Edgar Filing: INDEPENDENT BANK CORP

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

Commission File Number: 1-9047

Independent Bank Corp.

(Exact name of registrant as specified in its charter)

Massachusetts

04-2870273

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Office Address: 2036 Washington Street, Hanover Massachusetts 02339

Mailing Address: 288 Union Street, Rockland, Massachusetts 02370

(Address of principal executive offices, including zip code)

(781) 878-6100

(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.

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

As of August 1, 2012, there were 21,654,707 shares of the issuer’s common stock outstanding, par value $0.01 per share.

INDEX


	PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - June 30, 2012 and December 31, 2011		4
Consolidated Statements of Income - Three and six months ended June 30, 2012 and 2011		5
Consolidated Statements of Other Comprehensive Income Three and six months ended June 30, 2012 and 2011		6
Consolidated Statements of Stockholders’ Equity - Six months ended June 30, 2012 and 2011		7
Consolidated Statements of Cash Flows - Six months ended June 30, 2012 and 2011		8
Notes to Consolidated Financial Statements - June 30, 2012

Note 1 - Basis of Presentation		9
Note 2 - Recent Accounting Standards		9
Note 3 - Securities		11
Note 4 - Loans, Allowance for Loan Losses, and Credit Quality		17
Note 5 - Earnings Per Share		32
Note 6 - Stock Based Compensation		32
Note 7 - Derivative and Hedging Activities		33
Note 8 - Fair Value Measurements		40
Note 9 - Comprehensive Income/(Loss)		49

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		52
Table 1 - Nonperforming Assets/Loans		68
Table 2 - Troubled Debt Restructurings		69
Table 3 - Interest Income Recognized/Collected on Nonaccrual Loans And Troubled Debt Restructurings		69
Table 4 - Potential Problem Commercial Loans		70
Table 5 - Summary of Changes in the Allowance for Loan Losses		72
Table 6 - Summary of Allocation of the Allowance for Loan Losses		73
Table 7 - Borrowings		75
Table 8 - Company and Bank’s Capital Amounts and Ratios		76
Table 9 - Closed Residential Real Estate Loans		77
Table 10 - Mortgage Servicing Asset		78
Table 11 - Summary of Results of Operations		78
Table 12 - Average Balance, Interest Earned/Paid & Average Yields – Three Months Ended		80
Table 13 – Average Balance, Interest Earned/Paid & Average Yields – Six Months Ended		81
Table 14 - Volume Rate		83
Table 15 - Noninterest Income – Three Months Ended		85
Table 16 - Noninterest Income – Six Months Ended		86
Table 17 - Noninterest Expense – Three Months Ended		87
Table 18 - Noninterest Expense – Six Months Ended		88
Table 19 - Tax Provision and Applicable Tax Rates		89
Table 20 - New Markets Tax Credit Recognition Schedule		90
Table 21 - Interest Rate Sensitivity		93
Table 22 - Sources of Liquidity		95


Item 3. Quantitative and Qualitative Disclosures About Market Risk			96
Item 4. Controls and Procedures			96

PART II. OTHER INFORMATION			96
Item 1. Legal Proceedings			96
Item 1A. Risk Factors			97
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			97
Item 3. Defaults Upon Senior Securities			97
Item 4. Mine Safety Disclosures			97
Item 5. Other Information			97
Item 6. Exhibits			97

Signatures			102
Exhibit 31.1 – Certification 302			1
Exhibit 31.2 – Certification 302			1
Exhibit 32.1 – Certification 906			1
Exhibit 32.2 – Certification 906			2

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

INDEPENDENT BANK CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited—Dollars in Thousands)


	June 30,			December 31,
	2012			2011
ASSETS
CASH AND DUE FROM BANKS	$	65,826		$	58,301
INTEREST EARNING DEPOSITS WITH BANKS		121,029			179,203
FEDERAL FUNDS SOLD		1,524			—
SECURITIES:
Trading Securities		—			8,240
Securities Available for Sale		338,331			305,332
Securities Held to Maturity (fair value $196,199 and $211,494)		188,450			204,956

TOTAL SECURITIES		526,781			518,528

LOANS HELD FOR SALE (at fair value)		22,310			20,500
LOANS:
Commercial and Industrial		625,695			575,716
Commercial Real Estate		1,912,563			1,847,654
Commercial Construction		149,990			128,904
Small Business		79,738			78,509
Residential Real Estate		389,053			416,570
Residential Construction		14,960			9,631
Home Equity—1st Position		466,136			381,766
Home Equity—2nd Position		310,717			314,297
Consumer—Other		31,937			41,343

TOTAL LOANS		3,980,789			3,794,390
Less: Allowance for Loan Losses		(48,403	)		(48,260	)

NET LOANS		3,932,386			3,746,130

FEDERAL HOME LOAN BANK STOCK		33,564			35,854
BANK PREMISES AND EQUIPMENT, NET		49,384			48,252
GOODWILL		130,074			130,074
IDENTIFIABLE INTANGIBLE ASSETS		9,850			10,648
CASH SURRENDER VALUE OF LIFE INSURANCE POLICIES		87,525			86,137
OTHER REAL ESTATE OWNED & OTHER FORECLOSED ASSETS		11,275			6,924
OTHER ASSETS		133,036			129,689

TOTAL ASSETS	$	5,124,564		$	4,970,240

LIABILITIES AND STOCKHOLDERS’ EQUITY
DEPOSITS:
Demand Deposits	$	1,070,279		$	992,418
Savings and Interest Checking Accounts		1,560,523			1,473,812
Money Market		807,796			780,437
Time Certificates of Deposit Over $100,000		249,293			225,099
Other Time Certificates of Deposits		390,242			405,063

TOTAL DEPOSITS		4,078,133			3,876,829

BORROWINGS:
Federal Home Loan Bank and Other Borrowings		189,522			229,701
Wholesale Repurchase Agreements		50,000			50,000
Customer Repurchase Agreements		144,838			166,128
Junior Subordinated Debentures		61,857			61,857
Subordinated Debentures		30,000			30,000

TOTAL BORROWINGS		476,217			537,686

OTHER LIABILITIES		86,622			86,668

TOTAL LIABILITIES		4,640,972			4,501,183

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred Stock, $.01 par value. Authorized: 1,000,000 Shares, Outstanding: None		—			—
Common Stock, $.01 par value. Authorized: 75,000,000
Issued and Outstanding: 21,627,710 Shares at June 30, 2012 and 21,499,768 Shares at December 31, 2011 (includes 263,124 and 235,540 shares of unvested participating restricted stock awards, respectively)		214			213
Shares Held in Rabbi Trust at Cost 176,981
Shares at June 30, 2012 and 180,058 Shares at December 31, 2011		(3,078	)		(2,980	)
Deferred Compensation Obligation		3,078			2,980
Additional Paid in Capital		236,279			233,878
Retained Earnings		251,429			239,452
Accumulated Other Comprehensive Loss, Net of Tax		(4,330	)		(4,486	)

TOTAL STOCKHOLDERS’ EQUITY		483,592			469,057

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,124,564		$	4,970,240

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

INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited—Dollars in Thousands, Except Per Share Data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
INTEREST INCOME:
Interest on Loans	$	43,813		$	43,938		$	86,891		$	87,154
Taxable Interest and Dividends on Securities		4,415			5,357			8,942			10,850
Nontaxable Interest and Dividends on Securities		23			95			52			208
Interest on Loans Held for Sale		156			70			286			189
Interest on Federal Funds Sold		19			14			51			31

TOTAL INTEREST AND DIVIDEND INCOME		48,426			49,474			96,222			98,432

INTEREST EXPENSE:
Interest on Deposits		2,687			3,544			5,426			7,029
Interest on Borrowings		3,111			3,854			6,316			7,854

TOTAL INTEREST EXPENSE		5,798			7,398			11,742			14,883

NET INTEREST INCOME		42,628			42,076			84,480			83,549

PROVISION FOR LOAN LOSSES		8,500			3,482			10,100			5,682

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		34,128			38,594			74,380			77,867

NONINTEREST INCOME:
Service Charges on Deposit Accounts		3,923			4,192			7,812			8,151
Interchange and ATM Fees		2,399			1,974			4,767			3,676
Investment Management		3,827			3,603			7,390			6,819
Mortgage Banking Income		1,463			683			2,793			1,730
Increase in Cash Surrender Value of Life Insurance Policies		741			860			1,454			1,566
Net Gain on Sales of Securities		—			723			—			723
Gross Change on OTTI Securities		(106	)		170			168			419
Less: Portion of OTTI Losses Recognized in OCI		30			(306	)		(244	)		(595	)

Net Impairment Losses Recognized in Earnings on Securities		(76	)		(136	)		(76	)		(176	)
Other Noninterest Income		2,706			1,575			4,753			3,583

TOTAL NONINTEREST INCOME		14,983			13,474			28,893			26,072

NONINTEREST EXPENSES:
Salaries and Employee Benefits		19,775			19,762			41,211			40,014
Occupancy and Equipment Expenses		4,234			4,263			8,534			8,838
Advertising Expense		1,473			1,606			2,210			2,544
Data Processing & Facilities Management		1,099			1,038			2,274			2,676
FDIC Assessment		830			778			1,579			2,069
Merger and Acquisition Expenses		672			—			672			—
Telecommunications		666			534			1,284			1,061
Consulting Expense		583			512			1,209			1,029
Legal Fees		447			647			1,095			1,066
Foreclosure Expenses		124			594			323			1,021
Other Non-Interest Expenses		7,096			7,122			13,965			13,020

TOTAL NONINTEREST EXPENSES		36,999			36,856			74,356			73,338

INCOME BEFORE INCOME TAXES		12,112			15,212			28,917			30,601
PROVISION FOR INCOME TAXES		3,238			4,092			7,860			8,293

NET INCOME	$	8,874		$	11,120		$	21,057		$	22,308

BASIC EARNINGS PER SHARE	$	0.41		$	0.52		$	0.98		$	1.04

DILUTED EARNINGS PER SHARE	$	0.41		$	0.52		$	0.97		$	1.04

WEIGHTED AVERAGE COMMON SHARES (BASIC)		21,623,827			21,441,864			21,592,416			21,370,457
COMMON SHARE EQUIVALENTS		20,377			39,159			22,251			43,775

WEIGHTED AVERAGE COMMON SHARES (DILUTED)		21,644,204			21,481,023			21,614,667			21,414,232

CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.21		$	0.19		$	0.42		$	0.38

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

INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited—Dollars in Thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
NET INCOME	$	8,874		$	11,120		$	21,057		$	22,308
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

UNREALIZED GAINS (LOSSES) ON SECURITIES
Change in Fair Value of Securities Available for Sale		(139	)		1,436			(300	)		772
Less: Net Security Losses (Gains) Reclassified into Earnings		45			(357	)		45			(333	)

Net Change in Fair Value of Securities Available for Sale		(94	)		1,079			(255	)		439
UNREALIZED GAINS (LOSSES) ON CASH FLOW HEDGES
Change in Fair Value of Cash Flow Hedges		(1,227	)		(2,711	)		(1,196	)		(2,407	)
Less: Net Cash Flow Hedge Losses Reclassified into Earnings		796			807			1,561			1,497

Net Change in Fair Value of Cash Flow Hedges		(431	)		(1,904	)		365			(910	)
AMORTIZATION OF CERTAIN COSTS INCLUDED IN
NET PERIODIC RETIREMENT COSTS		23			91			46			252

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		(502	)		(734	)		156			(219	)

TOTAL COMPREHENSIVE INCOME	$	8,372		$	10,386		$	21,213		$	22,089

The accompanying notes are an integral part of these consolidated financials statements

INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited—Dollars in Thousands, Except Per Share Data)


	Common Stock Outstanding		Common Stock		Value of Shares Held in Rabbi Trust at Cost			Deferred Compensation Obligation		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss)Income			TOTAL
BALANCE DECEMBER 31, 2011		21,499,768	$	213	$	(2,980	)	$	2,980	$	233,878		$	239,452		$	(4,486	)	$	469,057

NET INCOME		—		—		—			—		—			21,057			—			21,057
OTHER COMPREHENSIVE INCOME		—		—		—			—		—			—			156			156
COMMON DIVIDEND DECLARED ($0.42 PER SHARE)		—		—		—			—		—			(9,080	)		—			(9,080	)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS		21,658		—		—			—		459			—			—			459
TAX BENEFIT RELATED TO EQUITY AWARD ACTIVITY		—		—		—			—		59			—			—			59
EQUITY BASED COMPENSATION		—		—		—			—		1,551			—			—			1,551
RESTRICTED STOCK AWARDS GRANTED, NET OF AWARDS SURRENDERED		85,254		1		—			—		(345	)		—			—			(344	)
SHARES ISSUED UNDER DIRECT STOCK PURCHASE PLAN		21,030		—		—			—		591			—			—			591
DEFERRED COMPENSATION OBLIGATION		—		—		(98	)		98		—			—			—			—
TAX BENEFIT RELATED TO DEFERRED COMPENSATION DISTRIBUTIONS		—		—		—			—		86			—			—			86

BALANCE JUNE 30, 2012		21,627,710	$	214	$	(3,078	)	$	3,078	$	236,279		$	251,429		$	(4,330	)	$	483,592


BALANCE DECEMBER 31, 2010		21,220,801	$	210	$	(2,738	)	$	2,738	$	226,708		$	210,320		$	(766	)	$	436,472


NET INCOME		—		—		—			—		—			22,308			—			22,308
OTHER COMPREHENSIVE LOSS		—		—		—			—		—			—			(219	)		(219	)
COMMON DIVIDEND DECLARED ($0.38 PER SHARE)		—		—		—			—		—			(8,140	)		—			(8,140	)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS		162,875		2		—			—		3,699			—			—			3,701
TAX BENEFIT RELATED TO EQUITY AWARD ACTIVITY		—		—		—			—		253			—			—			253
EQUITY BASED COMPENSATION		—		—		—			—		1,352			—			—			1,352
RESTRICTED STOCK AWARDS GRANTED, NET OF AWARDS SURRENDERED		60,495		—		—			—		(361	)		—			—			(361	)
SHARES ISSUED UNDER DIRECT STOCK PURCHASE PLAN		10,018		—		—			—		262			—			—			262
DEFERRED COMPENSATION OBLIGATION		—		—		(119	)		119		—			—			—			—
TAX BENEFIT RELATED TO DEFERRED COMPENSATION DISTIBUTIONS		—		—		—			—		74			—			—			74

BALANCE JUNE 30, 2011		21,454,189	$	212	$	(2,857	)	$	2,857	$	231,987		$	224,488		$	(985	)	$	455,702

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

INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited—Dollars In Thousands)


	Six Months Ended
				June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	21,057		$	22,308
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and Amortization		5,346			4,896
Provision for Loan Losses		10,100			5,682
Deferred Income Tax Benefit		(19	)		(21	)
Net Gain on Sale of Investments		—			(723	)
Loss on Write-Down of Investments in Securities Available for Sale		76			176
(Gain)Loss on Sale of Fixed Assets		(16	)		5
Loss on Sale of Other Real Estate Owned and Foreclosed Assets		290			953
Gain Realized from Early Termination of Hedging Relationship		(22	)		—
Realized Gain on Sale Leaseback Transaction		(517	)		(517	)
Stock Based Compensation		1,551			1,352
Increase in Cash Surrender Value of Life Insurance Policies		(1,451	)		(1,551	)
Change in Fair Value on Loans Held for Sale		(112	)		(647	)
Net Change In:
Trading Assets		(265	)		(942	)
Loans Held for Sale		(1,698	)		16,309
Other Assets		(5,034	)		(6,428	)
Other Liabilities		831			(1,789	)

TOTAL ADJUSTMENTS		9,060			16,755

NET CASH PROVIDED BY OPERATING ACTIVITIES		30,117			39,063

CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from Sales of Securities Available For Sale		—			14,639
Proceeds from Maturities and Principal Repayments of Securities Available For Sale		46,434			58,018
Purchase of Securities Available For Sale		(71,699	)		—
Proceeds from Maturities and Principal Repayments of Securities Held to Maturity		25,944			15,130
Purchase of Securities Held to Maturity		(9,975	)		(45,946	)
Redemption of Federal Home Loan Bank Stock		2,290			—
Proceeds from (Purchase of) Life Insurance Policies		63			(101	)
Net Increase in Loans		(202,505	)		(180,011	)
Cash Used In Business Combinations		—			(457	)
Purchase of Bank Premises and Equipment		(3,889	)		(3,214	)
Proceeds from the Sale of Bank Premises and Equipment		30			—
Proceeds Resulting from Early Termination of Hedging Relationship		22			—
Proceeds from the Sale of Other Real Estate Owned and Foreclosed Assets		1,801			3,573

NET CASH USED IN INVESTING ACTIVITIES		(211,484	)		(138,369	)

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net Increase(Decrease) in Time Deposits		9,373			(22,173	)
Net Increase in Other Deposits		191,931			180,952
Net (Decrease) Increase in Wholesale and Customer Repurchase Agreements		(21,290	)		15,047
Net (Decrease) Increase in Short Term Federal Home Loan Bank Advances		(40,000	)		856
Net Decrease in Long Term Federal Home Loan Bank Advances		—			(45,000	)
Net Decrease in Treasury Tax & Loan Notes		—			(409	)
Proceeds from Exercise of Stock Options		459			3,701
Tax Benefit from Stock Option Exercises		59			253
Restricted Shares Surrendered		(344	)		(361	)
Tax Benefit from Deferred Compensation Distribution		86			74
Shares Issued Under Direct Stock Purchase Plan		591			262
Common Dividends Paid		(8,623	)		(7,882	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		132,242			125,320

NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS		(49,125	)		26,014

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		237,504			161,282

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	188,379		$	187,296

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of Loans to Foreclosed Assets	$	5,136		$	4,233
Transfer of Securities from Trading to Available for Sale	$	8,505		$	—

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

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company, incorporated in 1985. The Company is the sole stockholder of Rockland Trust Company (“Rockland Trust” or the “Bank”), a Massachusetts trust company chartered in 1907.

All material intercompany balances and transactions have been eliminated in consolidation. Certain previously reported amounts may have been reclassified to conform to the current year’s presentation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Operating results for the quarter ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other interim period.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission.

NOTE 2 – RECENT ACCOUNTING STANDARDS

FASB ASC Topic No. 220 “Comprehensive Income” Update No. 2011-05 and Update no. 2011-12. Update No. 2011-05 was issued in June 2011, and provided amendments to Topic No. 220, “Comprehensive Income”, stating that an entity has the option to present total comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The entity is no longer permitted to present the components of other comprehensive income within the statement of stockholders’ equity. Update 2011-12 deferred the component of Update 2011-05 which required entities to present separately on the income statement, reclassification adjustments between other comprehensive income and

net income. The amendments in these updates should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption of this standard did not have an impact on the Company’s consolidated financial position.

FASB ASC Topic No. 820 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in United States Generally Accepted Accounting Principles (“U.S. GAAP”) and International Financial Report Standards (“IFRS”)” Update No. 2011-04. Issued in May 2011, the amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. This update does require additional disclosures pertaining to transfers between Level 1 and Level 2 investments, sensitivity analysis on Level 3 investments, and additional categorization of disclosed fair value amounts. The amendments in this update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. The adoption of this standard did not have an impact on the Company’s consolidated financial position.

NOTE 3 – SECURITIES

The following table presents a summary of the amortized cost, gross unrealized holding gains and losses, other-than-temporary impairment recorded in other comprehensive income and fair value of securities available for sale and securities held to maturity for the periods below:


	June 30, 2012												December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Unrealized Losses Other			Other-Than- Temporary Impairment			Fair Value		Amortized Cost		Gross Unrealized Gains		Unrealized Losses Other			Other-Than- Temporary Impairment			Fair Value
	(Dollars In Thousands)
AVAILABLE FOR SALE SECURITIES:
U.S. Government Agency Securities	$	20,057	$	394	$	—		$	—		$	20,451	$	—	$	—	$	—		$	—		$	—
Agency Mortgage-Backed Securities		223,851		14,621		—			—			238,472		222,349		16,042		—			—			238,391
Agency Collateralized Mortgage Obligations		56,566		639		—			—			57,205		52,927		874		—			—			53,801
Private Mortgage-Backed Securities		4,612		—		—			127			4,739		6,215		—		—			(105	)		6,110
Single Issuer Trust Preferred Securities Issued by Banks		5,000		8		—			—			5,008		5,000		—		(790	)		—			4,210
Pooled Trust Preferred Securities Issued by Banks and Insurers		8,485		—		(2,577	)		(3,154	)		2,754		8,505		—		(2,518	)		(3,167	)		2,820
Marketable Equity Securities		9,780		17		(95	)		—			9,702		—		—		—			—			—

TOTAL AVAILABLE FOR SALE SECURITIES	$	328,351	$	15,679	$	(2,672	)	$	(3,027	)	$	338,331	$	294,996	$	16,916	$	(3,308	)	$	(3,272	)	$	305,332

HELD TO MATURITY SECURITIES:
U.S. Treasury Securities	$	1,014	$	124	$	—		$	—		$	1,138	$	1,014	$	103	$	—		$	—		$	1,117
Agency Mortgage-Backed Securities		91,385		4,888		—			—			96,273		109,553		4,406		—			—			113,959
Agency Collateralized Mortgage Obligations		81,147		2,567		—			—			83,714		77,804		2,494		—			—			80,298
State, County, and Municipal Securities		1,939		14		—			—			1,953		3,576		34		—			—			3,610
Single Issuer Trust Preferred Securities Issued by Banks		7,957		18		(38	)		—			7,937		8,000		15		(669	)		—			7,346
Corporate Debt Securities		5,008		176		—			—			5,184		5,009		155		—			—			5,164

TOTAL HELD TO MATURITY SECURITIES	$	188,450	$	7,787	$	(38	)	$	—		$	196,199	$	204,956	$	7,207	$	(669	)	$	—		$	211,494

TOTAL	$	516,801	$	23,466	$	(2,710	)	$	(3,027	)	$	534,530	$	499,952	$	24,123	$	(3,977	)	$	(3,272	)	$	516,826

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The following table shows the gross gains realized on available for sale securities for the periods indicated:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
	(Dollars in Thousands)
GROSS GAINS REALIZED ON AVAILABLE FOR SALE SECURITIES	$	—	$	723	$	—	$	723

The actual maturities of certain securities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. A schedule of the contractual maturities of securities available for sale and securities held to maturity as of June 30, 2012 is presented below:


	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(Dollars in Thousands)
DUE IN ONE YEAR OR LESS	$	10	$	11	$	—	$	—
DUE AFTER ONE YEAR TO FIVE YEARS		2,015		2,154		7,247		7,518
DUE AFTER FIVE TO TEN YEARS		71,487		75,389		1,658		1,785
DUE AFTER TEN YEARS		245,059		251,075		179,545		186,896

TOTAL DEBT SECURITIES	$	318,571	$	328,629	$	188,450	$	196,199

MARKETABLE EQUITY SECURITIES	$	9,780	$	9,702	$	—	$	—

TOTAL	$	328,351	$	338,331	$	188,450	$	196,199

Inclusive in the table above is $11.3 million and $13.0 million, respectively, of callable securities in the Company’s investment portfolio at June 30, 2012 and December 31, 2011.

At June 30, 2012 and December 31, 2011 investment securities carried at $369.8 million and $389.7 million, respectively, were pledged to secure public deposits, assets sold under repurchase agreements, letters of credit, and for other purposes.

At June 30, 2012 and December 31, 2011, the Company had no investments in obligations of individual states, counties, or municipalities, which exceeded 10% of stockholders’ equity.

Other-Than-Temporary Impairment

The Company continually reviews investment securities for the existence of OTTI, taking into consideration current market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, the credit worthiness of the obligor of the security, volatility of earnings, current analysts’ evaluations, the Company’s intent to sell the security, or whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery, as well as other qualitative factors. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.

The following tables show the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position, which the Company has not deemed to be OTTI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:


	June 30, 2012
			Less than 12 months					12 months or longer					Total
	# of holdings		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars In Thousands)
SINGLE ISSUER TRUST PREFERRED SECURITIES ISSUED BY BANKS AND INSURERS		1	$	—	$	—		$	5,000	$	(38	)	$	5,000	$	(38	)
POOLED TRUST PREFERRED SECURITIES ISSUED BY BANKS AND INSURERS		2		—		—			2,039		(2,577	)		2,039		(2,577	)
MARKETABLE EQUITY SECURITIES		33		7,111		(95	)		—		—			7,111		(95	)

TOTAL TEMPORARILY IMPAIRED SECURITIES		36	$	7,111	$	(95	)	$	7,039	$	(2,615	)	$	14,150	$	(2,710	)


	December 31, 2011
			Less than 12 months				12 months or longer					Total
	# of holdings		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars In Thousands)
SINGLE ISSUER TRUST PREFERRED SECURITIES ISSUED BY BANKS AND INSURERS		2	$	—	$	—	$	8,617	$	(1,459	)	$	8,617	$	(1,459	)
POOLED TRUST PREFERRED SECURITIES ISSUED BY BANKS AND INSURERS		2		—		—		2,117		(2,518	)		2,117		(2,518	)

TOTAL TEMPORARILY IMPAIRED SECURITIES		4	$	—	$	—	$	10,734	$	(3,977	)	$	10,734	$	(3,977	)

The Company does not intend to sell these investments and has determined based upon available evidence that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost basis. As a result, the Company does not consider these investments to be OTTI. The Company made this determination by reviewing various qualitative and quantitative factors regarding each investment category, such as current market conditions, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, and current analysts’ evaluations.

As a result of the Company’s review of these qualitative and quantitative factors, the causes of the impairments listed in the table above by category are as follows at June 30, 2012:

•

Single Issuer Trust Preferred Securities: This portfolio currently consists of one security, which is below investment grade. The unrealized loss on this security is attributable to the illiquid nature of the trust preferred market in the current economic environment. Management evaluates various financial metrics for this issuer, including regulatory capital ratios.

•

Pooled Trust Preferred Securities: This portfolio consists of two below investment grade securities of which one is performing while the other is deferring payments as contractually allowed. The unrealized loss on these securities is attributable to the illiquid nature of the trust preferred market and the significant risk premiums required in the current economic environment. Management evaluates collateral credit and instrument structure, including current and expected deferral and default rates and timing. In addition, discount rates are determined by evaluating comparable spreads observed currently in the market for similar instruments.

•

Marketable Equity Securities: This portfolio consists of mutual funds and other equity investments. During some periods, the mutual funds in the Company’s investment portfolio may have unrealized losses resulting from market fluctuations as well as the risk premium associated with that particular asset class. For example, emerging market equities tend to trade at a higher risk premium than U.S. government bonds and thus, will fluctuate to a greater degree on both the upside and the downside. In the context of a well-diversified portfolio, however, the correlation amongst the various asset classes represented by the funds serves to minimize downside risk. The Company evaluates each mutual fund in the portfolio regularly and measures performance on both an absolute and relative basis. A reasonable recovery period for positions with an unrealized loss is based on management’s assessment of general economic data, trends within a particular asset class, valuations, earnings forecasts and bond durations.

Management monitors the following issuances closely for impairment due to the history of OTTI losses recorded within these classes of securities. Management has determined that these securities possess characteristics which in the current economic environment could lead to further credit related OTTI charges. The following tables summarize pertinent information as of June 30, 2012, that was considered by management in determining if OTTI existed:


	Class		Amortized Cost (1)		Gross Unrealized Gain/(Loss)			Non-Credit Related Other- Than-Temporary Impairment			Fair Value		Total Cumulative Credit Related Other-Than- Temporary Impairment			Total Cumulative Other-Than- Temporary impairment to Date
	(Dollars in Thousands)
POOLED TRUST PREFERRED SECURITIES:
Pooled Trust Preferred Security A		C1	$	1,283	$	—		$	(1,088	)	$	195	$	(3,676	)	$	(4,764	)
Pooled Trust Preferred Security B		D		—		—			—			—		(3,481	)		(3,481	)
Pooled Trust Preferred Security C		C1		506		—			(412	)		94		(482	)		(894	)
Pooled Trust Preferred Security D		D		—		—			—			—		(990	)		(990	)
Pooled Trust Preferred Security E		C1		2,080		—			(1,654	)		426		(1,368	)		(3,022	)
Pooled Trust Preferred Security F		B		1,892		(1,348	)		—			544		—			—
Pooled Trust Preferred Security G		A1		2,724		(1,229	)		—			1,495		—			—

TOTAL POOLED TRUST PREFERRED SECURITIES			$	8,485	$	(2,577	)	$	(3,154	)	$	2,754	$	(9,997	)	$	(13,151	)

PRIVATE MORTGAGE BACKED SECURITIES:
Private Mortgage-Backed Securities—One		2A1	$	2,767	$	—		$	67		$	2,834	$	(765	)	$	(698	)
Private Mortgage-Backed Securities—Two		A19		1,845		—			60			1,905		(85	)		(25	)

TOTAL PRIVATE MORTGAGE-BACKED SECURITIES			$	4,612	$	—		$	127		$	4,739	$	(850	)	$	(723	)

TOTAL			$	13,097	$	(2,577	)	$	(3,027	)	$	7,493	$	(10,847	)	$	(13,874	)

(1)	The amortized cost reflects previously recorded OTTI charges recognized in earnings for the applicable securities.


	Class	Number of Performing Banks and Insurance Cos. in Issuances (Unique)	Current Deferrals/ Defaults/Losses (As a % of Original Collateral)	Total Projected Defaults/Losses (as a % of Performing Collateral)	Excess Subordination (After Taking into Account Best Estimate of Future Deferrals/ Defaults/Losses) (1)	Lowest credit Ratings to date (2)
POOLED TRUST PREFERRED SECURITIES:
Trust Preferred Security A	C1	57	32.96%	20.76%	0.00%	C (Fitch)
Trust Preferred Security B	D	57	32.96%	20.76%	0.00%	C (Fitch)
Trust Preferred Security C	C1	48	30.90%	20.87%	0.00%	C (Fitch)
Trust Preferred Security D	D	48	30.90%	20.87%	0.00%	C (Fitch)
Trust Preferred Security E	C1	48	27.54%	15.37%	0.92%	C (Fitch)
Trust Preferred Security F	B	33	28.14%	24.88%	28.46%	CC (Fitch)
Trust Preferred Security G	A1	33	28.14%	24.88%	53.29%	CCC+ (S&P)
PRIVATE MORTGAGE BACKED SECURITIES:
Private Mortgage-Backed Securities—One	2A1	N/A	4.50%	13.44%	0.00%	C (Fitch)
Private Mortgage-Backed Securities—Two	A19	N/A	3.15%	6.22%	0.00%	CC (Fitch)

(1)	Excess subordination represents the additional default/losses in excess of both current and projected defaults/losses that the security can absorb before the security experiences any credit impairment.

(2)	The Company reviewed credit ratings provided by S&P, Moody’s and Fitch in its evaluation of issuers.

Per review of the factors outlined above, seven of the securities shown in the table above were deemed to be OTTI. The remaining securities were not deemed to be OTTI as the Company does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost basis.

The following table shows the cumulative credit related component of OTTI for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(Dollars in Thousands)
BALANCE AT BEGINNING OF PERIOD	$	(10,771	)	$	(10,568	)	$	(10,771	)	$	(10,528	)
ADD:
Incurred on Securities not Previously Impaired		—			—			—			—
Incurred on Securities Previously Impaired		(76	)		(136	)		(76	)		(176	)
LESS:
Realized Gain/Loss on Sale of Securities		—			—			—			—
Reclassification Due to Changes in Company’s Intent		—			—			—			—
Increases in Cash Flow Expected to be Collected		—			—			—			—

BALANCE AT END OF PERIOD	$	(10,847	)	$	(10,704	)	$	(10,847	)	$	(10,704	)

NOTE 4 – LOANS, ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

The following tables bifurcates the amount of allowance allocated to each loan category based on collective impairment analysis or evaluated individually for impairment as of the periods indicated:


	June 30, 2012
	(Dollars in Thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Consumer Home Equity		Consumer Other		Total
FINANCING RECEIVALBES:
Ending Balance: Total Loans by Group	$	625,695	$	1,912,563	$	149,990	$	79,738	$	404,013	$	776,853	$	31,937	$	3,980,789	(1)

Ending Balance: Individually Evaluated for Impairment	$	7,648	$	35,666	$	—	$	2,489	$	12,913	$	339	$	1,835	$	60,890

Ending Balance: Collectively Evaluated for Impairment	$	618,047	$	1,876,897	$	149,990	$	77,249	$	391,100	$	776,514	$	30,102	$	3,919,899


	December 31, 2011
	(Dollars in Thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Consumer Home Equity		Consumer Other		Total
FINANCING RECEIVALBES:
Ending Balance: Total Loans by Group	$	575,716	$	1,847,654	$	128,904	$	78,509	$	426,201	$	696,063	$	41,343	$	3,794,390	(1)

Ending Balance: Individually Evaluated for Impairment	$	5,608	$	37,476	$	843	$	2,326	$	12,984	$	326	$	2,138	$	61,701

Ending Balance: Collectively Evaluated for Impairment	$	570,108	$	1,810,178	$	128,061	$	76,183	$	413,217	$	695,737	$	39,205	$	3,732,689

(1)	The amount of deferred fees included in the ending balance was $3.0 million and $2.9 million at June 30, 2012 and December 31, 2011, respectively.

The following tables summarize changes in allowance for loan losses by loan category for the periods indicated:


	Three Months Ended June 30, 2012
	(Dollars in Thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Consumer Home Equity			Consumer Other			Total
ALLOWANCE FOR LOAN LOSSES:
Beginning Balance	$	11,454		$	22,829		$	2,233		$	1,459		$	3,072		$	6,077		$	1,216		$	48,340
Charge-offs		(4,707	)		(2,133	)		—			(136	)		(105	)		(1,391	)		(296	)		(8,768	)
Recoveries		113			—			—			46			—			18			154			331
Provision		4,698			680			(13	)		(49	)		14			3,150			20			8,500

Ending Balance	$	11,558		$	21,376		$	2,220		$	1,320		$	2,981		$	7,854		$	1,094		$	48,403


	Three Months Ended June 30, 2011
	(Dollars in Thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Consumer Home Equity			Consumer Other			Total
ALLOWANCE FOR LOAN LOSSES:
Beginning Balance	$	10,843		$	22,353		$	1,993		$	3,387		$	2,856		$	3,395		$	1,617		$	46,444
Charge-offs		(818	)		(492	)		(769	)		(318	)		(280	)		(501	)		(409	)		(3,587	)
Recoveries		69			—			25			26			—			13			165			298
Provision		989			1,134			822			(1,042	)		666			806			107			3,482

Ending Balance	$	11,083		$	22,995		$	2,071		$	2,053		$	3,242		$	3,713		$	1,480		$	46,637


							Six Months Ended June 30, 2012
							(Dollars in Thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction		Small Business			Residential Real Estate			Consumer Home Equity			Consumer Other			Total
ALLOWANCE FOR LOAN LOSSES:
Beginning Balance	$	11,682		$	23,514		$	2,076	$	1,896		$	3,113		$	4,597		$	1,382		$	48,260
Charge-offs		(4,722	)		(2,737	)		—		(306	)		(214	)		(2,141	)		(593	)		(10,713	)
Recoveries		313			—			—		98			—			31			314			756
Provision		4,285			599			144		(368	)		82			5,367			(9	)		10,100

Ending Balance	$	11,558		$	21,376		$	2,220	$	1,320		$	2,981		$	7,854		$	1,094		$	48,403

Ending Balance: Individually Evaluated for Impairment	$	278		$	445		$	—	$	140		$	1,209		$	30		$	178		$	2,280

Ending Balance: Collectively Evaluated for Impairment	$	11,280		$	20,931		$	2,220	$	1,180		$	1,772		$	7,824		$	916		$	46,123


							Six Months Ended June 30, 2011
										(Dollars in Thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Consumer Home Equity			Consumer Other			Total
ALLOWANCE FOR LOAN LOSSES:
Beginning Balance	$	10,423		$	21,939		$	2,145		$	3,740		$	2,915		$	3,369		$	1,724		$	46,255
Charge-offs		(1,706	)		(1,144	)		(769	)		(584	)		(402	)		(579	)		(887	)		(6,071	)
Recoveries		271			—			75			54			—			17			354			771
Provision		2,095			2,200			620			(1,157	)		729			906			289			5,682

Ending Balance	$	11,083		$	22,995		$	2,071		$	2,053		$	3,242		$	3,713		$	1,480		$	46,637

Ending Balance: Individually Evaluated for Impairment	$	60		$	478		$	—		$	181		$	1,281		$	23		$	255		$	2,278

Ending Balance: Collectively Evaluated for Impairment	$	11,023		$	22,517		$	2,071		$	1,872		$	1,961		$	3,690		$	1,225		$	44,359

For the purpose of estimating the allowance for loan losses, management segregates the loan portfolio into the portfolio segments detailed in the above tables. Each of these loan categories possesses unique risk characteristics that are considered when determining the appropriate level of allowance for each segment. Some of the risk characteristics unique to each loan category include:

Commercial Portfolio:

Commercial & Industrial—Loans in this category consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant & equipment, or real estate, if applicable. Repayment sources consist of: primarily, operating cash flow, and secondarily, liquidation of assets.

Commercial Real Estate—Loans in this category consist of mortgage loans to finance investment in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties. Loans are typically written with amortizing payment structures. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources consist of: primarily, cash flow from operating leases and rents, and secondarily, liquidation of assets.

Commercial Construction—Loans in this category consist of short-term construction loans, revolving and nonrevolving credit lines and construction/permanent loans to finance the acquisition, development and construction or rehabilitation of real property. Project types include: residential 1-4 family condominium and multi-family homes, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties. Loans may be written with nonamortizing or hybrid payment structures depending upon the type of project. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources vary depending upon the type of project and may consist of: sale or lease of units, operating cash flows or liquidation of other assets.

Small Business—Loans in this category consist of revolving, term loan and mortgage obligations extended to sole proprietors and small businesses for purposes of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant & equipment, or real estate if applicable. Repayment sources consist of: primarily, operating cash flows, and secondarily, liquidation of assets.

For the commercial portfolio it is the Bank’s policy to obtain personal guarantees for payment from individuals holding material ownership interests of the borrowing entities.

Consumer Portfolio:

Residential Real Estate—Residential mortgage loans held in the Bank’s portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors such as current and expected income, employment status, current assets, other financial resources, credit history and the value of the collateral. Collateral consists of mortgage liens on 1-4 family residential properties. The Company does not originate sub-prime loans.

Consumer Home Equity—Home equity loans and lines are made to qualified individuals for legitimate purposes secured by senior or junior mortgage liens on owner-occupied 1-4 family homes, condominiums or vacation homes or on nonowner occupied 1-4 family homes with more restrictive loan to value requirements. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan to value ratios within established policy guidelines.

Consumer—Other—Other consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. These loans may be secured or unsecured.

Credit Quality:

The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as delinquent, impaired, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. If a restructured loan meets certain criteria, it may be categorized as a troubled debt restructuring (“TDR”).

The Company reviews numerous credit quality indicators when assessing the risk in its loan portfolio. For the commercial portfolio, the Company utilizes a 10-point commercial risk-rating system, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated with a commercial loan transaction. Factors considered include industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral, and other considerations. The risk-ratings categories are defined as follows:

1- 6 Rating – Pass

Risk-rating grades “1” through “6” comprise those loans ranging from ‘Substantially Risk Free’ which indicates borrowers are of unquestioned credit standing and the pinnacle of credit quality, well established companies with a very strong financial condition, and loans fully secured by cash collateral, through ‘Acceptable Risk’, which indicates borrowers may exhibit declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average or below average asset quality, margins and market share. Collateral coverage is protective.

7 Rating – Potential Weakness

Borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Bank’s asset and position. While potentially weak, currently these borrowers are marginally acceptable; no loss of principal or interest is envisioned.

8 Rating – Definite Weakness

Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. Loan may be inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. However, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation.

9 Rating – Partial Loss Probable

Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt with the added provision that the weaknesses make collection of the debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely.

10 Rating – Definite Loss

Borrowers deemed incapable of repayment. Loans to such borrowers are considered uncollectible and of such little value that continuation as active assets of the Bank is not warranted.

The credit quality of the commercial loan portfolio is actively monitored and any changes in credit quality are reflected in risk-rating changes. Risk-ratings are assigned or reviewed for all new loans, when advancing significant additions to existing relationships (over $50,000), at least quarterly for all actively managed loans, and any time a significant event occurs, including at renewal of the loan.

The Company utilizes a comprehensive strategy for monitoring commercial credit quality. Borrowers are required to provide updated financial information at least annually which is carefully evaluated for any changes in credit quality. Larger loan relationships are subject to a full annual credit review by an experienced credit analysis group. Additionally, the Company retains an independent loan review firm to evaluate the credit quality of the commercial loan portfolio. The independent loan review process achieves significant penetration into the commercial loan portfolio and reports the results of these reviews to the Audit Committee of the Board of Directors on a quarterly basis.

The following table details the internal risk-rating categories for the Company’s commercial portfolio:


		June 30, 2012
Category	Risk Rating	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Total
		(Dollars in Thousands)
PASS	1 - 6	$	580,396	$	1,715,824	$	138,288	$	71,923	$	2,506,431
POTENTIAL WEAKNESS	7		25,862		94,459		6,112		3,824		130,257
DEFINITE WEAKNESS—LOSS UNLIKELY	8		18,258		100,926		5,590		3,893		128,667
PARTIAL LOSS PROBABLE	9		1,179		1,354		—		98		2,631
DEFINITE LOSS	10		—		—		—		—		—

TOTAL		$	625,695	$	1,912,563	$	149,990	$	79,738	$	2,767,986


		December 31, 2011
Category	Risk Rating	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Total
		(Dollars in Thousands)
PASS	1 - 6	$	528,798	$	1,626,745	$	114,633	$	70,543	$	2,340,719
POTENTIAL WEAKNESS	7		33,313		124,661		7,859		4,041		169,874
DEFINITE WEAKNESS—LOSS UNLIKELY	8		12,683		93,438		6,412		3,762		116,295
PARTIAL LOSS PROBABLE	9		922		2,810		—		163		3,895
DEFINITE LOSS	10		—		—		—		—		—

TOTAL		$	575,716	$	1,847,654	$	128,904	$	78,509	$	2,630,783

For the Company’s consumer portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. However, the Company does supplement performance data with current Fair Isaac Corporation (“FICO”) and Loan to Value (“LTV”) estimates. Current FICO data is purchased and appended to all consumer loans on a quarterly basis. In addition, automated valuation services and broker opinions of value are used to supplement original value data for the residential and home equity portfolios, periodically, typically twice per annum. At June 30, 2012 and December 31, 2011, 60.0% and 54.8% of the home equity loans were in first lien position, respectively. In addition, for all second lien position home equity loans, management reviews the performance of the first position lien, which is often held at another institution, when determining the performing status of the loan. The following table shows the weighted average FICO scores and the weighted average combined LTV ratio as of the periods indicated below:


	June 30,			December 31,
	2012			2011
RESIDENTIAL PORTFOLIO:
FICO Score (re-scored) (1)		729			731
Combined LTV (re-valued) (2)		67.0	%		67.0	%

HOME EQUITY PORTFOLIO:
FICO Score (re-scored) (1)		763			762
Combined LTV (re-valued) (2)		55.0	%		55.0	%

(1)

The average FICO scores for June 30, 2012 are based upon rescores available from May 2012 , and actual score data for loans booked between June 1 and June 30, 2012. The average FICO scores for December 31, 2011 are based upon rescores available from November 2011 and actual score data for loans booked between December 1 and December 31.

(2)	The combined LTV ratios for June 30, 2012 are based upon updated automated valuations as of May 31, 2012. The combined LTV ratios for December 31, 2011 are based upon updated automated valuations as of November 30, 2011.

The Bank’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. Delinquent loans are managed by a team of seasoned collection specialists and the Bank seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. As a general rule, loans more than 90 days past due with respect to principal or interest are classified as nonaccrual loans. As permitted by banking regulations, certain consumer loans past due 90 days or more may continue to accrue interest. The Company also may use discretion regarding other loans over 90 days delinquent if the loan is well secured and in process of collection. Set forth is information regarding the Company’s nonperforming loans at the period shown.

The following table shows nonaccrual loans at the dates indicated:


	June 30, 2012		December 31, 2011
	(Dollars In Thousands)
COMMERCIAL AND INDUSTRIAL	$	4,404	$	1,883
COMMERCIAL REAL ESTATE		9,371		12,829
COMMERCIAL CONSTRUCTION		—		280
SMALL BUSINESS		588		542
RESEDENTIAL REAL ESTATE		9,939		9,867
HOME EQUITY		6,730		3,130
CONSUMER—OTHER		211		381

TOTAL NONACCRUAL LOANS (1)	$	31,243	$	28,912

(1)	Included in these amounts were $4.6 million and $9.2 million nonaccruing TDRs at June 30, 2012 and December 31, 2011, respectively.

The following table shows the age analysis of past due financing receivables as of the dates indicated:


	June 30, 2012
	30-59 days				60-89 days				90 days or more				Total Past Due						Total Financing Receivables		Recorded Investment >90 Days and Accruing
	Number of Loans		Principal Balance		Number of Loans		Principal Balance		Number of Loans		Principal Balance		Number of Loans		Principal Balance		Current		Total Financing Receivables		Recorded Investment >90 Days and Accruing
	(Dollars in Thousands)
LOAN PORTFOLIO:
Commercial and Industrial		15	$	2,016		11	$	1,336		16	$	2,070		42	$	5,422	$	620,273	$	625,695	$	—
Commercial Real Estate		12		3,171		5		1,497		24		5,350		41		10,018		1,902,545		1,912,563		—
Commercial Construction		—		—		—		—		—		—		—		—		149,990		149,990		—
Small Business		14		603		3		25		8		64		25		692		79,046		79,738		—
Residential Real Estate		18		2,944		5		1,352		30		7,663		53		11,959		377,094		389,053		—
Residential Construction		—		—		—		—		—		—		—		—		14,960		14,960		—
Home Equity		11		541		11		786		22		1,754		44		3,081		773,772		776,853		38
Consumer—Other		189		1,207		45		199		36		226		270		1,632		30,305		31,937		41

TOTAL		259	$	10,482		80	$	5,195		136	$	17,127		475	$	32,804	$	3,947,985	$	3,980,789	$	79


	December 31, 2011
	30-59 days				60-89 days				90 days or more				Total Past Due						Total Financing Receivables		Recorded Investment >90 Days and Accruing
	Number of Loans		Principal Balance		Number of Loans		Principal Balance		Number of Loans		Principal Balance		Number of Loans		Principal Balance		Current		Total Financing Receivables		Recorded Investment >90 Days and Accruing
	(Dollars in Thousands)
LOAN PORTFOLIO:
Commercial and Industrial		21	$	2,143		10	$	2,709		20	$	1,279		51	$	6,131	$	569,585	$	575,716	$	—
Commercial Real Estate		7		3,684		7		2,522		29		6,737		43		12,943		1,834,711		1,847,654		—
Commercial Construction		—		—		—		—		3		280		3		280		128,624		128,904		—
Small Business		19		320		3		21		12		148		34		489		78,020		78,509		—
Residential Real Estate		14		2,770		10		3,208		31		6,065		55		12,043		404,527		416,570		—
Residential Construction		—		—		—		—		—		—		—		—		9,631		9,631		—
Home Equity		28		1,483		19		1,139		19		1,502		66		4,124		691,939		696,063		—
Consumer—Other		260		1,821		57		303		58		374		375		2,498		38,845		41,343		41

TOTAL		349	$	12,221		106	$	9,902		172	$	16,385		627	$	38,508	$	3,755,882	$	3,794,390	$	41

In the course of resolving nonperforming loans, the Bank may choose to restructure the contractual terms of certain loans. The Bank attempts to work-out an alternative payment schedule with the borrower in order to avoid foreclosure actions. Any loans that are modified are reviewed by the Bank to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.

The following table shows the Company’s total TDRs and other pertinent information as of the dates indicated:


	June 30, 2012		December 31, 2011
	(Dollars in Thousands)
TDRS ON ACCRUAL STATUS	$	40,184	$	37,151
TDRS ON NONACCRUAL		4,561		9,230

TOTAL TDR’S	$	44,745	$	46,381


AMOUNT OF SPECIFIC RESERVES INCLUDED IN THE ALLOWANCE FOR LOAN LOSSES ASSOCIATED WITH TDRS:	$	2,025	$	1,887

ADDITIONAL COMMITMENTS TO LEND TO A BORROWER WHO HAS BEEN A PARTY TO A TDR:	$	398	$	693

The Bank’s policy is to have any restructured loan which is on nonaccrual status prior to being modified remain on nonaccrual status for six months, subsequent to being modified, before management considers its return to accrual status. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. Additionally, loans classified as TDRs are adjusted to reflect the changes in value of the recorded investment in the loan, if any, resulting from the granting of a concession. For all residential loan modifications, the borrower must perform during a 90 day trial period before the modification is finalized.

The following table shows the modifications which occurred during the periods indicated and the change in the recorded investment subsequent to the modifications occurring:


	Three Months Ended, June 30, 2012						Six Months Ended, June 30, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
					(Dollars in Thousands)
TROUBLED DEBT RESTRUCTURINGS:
Commercial & Industrial		7	$	1,115	$	1,115		11	$	1,273	$	1,273
Commercial Real Estate		7		3,839		3,839		9		4,907		4,907
Small Business		1		17		17		8		360		360
Residential Real Estate		1		261		261		2		378		378
Consumer—Home Equity		1		64		66		1		64		66
Consumer—Other		2		65		65		4		150		150

TOTAL		19	$	5,361	$	5,363		35	$	7,132	$	7,134

(1)	The post-modification balances represent the balance of the loan on the date of modifications. These amounts may show an increase when modifications include a capitalization of interest.


	Three Months Ended, June 30, 2011						Six Months Ended, June 30, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
					(Dollars in Thousands)
TROUBLED DEBT RESTRUCTURINGS:
Commercial & Industrial		4	$	210	$	210		4	$	210	$	210
Commercial Real Estate		2		3,831		3,831		5		4,995		4,995
Small Business		10		395		395		20		787		787
Residential Real Estate		7		2,715		2,761		9		2,880		2,927
Consumer—Home Equity		2		101		101		2		101		101
Consumer—Other		17		246		246		46		528		528

TOTAL		42	$	7,498	$	7,544		86	$	9,501	$	9,548

(1)	The post-modification balances represent the balance of the loan on the date of modifications. These amounts may show an increase when modifications include a capitalization of interest.

The following table shows the Company’s post-modification balance of TDRs listed by type of modification as of the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(Dollars in Thousands)				(Dollars in Thousands)
EXTENDED MATURITY	$	313	$	1,633	$	354	$	3,188
ADJUSTED INTEREST RATE		2,119		—		3,557		25
COMBINATION RATE & MATURITY		2,931		5,911		3,223		6,335

TOTAL	$	5,363	$	7,544	$	7,134	$	9,548

The following table shows the loans that have been modified during the past twelve months which have subsequently defaulted during the periods indicated. The Company considers a loan to have defaulted when it reaches 90 days past due.


	Three Months Ended June 30,
	2012				2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	(Dollars in Thousands)
TROUBLED DEBT RESTRUCTURINGS
THAT SUBSEQUENTLY DEFAULTED:
Commercial & Industrial		—	$	—		1	$	12
Commercial Real Estate		—		—		—		—
Small Business		—		—		1		7
Residential Real Estate		—		—		1		452
Consumer—Home Equity		—		—		1		67
Consumer—Other		—		—		1		15

TOTAL		—	$	—		5	$	553


	Six Months Ended June 30,
	2012				2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	(Dollars in Thousands)
TROUBLED DEBT RESTRUCTURINGS
THAT SUBSEQUENTLY DEFAULTED:
Commercial & Industrial		—	$	—		2	$	211
Commercial Real Estate		1		250		—		—
Small Business		—		—		1		7
Residential Real Estate		—		—		2		745
Consumer—Home Equity		—		—		1		67
Consumer—Other		1		6		1		15

TOTAL		2	$	256		7	$	1,045

All TDR loans are considered impaired and therefore are subject to a specific review for impairment. The impairment analysis appropriately discounts the present value of the anticipated cash flows by the loan’s contractual rate of interest in effect prior to the loan’s modification. The amount of impairment, if any, is recorded as a specific loss allocation to each individual loan in the allowance for loan losses. Commercial loans (commercial and industrial, commercial construction, commercial real estate and small business loans) and residential loans that have been classified as TDRs and which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. In such an instance, any shortfall between the value of the collateral and the book value of the loan is determined by measuring the recorded investment in the loan against the fair value of the collateral less costs to sell. The Bank charges off the amount of any confirmed loan loss in the period when the loans, or portion of loans, are deemed uncollectible. Smaller balance consumer TDR loans are reviewed to determine when a charge-off is appropriate. In the limited circumstances that a loan is removed from TDR classification it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan agreement.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The tables below set forth information regarding the Company’s impaired loans by loan portfolio as of the dates indicated:


	June 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in Thousands)
WITH NO RELATED ALLOWANCE RECORDED:
Commercial & Industrial	$	6,312	$	6,555	$	—
Commercial Real Estate		20,024		20,636		—
Commercial Construction		—

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