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(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock - without par value

SRCE

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes  o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ☐

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

Number of shares of common stock outstanding as of April 17, 2020 — 25,535,634 shares

TABLE OF CONTENTS

						Page
PART I. FINANCIAL INFORMATION
Item 1.			Financial Statements (Unaudited)
			Consolidated Statements of Financial Condition — March 31, 2020 and December 31, 2019			3
			Consolidated Statements of Income — three months ended March 31, 2020 and 2019			4
			Consolidated Statements of Comprehensive Income — three months ended March 31, 2020 and 2019			5
			Consolidated Statements of Shareholders’ Equity — three months ended March 31, 2020 and 2019			5
			Consolidated Statements of Cash Flows — three months ended March 31, 2020 and 2019			6
			Notes to the Consolidated Financial Statements			7
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			39
Item 4.			Controls and Procedures			39
PART II. OTHER INFORMATION
Item 1.			Legal Proceedings			39
Item 1A.			Risk Factors			39
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 3.			Defaults Upon Senior Securities			40
Item 4.			Mine Safety Disclosures			40
Item 5.			Other Information			40
Item 6.			Exhibits			40
SIGNATURES									41
EXHIBITS
			Exhibit 31.1
			Exhibit 31.2
			Exhibit 32.1
			Exhibit 32.2

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited - Dollars in thousands)

			March 31, 2020						December 31, 2019
ASSETS
Cash and due from banks			$	72,756					$	67,215
Federal funds sold and interest bearing deposits with other banks			49,543						16,150
Investment securities available-for-sale			1,057,169						1,040,583
Other investments			28,414						28,414
Mortgages held for sale			13,449						20,277
Loans and leases, net of unearned discount:
Commercial and agricultural			1,166,462						1,132,791
Auto and light truck			577,757						588,807
Medium and heavy duty truck			278,076						294,824
Aircraft			773,132						784,040
Construction equipment			718,307						705,451
Commercial real estate			930,757						908,177
Residential real estate and home equity			545,606						532,003
Consumer			139,417						139,434
Total loans and leases			5,129,514						5,085,527
Reserve for loan and lease losses			(120,798)						(111,254)
Net loans and leases			5,008,716						4,974,273
Equipment owned under operating leases, net			101,238						111,684
Net premises and equipment			52,431						52,219
Goodwill and intangible assets			83,964						83,971
Accrued income and other assets			267,438						227,990
Total assets			$	6,735,118					$	6,622,776
LIABILITIES
Deposits:
Noninterest-bearing demand			$	1,219,327					$	1,216,834
Interest-bearing deposits:
Interest-bearing demand			1,591,419						1,677,200
Savings			840,606						814,794
Time			1,624,559						1,648,498
Total interest-bearing deposits			4,056,584						4,140,492
Total deposits			5,275,911						5,357,326
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase			135,942						120,459
Other short-term borrowings			146,903						25,434
Total short-term borrowings			282,845						145,893
Long-term debt and mandatorily redeemable securities			81,877						71,639
Subordinated notes			58,764						58,764
Accrued expenses and other liabilities			158,419						140,518
Total liabilities			5,857,816						5,774,140
SHAREHOLDERS’ EQUITY
Preferred stock; no par value
Authorized 10,000,000 shares; none issued or outstanding			—						—
Common stock; no par value
Authorized 40,000,000 shares; issued 28,205,674 at March 31, 2020 and December 31, 2019			436,538						436,538
Retained earnings			472,911						463,269
Cost of common stock in treasury (2,670,290 shares at March 31, 2020 and 2,696,200 shares at December 31, 2019)			(76,203)						(76,702)
Accumulated other comprehensive income			17,651						5,172
Total shareholders’ equity			850,897						828,277
Noncontrolling interests			$	26,405					$	20,359
Total equity			$	877,302					$	848,636
Total liabilities and equity			$	6,735,118					$	6,622,776

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

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited - Dollars in thousands, except per share amounts)

															Three Months Ended March 31,
															2020						2019
Interest income:
Loans and leases															$	61,526					$	62,683
Investment securities, taxable															5,550						5,515
Investment securities, tax-exempt															264						385
Other															346						438
Total interest income															67,686						69,021
Interest expense:
Deposits															10,851						11,470
Short-term borrowings															254						931
Subordinated notes															884						928
Long-term debt and mandatorily redeemable securities															853						744
Total interest expense															12,842						14,073
Net interest income															54,844						54,948
Provision for loan and lease losses															11,353						4,918
Net interest income after provision for loan and lease losses															43,491						50,030
Noninterest income:
Trust and wealth advisory															4,848						4,858
Service charges on deposit accounts															2,605						2,498
Debit card															3,373						3,220
Mortgage banking															2,336						936
Insurance commissions															1,881						2,174
Equipment rental															6,630						7,982
Gains on investment securities available-for-sale															280						—
Other															2,669						2,456
Total noninterest income															24,622						24,124
Noninterest expense:
Salaries and employee benefits															24,401						23,495
Net occupancy															2,721						2,772
Furniture and equipment															6,407						6,024
Depreciation – leased equipment															5,427						6,524
Professional fees															1,442						1,598
Supplies and communication															1,634						1,493
FDIC and other insurance															288						645
Business development and marketing															1,359						949
Loan and lease collection and repossession															763						1,361
Other															2,093						343
Total noninterest expense															46,535						45,204
Income before income taxes															21,578						28,950
Income tax expense															5,160						6,754
Net income															16,418						22,196
Net (income) loss attributable to noncontrolling interests															(5)						—
Net income available to common shareholders															$	16,413					$	22,196
Per common share:
Basic net income per common share															$	0.64					$	0.86
Diluted net income per common share															$	0.64					$	0.86
Cash dividends															$	0.29					$	0.27
Basic weighted average common shares outstanding															25,523,356						25,759,186
Diluted weighted average common shares outstanding															25,523,356						25,759,186

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

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited - Dollars in thousands)

															Three Months Ended March 31,
															2020						2019
Net income															$	16,418					$	22,196
Other comprehensive income:
Unrealized appreciation of available-for-sale securities															16,717						9,573
Reclassification adjustment for realized gains included in net income															(280)						—
Income tax effect															(3,958)						(2,305)
Other comprehensive income, net of tax															12,479						7,268
Comprehensive income															$	28,897					$	29,464
Comprehensive (income) loss attributable to noncontrolling interests															(5)						—
Comprehensive income available to common shareholders															$	28,892					$	29,464

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

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited - Dollars in thousands, except per share amounts)

			Three Months Ended
			Preferred Stock						Common Stock						Retained Earnings						Cost of Common Stock in Treasury						Accumulated Other Comprehensive Income (Loss), Net						Total Shareholders’ Equity						Noncontrolling Interests						Total Equity
Balance at January 1, 2019			$	—					$	436,538					$	398,980					$	(62,760)					$	(10,676)					$	762,082					$	1,508					$	763,590
Cumulative-effect adjustment			—						—						(301)						—						—						(301)						—						(301)
Balance at January 1, 2019, adjusted			—						436,538						398,679						(62,760)						(10,676)						761,781						1,508						763,289
Net income			—						—						22,196						—						—						22,196						—						22,196
Other comprehensive income			—						—						—						—						7,268						7,268						—						7,268
Issuance of 38,365 common shares under stock based compensation awards			—						—						533						882						—						1,415						—						1,415
Cost of 154,160 shares of common stock acquired for treasury			—						—						—						(7,258)						—						(7,258)						—						(7,258)
Common stock dividend ($0.27 per share)			—						—						(6,980)						—						—						(6,980)						—						(6,980)
Contributions from noncontrolling interests			—						—						—						—						—						—						1,171						1,171
Balance at March 31, 2019			$	—					$	436,538					$	414,428					$	(69,136)					$	(3,408)					$	778,422					$	2,679					781,101
Balance at January 1, 2020			$	—					$	436,538					$	463,269					$	(76,702)					$	5,172					$	828,277					$	20,359					$	848,636
Net income			—						—						16,413						—						—						16,413						5						16,418
Other comprehensive income			—						—						—						—						12,479						12,479						—						12,479
Issuance of 25,910 common shares under stock based compensation awards			—						—						638						499						—						1,137						—						1,137
Cost of 0 shares of common stock acquired for treasury			—						—						—						—						—						—						—						—
Common stock dividend ($0.29 per share)			—						—						(7,409)						—						—						(7,409)						—						(7,409)
Contributions from noncontrolling interests			—						—						—						—						—						—						6,140						6,140
Distributions to noncontrolling interests			—						—						—						—						—						—						(99)						(99)
Balance at March 31, 2020			$	—					$	436,538					$	472,911					$	(76,203)					$	17,651					$	850,897					$	26,405					$	877,302

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

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited - Dollars in thousands)

			Three Months Ended March 31,
			2020						2019
Operating activities:
Net income			$	16,418					$	22,196
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses			11,353						4,918
Depreciation of premises and equipment			1,435						1,466
Depreciation of equipment owned and leased to others			5,427						6,524
Stock-based compensation			736						673
Amortization of investment securities premiums and accretion of discounts, net			717						824
Amortization of mortgage servicing rights			409						233
Amortization of right of use assets			704						785
Deferred income taxes			(2,941)						444
Gains on investment securities available-for-sale			(280)						—
Originations of loans held for sale, net of principal collected			(33,104)						(19,966)
Proceeds from the sales of loans held for sale			41,699						22,534
Net gain on sale of loans held for sale			(1,767)						(488)
Net gain on sale of other real estate and repossessions			(23)						(167)
Net gain on sale of premises and equipment			—						(1,288)
Change in interest receivable			(702)						(2,696)
Change in interest payable			(199)						2,427
Change in other assets			(826)						1,115
Change in other liabilities			(6,237)						(4,735)
Other			486						598
Net change in operating activities			33,305						35,397
Investing activities:
Proceeds from sales of investment securities available-for-sale			5,578						—
Proceeds from maturities and paydowns of investment securities available-for-sale			121,353						28,840
Purchases of investment securities available-for-sale			(127,517)						(33,072)
Net change in partnership investments			(12,904)						(3,171)
Loans sold or participated to others			2,863						2,862
Proceeds from principal payments on direct finance leases			9,682						15,238
Net change in loans and leases			(59,609)						(121,297)
Net change in equipment owned under operating leases			5,019						(3,678)
Purchases of premises and equipment			(1,659)						(2,821)
Proceeds from disposal of premises and equipment			12						3,426
Proceeds from sales of other real estate and repossessions			764						4,044
Net change in investing activities			(56,418)						(109,629)
Financing activities:
Net change in demand deposits and savings accounts			(57,476)						(95,505)
Net change in time deposits			(23,939)						97,274
Net change in short-term borrowings			136,952						56,044
Proceeds from issuance of long-term debt			10,000						—
Payments on long-term debt			(1,917)						(1,718)
Acquisition of treasury stock			—						(7,258)
Net change in noncontrolling interests			6,041						1,171
Cash dividends paid on common stock			(7,614)						(7,174)
Net change in financing activities			62,047						42,834
Net change in cash and cash equivalents			38,934						(31,398)
Cash and cash equivalents, beginning of year			83,365						99,079
Cash and cash equivalents, end of period			$	122,299					$	67,681
Supplemental Information:
Non-cash transactions:
Loans transferred to other real estate and repossessed assets			$	1,268					$	8,939
Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan			622						300
Right of use assets obtained in exchange for lease obligations			31						1,058

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

1ST SOURCE CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Accounting Policies

1st Source Corporation is a bank holding company headquartered in South Bend, Indiana that provides, through its subsidiaries (collectively referred to as “1st Source” or “the Company”), a broad array of financial products and services.

Basis of Presentation – The accompanying unaudited consolidated financial statements reflect all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income, changes in shareholders’ equity, and cash flows for the periods presented. These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been omitted.

The Notes to the Consolidated Financial Statements appearing in 1st Source Corporation’s Annual Report on Form 10-K (2019 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements. The Consolidated Statement of Financial Condition at December 31, 2019 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation.

Use of Estimates in the Preparation of Financial Statements – Financial statements prepared in accordance with GAAP require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates.

Loans and Leases – Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs and net of unearned income. Interest income is accrued as earned based on unpaid principal balances. Origination fees and direct loan and lease origination costs are deferred, and the net amount amortized to interest income over the estimated life of the related loan or lease. Loan commitment fees are deferred and amortized into other income over the commitment period.

Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, net of unamortized deferred lease origination fees and costs and unearned income. Interest income on direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment. Effective January 1, 2019, as part of the new leasing standard, only those costs incurred as a direct result of closing a lease transaction can be capitalized. All existing deferrals will continue to be amortized over the estimated life of the lease while all new incremental direct costs will be expensed immediately.

The accrual of interest on loans and leases is discontinued when a loan or lease becomes contractually delinquent for 90 days, or when an individual analysis of a borrower’s credit worthiness indicates a credit should be placed on nonperforming status, except for residential mortgage loans and consumer loans that are well secured and in the process of collection. Residential mortgage loans are placed on nonaccrual at the time the loan is placed in foreclosure. When interest accruals are discontinued, interest credited to income in the current year is reversed and interest accrued in the prior year is charged to the reserve for loan and lease losses. However, in some cases, the Company may elect to continue the accrual of interest when the net realizable value of collateral is sufficient to cover the principal and accrued interest. When a loan or lease is classified as nonaccrual and the future collectability of the recorded loan or lease balance is doubtful, collections on interest and principal are applied as a reduction to principal outstanding. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured, which is typically evidenced by a sustained repayment performance of at least six months.

A loan or lease is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. Interest on impaired loans and leases, which are not classified as nonaccrual, is recognized on the accrual basis. The Company evaluates loans and leases exceeding $100,000 for impairment and establishes a specific reserve as a component of the reserve for loan and lease losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan or lease and the recorded investment in the loan or lease exceeds its fair value.

Loans and leases that have been modified and economic concessions have been granted to borrowers who have experienced financial difficulties are considered a troubled debt restructuring (TDR) and, by definition, are deemed an impaired loan. These concessions typically result from the Company’s loss mitigation activities and may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

When the Company modifies loans and leases in a TDR, it evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or uses the current fair value of the collateral, less selling costs for collateral dependent loans. If the Company determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a reserve for loan and lease losses estimate or a charge-off to the reserve for loan and lease losses. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the reserve for loan and lease losses.

Note 2 — Recent Accounting Pronouncements

Reference Rate Reform: In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is implementing a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

Partnership Investments and Derivatives: In January 2020, the FASB issued ASU No. 2020-01 “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” These amendments, among other things, clarify that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is permitted, including early adoption in an interim period. An entity should apply ASU 2020-01 prospectively at the beginning of the interim period that includes the adoption date. The Company is assessing ASU 2020-01 and its impact on its accounting and disclosures.

Income Taxes: In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” These amendments remove specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intraperiod tax allocation; exceptions to accounting for basis differences where there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. It also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacts changes in tax laws in interim periods. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is assessing ASU 2019-12 and its impact on its accounting and disclosure.

Measurement of Credit Losses on Financial Instruments: In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments (CECL).” The provisions of ASU 2016-13 were issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the financial assets.

Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security.

The FASB issued additional ASUs containing clarifying guidance, transition relief provisions and minor updates to the original ASU. These include ASU 2018-19 (issued November 2018), ASU 2019-04 (issued April 2019), ASU 2019-05 (issued May 2019), ASU 2019-10 (issued November 2019), ASU 2019-11 (issued November 2019), ASU 2020-02 (issued February 2020) and ASU 2020-03 (issued March 2020). ASU 2016-13 and subsequent ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This amendment is required to be adopted using a modified retrospective approach with a cumulative-effect adjustment to beginning retained earnings, as of the beginning of the first reporting period in which the guidance is effective.

As previously disclosed, the Company formed a cross-functional team to work through its implementation plan. The Company’s cross-functional team is substantially complete with the assessment and documentation of processes, internal controls, data and model validation testing, parallel testing, qualitative factors and forecast periods as well as model development. The Company implemented a third-party software solution to assist in the application of the new standard including portfolio segmentation according to shared risk characteristics and modeling methodologies. The Company had finalized the formal review and approval process and the results of its CECL estimate as of year-end but has elected to delay its adoption of ASU 2016-13, as provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, until the date on which the national emergency related to the COVID-19 outbreak is terminated or December 31, 2020, whichever occurs first. Upon adoption of ASU 2016-13, the Company will recognize a one-time cumulative effect adjustment through retained earnings of $2.58 million to increase its allowance for credit losses and $0.78 million to increase the unfunded loan commitment liability as of January 1, 2020. As of March 31, 2020, the Company estimates an additional increase to its allowance for credit losses of between $2 million and $10 million which will be recognized through earnings after adoption.

Upon adopting ASU 2016-13, the Company will not record an allowance as of January 1, 2020 with respect to its available-for-sale debt securities as the majority of these securities are government agency-backed securities for which the risk of loss is minimal. The adoption of ASU 2016-13 is not expected to have a significant impact on the Company’s regulatory capital ratios.

Note 3 — Investment Securities Available-For-Sale

The following table shows investment securities available-for-sale.

At March 31, 2020 and December 31, 2019, the residential mortgage-backed securities held by the Company consisted primarily of GNMA, FNMA and FHLMC pass-through certificates which are guaranteed by those respective agencies of the United States government (Government Sponsored Enterprise, GSEs).

The following table shows the contractual maturities of investments in debt securities available-for-sale at March 31, 2020. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

The following table summarizes gross unrealized losses and fair value by investment category and age. At March 31, 2020, the Company’s available-for-sale securities portfolio consisted of 609 securities, 70 of which were in an unrealized loss position.

The initial indication of potential other-than-temporary-impairment (OTTI) for debt securities is a decline in fair value below amortized cost. Quarterly, the impaired securities are analyzed on a qualitative and quantitative basis in determining OTTI. Declines in the fair value of debt securities available-for-sale below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. In estimating OTTI losses, the Company considers among other things, (i) the length of time and the extent to which fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.

At March 31, 2020, the Company does not have the intent to sell any of the debt securities available-for-sale in the table above and believes that it is more likely than not, that it will not have to sell any such securities before an anticipated recovery of cost. Primarily the unrealized losses on debt securities are due to increases in market rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover on all debt securities as they approach their maturity date or re-pricing date or if market yields for such investments decline. The Company does not believe any of the securities are impaired due to reasons of credit quality.

The following table shows the gross realized gains and losses from the available-for-sale debt securities portfolio. Realized gains and losses of all securities are computed using the specific identification cost basis.

At March 31, 2020 and December 31, 2019, investment securities available-for-sale with carrying values of $336.38 million and $281.38 million, respectively, were pledged as collateral for security repurchase agreements and for other purposes.

Note 4 — Loan and Lease Financings

The Company evaluates loans and leases for credit quality at least annually but more frequently if certain circumstances occur (such as material new information which becomes available and indicates a potential change in credit risk). The Company uses two methods to assess credit risk: loan or lease credit quality grades and credit risk classifications. The purpose of the loan or lease credit quality grade is to document the degree of risk associated with individual credits as well as inform management of the degree of risk in the portfolio taken as a whole. Credit risk classifications are used to categorize loans by degree of risk and to designate individual or committee approval authorities for higher risk credits at the time of origination. Credit risk classifications include categories for: Acceptable, Marginal, Special Attention, Special Risk, Restricted by Policy, Regulated and Prohibited by Law.

All loans and leases, except residential real estate and home equity loans and consumer loans, are assigned credit quality grades on a scale from 1 to 12 with grade 1 representing superior credit quality. The criteria used to assign grades to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Company’s safety and soundness. Loans or leases graded 7 or weaker are considered “special attention” credits and, as such, relationships in excess of $100,000 are reviewed quarterly as part of management’s evaluation of the appropriateness of the reserve for loan and lease losses. Grade 7 credits are defined as “watch” and contain greater than average credit risk and are monitored to limit the exposure to increased risk; grade 8 credits are “special mention” and, following regulatory guidelines, are defined as having potential weaknesses that deserve management’s close attention. Credits that exhibit well-defined weaknesses and a distinct possibility of loss are considered “classified” and are graded 9 through 12 corresponding to the regulatory definitions of “substandard” (grades 9 and 10) and the more severe “doubtful” (grade 11) and “loss” (grade 12).

The following table shows the credit quality grades of the recorded investment in loans and leases, segregated by class.

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

The following table shows the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.

The following table shows impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.