands)
2015
 
2014
 
Change
Non-interest bearing demand deposits
 $630,789
 
 $579,495
 
 $51,294
Interest bearing demand, savings & money market accounts
 1,460,261
 
 1,423,035
 
 37,226
Time deposits under $100,000
 273,378
 
 285,379
 
 (12,001)
Time deposits of $100,000 or more
 783,106
 
 585,211
 
 197,895
   Total deposits
 3,147,534
 
 2,873,120
 
 274,414
Short-term borrowings
 80,414
 
 160,407
 
 (79,993)
Long-term borrowings
 34
 
 35
 
(1)
Subordinated debentures
 30,928
 
 30,928
 
0
  Total borrowings
 111,376
 
 191,370
 
 (79,994)
Total funding sources
 $3,258,910
 
 $3,064,490
 
 $194,420


Deposits and Borrowings

Total deposits increased by $274.4 million, or 9.6%, from December 31, 2014.  The growth in deposits consisted of $283.0 million in core deposit growth and a decrease of $8.6 million in brokered deposits.  Core deposit growth was concentrated in public fund certificates of deposit of $100,000 or more, other time deposits of $100,000 or more and non-interest bearing demand deposits.   Total brokered deposits were $133.8 million at September 30, 2015 compared to $142.4 million at December 31, 2014.  Total public funds deposits, including public funds transaction accounts, were $930.2 million at September 30, 2015 compared to $758.2 at December 31, 2014.

Total borrowings decreased by $80.0 million, or 49.9%, from December 31, 2014.  Most of the decrease was from a decrease in short-term advances from the Federal Home Loan Bank of Indianapolis.  The Company used wholesale funding, including brokered deposits and Federal Home Loan Bank advances, to fund part of its loan growth and to help maintain its desired interest rate risk position.

 
46

 
Capital

As of September 30, 2015, total stockholders’ equity was $386.6 million, an increase of $25.3 million, or 7.0%, from $361.3 million at December 31, 2014.  In addition to net income of $34.1 million, other significant changes in equity during the first nine months of 2015 included $11.6 million of dividends paid and $1.8 million in stock based compensation expense. The accumulated other comprehensive income component of equity increased $1.2 million during the nine months ended September 30, 2015, driven by changes in the fair values of available-for-sale securities.  The impact on equity by other comprehensive income is not included in regulatory capital.  The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1, or core capital, as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations. The final rules implementing the Basel Committee on Banking Supervision's (“BCBS”) capital guidelines for U.S. banks (the “Basel III rules”) became effective for the Company on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019.  As of September 30, 2015, the Company's capital levels remained characterized as "well-capitalized" under the new rules.  The actual capital amounts and ratios of the Company and the Bank as of September 30, 2015 and December 31, 2014, are presented in the table below.  Capital amounts and ratios for September 30, 2015 are calculated using the Basel III rules and capital amounts and ratios for December 31, 2014 are calculated using the Basel I rules:


                 
Minimum Required to
         
Minimum Required
 
Be Well Capitalized
         
For Capital
 
Under Prompt Corrective
 
Actual
 
Adequacy Purposes
 
Action Regulations
(dollars in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of September 30, 2015:
                     
Total Capital (to Risk
                     
Weighted Assets)
                     
  Consolidated
 $447,295
 
13.79%
 
 $259,495
 
8.00%
 
 $324,369
 
10.00%
  Bank
 $435,726
 
13.45%
 
 $259,074
 
8.00%
 
 $323,843
 
10.00%
Tier I Capital (to Risk
                     
Weighted Assets)
                     
  Consolidated
 $406,606
 
12.54%
 
 $194,621
 
6.00%
 
 $259,495
 
8.00%
  Bank
 $395,101
 
12.20%
 
 $194,306
 
6.00%
 
 $259,074
 
8.00%
Common Equity Tier 1 (CET1)
                     
  Consolidated
 $376,606
 
11.61%
 
 $145,966
 
4.50%
 
 $210,840
 
6.50%
  Bank
 $395,101
 
12.20%
 
 $145,729
 
4.50%
 
 $210,498
 
6.50%
Tier I Capital (to Average Assets)
                     
  Consolidated
 $406,606
 
11.18%
 
 $145,432
 
4.00%
 
 $181,790
 
5.00%
  Bank
 $395,101
 
10.92%
 
 $144,660
 
4.00%
 
 $180,825
 
5.00%
                       
As of December 31, 2014:
                     
Total Capital (to Risk
                     
Weighted Assets)
                     
  Consolidated
 $418,827
 
14.36%
 
 $233,286
 
8.00%
 
 $291,607
 
10.00%
  Bank
 $403,454
 
13.87%
 
 $232,787
 
8.00%
 
 $290,984
 
10.00%
Tier I Capital (to Risk
                     
Weighted Assets)
                     
  Consolidated
 $382,254
 
13.11%
 
 $116,643
 
4.00%
 
 $174,964
 
6.00%
  Bank
 $366,958
 
12.61%
 
 $116,394
 
4.00%
 
 $174,591
 
6.00%
Common Equity Tier 1 (CET1)
                     
  Consolidated
 N/A
 
 N/A
 
 N/A
 
 N/A
 
 N/A
 
 N/A
  Bank
 N/A
 
 N/A
 
 N/A
 
 N/A
 
 N/A
 
 N/A
Tier I Capital (to Average Assets)
                     
  Consolidated
 $382,254
 
11.22%
 
 $136,265
 
4.00%
 
 $170,332
 
5.00%
  Bank
 $366,958
 
10.84%
 
 $135,420
 
4.00%
 
 $169,276
 
5.00%


 
47

 
FORWARD-LOOKING STATEMENTS

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, are detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company’s Annual Report on Form 10-K. In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:

 
·
the effects of future economic, business and market conditions and changes, both domestic and foreign, including seasonality;

 
·
governmental monetary and fiscal policies;

 
·
legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators;

 
·
changes in accounting policies, rules and practices;

 
·
the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities;

 
·
the failure of assumptions and estimates underlying the establishment of reserves for possible loan losses and other estimates;

 
·
changes in borrowers’ credit risks and payment behaviors;

 
·
changes in the availability and cost of credit and capital in the financial markets;

 
·
changes in the prices, values and sales volumes of residential and commercial real estate;

 
·
the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

 
·
the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;

 
·
changes in technology or products that may be more difficult, costly or less effective than anticipated;

 
·
the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets;

 
·
the failure of assumptions and estimates used in our reviews of our loan portfolio and our analysis of our capital position; and

 
·
cyber-security risks and or cyber-security damage that could result from attacks on networks or data of the Company.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  Additional information concerning the company and its business, including factors that could materially affect the company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K

 
48

 
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk represents the Company’s primary market risk exposure. The Company does not have a material exposure to foreign currency exchange risk, does not have any material amount of derivative financial instruments and does not maintain a trading portfolio. The Corporate Risk Committee of the Board of Directors annually reviews and approves the policy used to manage interest rate risk. The policy was last reviewed and approved in July 2015. The policy sets guidelines for balance sheet structure, which are designed to protect the Company from the impact that interest rate changes could have on net income but does not necessarily indicate the effect on future net interest income. The Company, through its Asset and Liability Committee, manages interest rate risk by monitoring the computer simulated earnings impact of various rate scenarios and general market conditions. The Company then modifies its long-term risk parameters by attempting to generate the types of loans, investments, and deposits that currently fit the Company’s needs, as determined by its Asset and Liability Committee. This computer simulation analysis measures the net interest income impact of various interest rate scenario changes during the next twelve months. The Company continually evaluates the assumptions used in the model.  The balance sheet structure is considered to be within acceptable risk levels.

Results for the base, falling 100 basis points, rising 25 basis points, rising 50 basis points, rising 100 basis points, and rising 300 basis points interest rate scenarios are listed below based upon the Company’s rate sensitive assets and liabilities at September 30, 2015. The net interest income shown represents cumulative net interest income over a twelve-month time horizon. Balance sheet assumptions used for the base scenario are the same for the rising and falling simulations.


     
Falling
 
Rising
 
Rising
 
Rising
 
Rising
 
(dollars in thousands)
Base
 
(100 Basis Points)
 
25 Basis Points
 
50 Basis Points
 
100 Basis Points
 
300 Basis Points
 
Net interest income
$110,963
 
$108,517
 
$112,917
 
$114,906
 
$119,320
 
$137,157
 
Variance from Base
   
($2,446)
 
$1,954
 
$3,943
 
$8,357
 
$26,194
 
Percent of change from Base
 
-2.20
%
1.76
%
3.55
%
7.53
%
23.61
%

ITEM 4 – CONTROLS AND PROCEDURES

As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of September 30, 2015.  Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
 
During the quarter ended September 30, 2015, there were no changes to the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.
 





 
49

 









PART II – OTHER INFORMATION

Item 1. Legal proceedings

There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. of Part I of the Company’s 2014 Form 10-K.  Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information as of September 30, 2015 with respect to shares of common stock repurchased by the Company during the quarter then ended:



ISSUER PURCHASES OF EQUITY SECURITIES
               
             
Maximum Number (or
         
Total Number of
 
Appropriate Dollar
         
Shares Purchased as
 
Value) of Shares that
         
Part of Publicly
 
May Yet Be Purchased
 
Total Number of
 
Average Price
 
Announced Plans or
 
Under the Plans or
Period
Shares Purchased
 
Paid per Share
 
Programs
 
Programs
               
July 1-31
 4,583
 
 $42.66
 
 0
 
 $0
August 1-31
 538
 
 43.18
 
 0
 
 0
September 1-30
 0
 
 0
 
 0
 
 0
               
Total
 5,121
 
 $42.71
 
 0
 
 $0


(a)
The shares purchased during the periods were credited to the deferred share accounts of 
 
non-employee directors under the Company’s directors’ deferred compensation plan.  These
shares were purchased in the ordinary course of business and consistent with past practice.

Item 3. Defaults Upon Senior Securities

            None

Item 4. Mine Safety Disclosures

 N/A

Item 5. Other Information

            None




 
50

 


Item 6. Exhibits

31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
   
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
   
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101
Interactive Data File
   
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2015 and September 30, 2014; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and September 30, 2014; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and September 30, 2014; and (v) Notes to Unaudited Consolidated Financial Statements.
   





























 
51

 









LAKELAND FINANCIAL CORPORATION

FORM 10-Q

September 30, 2015

Part II - Other Information

Signatures




Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



LAKELAND FINANCIAL CORPORATION
(Registrant)



Date: November 9, 2015
/s/ David M. Findlay
 
David M. Findlay – President and
 
Chief Executive Officer


Date: November 9, 2015
/s/ Lisa M. O’Neill
 
Lisa M. O’Neill – Executive Vice President and
 
Chief Financial Officer


Date: November 9, 2015
/s/ Teresa A. Bartman
 
Teresa A. Bartman – Senior Vice President-
 
Finance and Controller









 
52

 













Exhibit Index

Exhibit Number
   
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
   
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
   
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101
Interactive Data File
   
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2015 and September 30, 2014; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and September 30, 2014; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and September 30, 2014; and (v) Notes to Unaudited Consolidated Financial Statements.
   



 
53