Edgar Filing: INDEPENDENT BANK CORP

INDB 3.31.2013 10-Q

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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 March 31, 2013

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 o

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 o

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.



Large Accelerated Filer	o	Accelerated Filer	x

Non-accelerated Filer	o	Smaller Reporting Company	o

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

As of May 1, 2013, there were 22,882,079 shares of the issuer’s common stock outstanding, par value $0.01 per share.

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INDEX



	PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - March 31, 2013 and December 31, 2012	4
Consolidated Statements of Income - Three months ended March 31, 2013 and 2012	6
Consolidated Statements of Comprehensive Income -Three months ended March 31, 2013 and 2012	7
Consolidated Statements of Stockholders’ Equity - Three months ended March 31, 2013 and 2012	8
Consolidated Statements of Cash Flows - Three months ended March 31, 2013 and 2012	9

Notes to Consolidated Financial Statements - March 31, 2013

Note 1 - Basis of Presentation	11
Note 2 - Recent Accounting Standards	11
Note 3 - Securities	12
Note 4 - Loans, Allowance for Loan Losses, and Credit Quality	16
Note 5 - Earnings Per Share	28
Note 6 - Stock Based Compensation	28
Note 7 - Derivative and Hedging Activities	29
Note 8 - Fair Value Measurements	35
Note 9 - Comprehensive Income/(Loss)	43

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Table 1 - Nonperforming Assets	57
Table 2 - Activity in Nonperforming Assets	58
Table 3 - Troubled Debt Restructurings	58
Table 4 - Activity in Troubled Debt Restructurings	59
Table 5 - Interest Income Recognized/Collected on Nonaccrual Loans And Troubled Debt Restructurings	59
Table 6 - Potential Problem Commercial Loans	60
Table 7 - Summary of Changes in the Allowance for Loan Losses	61
Table 8 - Summary of Allocation of the Allowance for Loan Losses	62
Table 9 - Borrowings	63
Table 10 - Company and Bank’s Capital Amounts and Ratios	64
Table 11 - Closed Residential Real Estate Loans	66
Table 12 - Mortgage Servicing Asset	66
Table 13 - Summary of Results of Operations	67
Table 14 - Average Balance, Interest Earned/Paid & Average Yields – Three Months Ended	67
Table 15 - Volume Rate Analysis	69
Table 16 - Noninterest Income – Three Months Ended	71

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Table 17 - Noninterest Expense – Three Months Ended	72
Table 18 - Tax Provision and Applicable Tax Rates	73
Table 19 - New Markets Tax Credit Recognition Schedule	73
Table 20 - Interest Rate Sensitivity	75
Table 21 - Sources of Liquidity	77



Item 3. Quantitative and Qualitative Disclosures About Market Risk	77
Item 4. Controls and Procedures	77

PART II. OTHER INFORMATION	78
Item 1. Legal Proceedings	78
Item 1A. Risk Factors	78
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3. Defaults Upon Senior Securities	78
Item 4. Mine Safety Disclosures	78
Item 5. Other Information	78
Item 6. Exhibits	79

Signatures	82
Exhibit 31.1 – Certification 302
Exhibit 31.2 – Certification 302
Exhibit 32.1 – Certification 906
Exhibit 32.2 – Certification 906

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

INDEPENDENT BANK CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited—Dollars in thousands)



	March 31, 2013			December 31, 2012
Assets
Cash and due from banks	$	70,434		$	98,144
Interest earning deposits with banks	129,406			117,330
Securities
Securities available for sale	335,693			329,286
Securities held to maturity (fair value $215,410 and $185,824)	209,090			178,318
Total securities	544,783			507,604
Loans held for sale (at fair value)	36,790			48,187
Loans
Commercial and industrial	702,486			687,511
Commercial real estate	2,123,778			2,122,153
Commercial construction	211,984			188,768
Small business	77,220			78,594
Residential real estate	547,649			604,668
Residential construction	7,764			8,213
Home equity—1st position	481,935			487,246
Home equity—2nd position	310,695			314,903
Other consumer	23,967			26,955
Total loans	4,487,478			4,519,011
Less: allowance for loan losses	(51,906		)	(51,834		)
Net loans	4,435,572			4,467,177
Federal Home Loan Bank stock	38,674			41,767
Bank premises and equipment, net	55,160			55,227
Goodwill	150,391			150,391
Identifiable intangible assets	11,225			11,753
Cash surrender value of life insurance policies	98,100			97,261
Other real estate owned & other foreclosed assets	11,821			12,150
Other assets	138,764			149,994
Total assets	$	5,721,120		$	5,756,985
Liabilities and Stockholders' Equity
Deposits
Demand deposits	$	1,199,623		$	1,248,394
Savings and interest checking accounts	1,711,477			1,691,187
Money market	872,044			853,971
Time certificates of deposit of $100,000 and over	339,666			317,438
Other time certificates of deposits	428,600			435,687
Total deposits	4,551,410			4,546,677
Borrowings
Federal Home Loan Bank and other borrowings	267,091			283,569
Wholesale repurchase agreements	50,000			50,000

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Customer repurchase agreements	129,618			153,359
Junior subordinated debentures	74,073			74,127
Subordinated debentures	30,000			30,000
Total borrowings	550,782			591,055
Other liabilities	81,353			89,933
Total liabilities	5,183,545			5,227,665
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 shares,
Issued and outstanding: 22,871,347 shares at March 31, 2013 and 22,774,009 shares at December 31, 2012 (includes 295,690 and 264,124 shares of unvested participating restricted stock awards, respectively)	226			225
Shares held in rabbi trust at cost 174,325 shares at March 31, 2013 and 179,814 shares at December 31, 2012	(3,198		)	(3,179		)
Deferred compensation obligation	3,198			3,179
Additional paid in capital	270,927			269,950
Retained earnings	270,891			263,671
Accumulated other comprehensive loss, net of tax	(4,469		)	(4,526		)
Total stockholders’ equity	537,575			529,320
Total liabilities and stockholders' equity	$	5,721,120		$	5,756,985

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

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited—Dollars in thousands, except per share data)



	Three Months Ended
	March 31
	2013		2012
Interest income
Interest on loans	$	46,978	$	43,077
Taxable interest and dividends on securities	3,529		4,527
Nontaxable interest and dividends on securities	11		29
Interest on loans held for sale	268		130
Interest on federal funds sold	34		33
Total interest and dividend income	50,820		47,796
Interest expense
Interest on deposits	2,665		2,739
Interest on borrowings	3,293		3,204
Total interest expense	5,958		5,943
Net interest income	44,862		41,853
Provision for loan losses	1,300		1,600
Net interest income after provision for loan losses	43,562		40,253
Noninterest income
Deposit account fees	4,217		3,889
Interchange and ATM fees	2,328		2,368
Investment management	3,884		3,563
Mortgage banking income	2,281		1,330
Increase in cash surrender value of life insurance policies	746		713
Loan level derivative income	532		328
Other noninterest income	1,736		1,718
Total noninterest income	15,724		13,909
Noninterest expenses
Salaries and employee benefits	22,715		21,436
Occupancy and equipment expenses	5,249		4,300
Advertising expense	1,172		738
Data processing & facilities management	1,184		1,175
FDIC assessment	821		749
Consulting expense	710		626
Merger and acquisition expenses	1,345		—
Legal fees	503		647
Debit card expense	670		559
Software maintenance	681		476
Telecommunications	655		618
Other noninterest expenses	7,215		6,034
Total noninterest expenses	42,920		37,358
Income before income taxes	16,366		16,804
Provision for income taxes	4,114		4,621
Net income	$	12,252	$	12,183
Basic earnings per share	0.54		0.57
Diluted earnings per share	0.54		0.56
Weighted average common shares (basic)	22,823,753		21,561,006
Common shares equivalents	46,040		24,481
Weighted average common shares (diluted)	22,869,793		21,585,487
Cash dividends declared per common share	0.22		0.21

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

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited—Dollars in thousands)



	Three Months Ended
	March 31
	2013			2012
Net income	$	12,252		$	12,183
Other comprehensive income (loss), net of tax
Unrealized losses on securities
Change in fair value of securities available for sale	(777		)	(161		)
Less: net security losses (gains) reclassified into earnings	—			—
Net change in fair value of securities available for sale	(777		)	(161		)
Unrealized gains (losses) on cash flow hedges
Change in fair value of cash flow hedges	(3		)	31
Less: net cash flow hedge losses reclassified into earnings	836			765
Net change in fair value of cash flow hedges	833			796
Amortization of certain costs included in net periodic retirement costs	1			23
Total other comprehensive income	57			658
Total comprehensive income	$	12,309		$	12,841

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

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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			Total
Balance at December 31, 2012	22,774,009	$	225	$	(3,179	)	$	3,179	$	269,950		$	263,671		$	(4,526	)	$	529,320
Net income	—	—		—			—		—			12,252			—			12,252
Other comprehensive income	—	—		—			—		—			—			57			57
Common dividend declared ($0.22 per share)	—	—		—			—		—			(5,032		)	—			(5,032		)
Proceeds from exercise of stock options	17,450	—		—			—		451			—			—			451
Tax benefit related to equity award activity	—	—		—			—		166			—			—			166
Equity based compensation	—	—		—			—		760			—			—			760
Restricted stock awards issued, net of awards surrendered	79,636	1		—			—		(508		)	—			—			(507		)
Shares issued under direct stock purchase plan	252	—		—			—		8			—			—			8
Deferred compensation obligation	—	—		(19		)	19		—			—			—			—
Tax benefit related to deferred compensation distributions	—	—		—			—		100			—			—			100
Balance at March 31, 2013	22,871,347	$	226	$	(3,198	)	$	3,198	$	270,927		$	270,891		$	(4,469	)	$	537,575
Balance at December 31, 2011	21,499,768	$	213	$	(2,980	)	$	2,980	$	233,878		$	239,452		$	(4,486	)	$	469,057
Net income	—	—		—			—		—			12,183			—			12,183
Other comprehensive income	—	—		—			—		—			—			658			658
Common dividend declared ($0.21 per share)	—	—		—			—		—			(4,538		)	—			(4,538		)
Proceeds from exercise of stock options	20,377	—		—			—		439			—			—			439
Tax benefit related to equity award activity	—	—		—			—		69			—			—			69
Equity based compensation	—	—		—			—		853			—			—			853
Restricted stock awards issued, net of awards surrendered	77,965	—		—			—		(229		)	—			—			(229		)
Shares issued under direct stock purchase plan	10,175	—		—			—		285			—			—			285
Deferred compensation obligation	—	—		(16		)	16		—			—			—			—
Tax benefit related to deferred compensation distributions	—	—		—			—		86			—			—			86
Balance March 31, 2012	21,608,285	$	213	$	(2,996	)	$	2,996	$	235,381		$	247,097		$	(3,828	)	$	478,863

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

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited—Dollars in thousands)



	Three Months Ended
	March 31
	2013			2012
Cash flow from operating activities
Net Income	$	12,252		$	12,183
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization	2,064			2,589
Provision for loan losses	1,300			1,600
Deferred income tax expense (benefit)	2			(9		)
Loss (gain) on sale of fixed assets	28			(9		)
Loss on sale of other real estate owned and foreclosed assets	198			95
Gain realized from early termination of hedging relationship	—			(22		)
Realized gain on sale leaseback transaction	(258		)	(258		)
Stock based compensation	760			853
Increase in cash surrender value of life insurance policies	(746		)	(713		)
Change in fair value on loans held for sale	140			269
Net change in:
Trading assets	—			(265		)
Loans held for sale	11,257			(2,615		)
Other assets	10,924			3,835
Other liabilities	(11,862		)	(8,369		)
Total adjustments	13,807			(3,019		)
Net cash provided by operating activities	26,059			9,164
Cash flows used in investing activities
Proceeds from maturities and principal repayments of securities available for sale	26,708			23,079
Purchase of securities available for sale	(34,725		)	(71,765		)
Proceeds from maturities and principal repayments of securities held to maturity	13,950			13,728
Purchase of securities held to maturity	(44,902		)	(9,975		)
Redemption of Federal Home Loan Bank stock	3,093			2,290
Purchase of life insurance policies	(93		)	(95		)
Net decrease (increase) in loans	29,167			(78,900		)
Purchase of bank premises and equipment	(1,478		)	(2,762		)
Proceeds from the sale of bank premises and equipment	—			11
Proceeds resulting from early termination of hedging relationship	—			22
Proceeds from the sale of other real estate owned and foreclosed assets	1,206			1,492
Net cash used in investing activities	(7,074		)	(122,875		)
Cash flows provided by financing activities
Net increase (decrease) in time deposits	15,141			(5,250		)
Net (decrease) increase in other deposits	(10,408		)	74,134
Net decrease in wholesale and customer repurchase agreements	(23,741		)	(18,450		)
Net decrease in short term Federal Home Loan Bank advances	(15,829		)	(35,000		)
Proceeds from exercise of stock options	451			439
Tax benefit from stock option exercises	166			69

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Restricted shares surrendered	(507		)	(229		)
Tax benefit from deferred compensation distribution	100			86
Shares issued under direct stock purchase plan	8			285
Common dividends paid	—			(4,085		)
Net cash (used in) provided by financing activities	(34,619		)	11,999
Net decrease in cash and cash equivalents	(15,634		)	(101,712		)
Cash and cash equivalents at beginning of year	215,474			237,504
Cash and cash equivalents at end of period	$	199,840		$	135,792
Supplemental schedule of noncash investing and financing activities
Transfer of loans to foreclosed assets	$	771		$	1,503
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.

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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 March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 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, 2012, filed with the Securities and Exchange Commission.

NOTE 2 – RECENT ACCOUNTING STANDARDS UPDATES

FASB ASC Topic No. 220 "Comprehensive Income" Update No. 2013-02. Update No. 2013-02 was issued in February 2013, stating that the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this standard did not have a material impact on the Company's consolidated financial position.

FASB ASC Topic No. 210 "Balance Sheet" Update No. 2013-01. Update No. 2013-01 was issued in January of 2013, the amendments in this update affect entities that have derivatives accounted for in accordance with Topic 815 "Derivatives and Hedges," including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. As a result of these amendments, entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement are no longer subject to the disclosure requirements in Update No. 2011-11. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The amendments are effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those periods. The adoption of this standard did not have a material impact on the Company's consolidated financial position.

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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:



	March 31, 2013												December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Unrealized Losses Other			Other-Than- Temporary (Impairment)/Recovery			Fair Value		Amortized Cost		Gross Unrealized Gains		Unrealized Losses Other			Other-Than- Temporary (Impairment)/Recovery			Fair Value
	(Dollars in thousands)
Available for sale securities
U.S. Government agency securities	$	20,051	$	685	$	—		$	—		$	20,736	$	20,053	$	769	$	—		$	—		$	20,822
Agency mortgage-backed securities	212,191		10,642		(256		)	—			222,577		209,381		12,158		(114		)	—			221,425
Agency collateralized mortgage obligations	71,631		899		(223		)	—			72,307		67,412		1,001		(37		)	—			68,376
Private mortgage-backed securities	3,101		—		—			269			3,370		3,227		—		—			305			3,532
Single issuer trust preferred securities issued by banks	2,244		29		—			—			2,273		2,255		—		(15		)	—			2,240
Pooled trust preferred securities issued by banks and insurers	8,185		—		(2,253		)	(2,640		)	3,292		8,353		—		(2,415		)	(2,957		)	2,981
Marketable securities	10,791		407		(60		)	—			11,138		9,875		92		(57		)	—			9,910
Total available for sale securities	$	328,194	$	12,662	$	(2,792	)	$	(2,371	)	$	335,693	$	320,556	$	14,020	$	(2,638	)	$	(2,652	)	$	329,286
Held to maturity securities
U.S. Treasury securities	$	1,013	$	113	$	—		$	—		$	1,126	$	1,013	$	121	$	—		$	—		$	1,134
Agency mortgage-backed securities	63,897		3,698		—			—			67,595		72,360		4,233		—			—			76,593
Agency collateralized mortgage obligations	136,745		2,512		(350		)	—			138,907		97,507		2,875		(2		)	—			100,380
State, county, and municipal securities	916		14		—			—			930		915		11		—			—			926
Single issuer trust preferred securities issued by banks	1,513		17		—			—			1,530		1,516		10		—			—			1,526
Corporate debt securities	5,006		316		—			—			5,322		5,007		258		—			—			5,265
Total held to maturity securities	$	209,090	$	6,670	$	(350	)	$	—		$	215,410	$	178,318	$	7,508	$	(2	)	$	—		$	185,824
Total	$	537,284	$	19,332	$	(3,142	)	$	(2,371	)	$	551,103	$	498,874	$	21,528	$	(2,640	)	$	(2,652	)	$	515,110

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. There were no sales of securities in the three months ended March 31, 2013 or 2012.

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 March 31, 2013 is presented below:

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	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	159	$	165	$	240	$	241
Due after one year to five years	7,615		8,037		6,412		6,795
Due after five years to ten years	89,343		92,394		1,013		1,126
Due after ten years	220,286		223,959		201,425		207,248
Total debt securities	$	317,403	$	324,555	$	209,090	$	215,410
Marketable securities	$	10,791	$	11,138	$	—	$	—
Total	$	328,194	$	335,693	$	209,090	$	215,410

Inclusive in the table above is $7.8 million and $7.7 million, respectively, of callable securities in the Company’s investment portfolio at March 31, 2013 and December 31, 2012.

At March 31, 2013 and December 31, 2012, investment securities carried at $370.3 million and $365.8 million, respectively, were pledged to secure public deposits, assets sold under repurchase agreements, letters of credit, and for other purposes.

At March 31, 2013 and December 31, 2012, 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:



	March 31, 2013
		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)
Agency mortgage-backed securities	14	$	36,218	$	(256	)	$	—	$	—		$	36,218	$	(256	)
Agency collateralized mortgage obligations	7	69,639		(573		)	—		—			69,639		(573		)
Pooled trust preferred securities issued by banks and insurers	2	—		—			2,062		(2,253		)	2,062		(2,253		)
Marketable securities	11	$	4,831	$	(60	)	$	—	$	—		$	4,831	$	(60	)
Total temporarily impaired securities	34	$	110,688	$	(889	)	$	2,062	$	(2,253	)	$	112,750	$	(3,142	)

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	December 31, 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)
Agency mortgage-backed securities	17	$	23,814	$	(114	)	$	—	$	—		$	23,814	$	(114	)
Agency collateralized mortgage obligations	2	17,677		(39		)	—		—			17,677		(39		)
Single issuer trust preferred securities issued by banks and insurers	2	$	2,240	$	(15	)	$	—	$	—		$	2,240	$	(15	)
Pooled trust preferred securities issued by banks and insurers	2	$	—	$	—		$	2,069	$	(2,415	)	$	2,069	$	(2,415	)
Marketable securities	15	$	6,613	$	(57	)	$	—	$	—		$	6,613	$	(57	)
Total temporarily impaired securities	38	$	50,344	$	(225	)	$	2,069	$	(2,415	)	$	52,413	$	(2,640	)

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 March 31, 2013:

•

Agency Mortgage-Backed Securities and Collateralized Mortgage Obligations: This portfolio has contractual terms that generally do not permit the issuer to settle the securities at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. Government or one of its agencies.

•

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 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 March 31, 2013, that was considered by management in determining if OTTI existed:

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	Class	Amortized Cost (1)		Gross Unrealized Gain/(Loss)			Non-Credit Related Other- Than-Temporary (Impairment)/Recovery			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	$	—		$	(889	)	$	394	$	(3,676	)	$	(4,565	)
Pooled trust preferred security B	D	—		—			—			—		(3,481		)	(3,481		)
Pooled trust preferred security C	C1	506		—			(320		)	186		(482		)	(802		)
Pooled trust preferred security D	D	—		—			1			1		(990		)	(989		)
Pooled trust preferred security E	C1	2,081		—			(1,432		)	649		(1,368		)	(2,800		)
Pooled trust preferred security F	B	1,894		(1,221		)	—			673		—			—
Pooled trust preferred security G	A1	2,421		(1,032		)	—			1,389		—			—
Total pooled trust preferred securities		$	8,185	$	(2,253	)	$	(2,640	)	$	3,292	$	(9,997	)	$	(12,637	)
Private mortgage-backed securities
Private mortgage-backed securities-one	2A1	$	2,177	$	—		$	153		$	2,330	$	(766	)	$	(613	)
Private mortgage-backed securities-two	A19	924		—			116			1,040		(85		)	31
Total private mortgage-backed securities		$	3,101	$	—		$	269		$	3,370	$	(851	)	$	(582	)
Total		$	11,286	$	(2,253	)	$	(2,371	)	$	6,662	$	(10,848	)	$	(13,219	)


(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	32.12%	18.15%	—%	C (Fitch & Moody's)
Trust preferred security B	D	57	32.12%	18.15%	—%	C (Fitch)
Trust preferred security C	C1	49	29.29%	15.16%	0.49%	C (Fitch & Moody's)
Trust preferred security D	D	49	29.29%	15.16%	—%	C (Fitch)
Trust preferred security E	C1	48	26.50%	16.62%	0.98%	C (Fitch & Moody's)
Trust preferred security F	B	32	25.08%	18.83%	31.31%	CC (Fitch)
Trust preferred security G	A1	32	25.08%	18.83%	56.37%	CCC+ (S&P)
Private mortgage-backed securities
Private mortgage-backed securities-one	2A1	N/A	6.10%	13.13%	—%	D (Fitch)
Private mortgage-backed securities-two	A19	N/A	3.99%	6.42%	—%	C (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.

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The following table shows the total OTTI that the Company recorded for the periods indicated:



	Three Months Ended
	March 31
	2013			2012
	(Dollars in thousands)
Gross change in OTTI recorded on certain investments (gain/(losses))	$	281		$	274
Portion of OTTI gains (losses) recognized in OCI	(281		)	(274		)
Total credit related OTTI losses recognized in earnings	$	—		$	—

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



	Three Months Ended
	March 31
	2013			2012
	(Dollars in thousands)
Balance at beginning of period	$	(10,847	)	$	(10,771	)
Add
Incurred on securities not previously impaired	—			—
Incurred on securities previously impaired	—			—
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	)	$	(10,771	)

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:



	March 31, 2013
	(Dollars in thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Consumer Home Equity		Other Consumer		Total
Financing receivables
Ending balance: total loans by group	$	702,486	$	2,123,778	$	211,984	$	77,220	$	555,413	$	792,630	$	23,967	$	4,487,478	(1	)
Ending balance: individually evaluated for impairment	$	7,773	$	31,285	$	1,608	$	2,073	$	16,428	$	4,446	$	1,882	$	65,495
Ending balance: purchase credit impaired loans	$	—	$	20,138	$	—	$	—	$	9,509	$	375	$	—	$	30,022
Ending balance: collectively evaluated for impairment	$	694,713	$	2,072,355	$	210,376	$	75,147	$	529,476	$	787,809	$	22,085	$	4,391,961

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	December 31, 2012
	(Dollars in thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Consumer Home Equity		Other Consumer		Total
Financing receivables
Ending balance: total loans by group	$	687,511	$	2,122,153	$	188,768	$	78,594	$	612,881	$	802,149	$	26,955	$	4,519,011	(1	)
Ending balance: individually evaluated for impairment	$	8,575	$	33,868	$	—	$	2,279	$	15,373	$	4,435	$	2,129	$	66,659
Ending Balance: purchase credit impaired loans	$	—	$	21,853	$	—	$	—	$	9,821	$	380	$	—	$	32,054
Ending balance: collectively evaluated for impairment	$	678,936	$	2,066,432	$	188,768	$	76,315	$	587,687	$	797,334	$	24,826	$	4,420,298


(1)	The amount of deferred fees included in the ending balance was $2.9 million and $3.1 million at March 31, 2013 and December 31, 2012, respectively.

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



	Three Months Ended March 31, 2013
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction		Small Business			Residential Real Estate			Consumer Home Equity			Other Consumer			Total
Allowance for loan losses
Beginning balance	$	13,461		$	22,598		$	2,811	$	1,524		$	2,930		$	7,703		$	807		$	51,834
Charge-offs	(423		)	(407		)	—		(145		)	(61		)	(277		)	(261		)	(1,574		)
Recoveries	136			—			—		39			—			21			150			346
Provision	269			378			328		(174		)	179			269			51			1,300
Ending balance	$	13,443		$	22,569		$	3,139	$	1,244		$	3,048		$	7,716		$	747		$	51,906
Ending balance: Individually Evaluated for Impairment	$	771		$	385		$	—	$	113		$	1,577		$	58		$	119		$	3,023
Ending balance: purchase credit impaired loans	$	—		$	—		$	—	$	—		$	—		$	—		$	—		$	—
Ending balance: Collectively Evaluated for Impairment	$	12,672		$	22,184		$	3,139	$	1,131		$	1,471		$	7,658		$	628		$	48,883



	Three Months Ended March 31, 2012
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction		Small Business			Residential Real Estate			Consumer Home Equity			Other Consumer			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	(15		)	(604		)	—		(170		)	(109		)	(750		)	(297		)	(1,945		)
Recoveries	200			—			—		52			—			13			160			425
Provision	(413		)	(81		)	157		(319		)	68			2,217			(29		)	1,600
Ending balance	$	11,454		$	22,829		$	2,233	$	1,459		$	3,072		$	6,077		$	1,216		$	48,340
Ending balance: individually evaluated for impairment	$	464		$	1,757		$	—	$	184		$	1,215		$	32		$	200		$	3,852
Ending balance: collectively evaluated for impairment	$	10,990		$	21,072