Edgar Filing: INDEPENDENT BANK CORP

INDB 6.30.2013 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 June 30, 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 August 1, 2013, there were 22,583,713 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 - June 30, 2013 and December 31, 2012	4
Consolidated Statements of Income - Three and six months ended June 30, 2013 and 2012	6
Consolidated Statements of Comprehensive Income -Three and six months ended June 30, 2013 and 2012	7
Consolidated Statements of Stockholders’ Equity - Six months ended June 30, 2013 and 2012	8
Consolidated Statements of Cash Flows - Six months ended June 30, 2013 and 2012	9

Notes to Consolidated Financial Statements - June 30, 2013

Note 1 - Basis of Presentation	11
Note 2 - Recent Accounting Standards Updates	11
Note 3 - Securities	12
Note 4 - Loans, Allowance for Loan Losses, and Credit Quality	16
Note 5 - Earnings Per Share	29
Note 6 - Stock Based Compensation	29
Note 7 - Derivative and Hedging Activities	30
Note 8 - Fair Value Measurements	36
Note 9 - Comprehensive Income/(Loss)	44

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
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 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 - Average Balance, Interest Earned/Paid & Average Yields – Six Months Ended	69
Table 16 - Volume Rate Analysis	71

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Table 17 - Noninterest Income – Three and Six Months Ended	74
Table 18 - Noninterest Expense – Three and six Months Ended	75
Table 19 - Tax Provision and Applicable Tax Rates	76
Table 20 - New Markets Tax Credit Recognition Schedule	76
Table 21 - Interest Rate Sensitivity	78
Table 22 - Sources of Liquidity	80



Item 3. Quantitative and Qualitative Disclosures About Market Risk	81
Item 4. Controls and Procedures	81

PART II. OTHER INFORMATION	81
Item 1. Legal Proceedings	81
Item 1A. Risk Factors	81
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	81
Item 3. Defaults Upon Senior Securities	82
Item 4. Mine Safety Disclosures	82
Item 5. Other Information	82
Item 6. Exhibits	83

Signatures	86
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)



	June 30, 2013			December 31, 2012
Assets
Cash and due from banks	$	139,672		$	98,144
Interest earning deposits with banks	197,266			117,330
Securities
Securities available for sale	303,855			329,286
Securities held to maturity (fair value $225,851 and $185,824)	225,278			178,318
Total securities	529,133			507,604
Loans held for sale (at fair value)	32,497			48,187
Loans
Commercial and industrial	742,343			687,511
Commercial real estate	2,150,833			2,122,153
Commercial construction	231,719			188,768
Small business	77,283			78,594
Residential real estate	509,185			604,668
Residential construction	4,366			8,213
Home equity—1st position	481,542			487,246
Home equity—2nd position	310,908			314,903
Other consumer	21,932			26,955
Total loans	4,530,111			4,519,011
Less: allowance for loan losses	(52,976		)	(51,834		)
Net loans	4,477,135			4,467,177
Federal Home Loan Bank stock	38,674			41,767
Bank premises and equipment, net	56,344			55,227
Goodwill	150,391			150,391
Identifiable intangible assets	10,698			11,753
Cash surrender value of life insurance policies	98,893			97,261
Other real estate owned & other foreclosed assets	9,387			12,150
Other assets	112,505			149,994
Total assets	$	5,852,595		$	5,756,985
Liabilities and Stockholders' Equity
Deposits
Demand deposits	$	1,283,301		$	1,248,394
Savings and interest checking accounts	1,798,495			1,691,187
Money market	884,696			853,971
Time certificates of deposit of $100,000 and over	292,046			317,438
Other time certificates of deposits	417,925			435,687
Total deposits	4,676,463			4,546,677
Borrowings
Federal Home Loan Bank and other borrowings	261,456			283,569
Wholesale repurchase agreements	50,000			50,000

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Customer repurchase agreements	141,826			153,359
Junior subordinated debentures	74,018			74,127
Subordinated debentures	30,000			30,000
Total borrowings	557,300			591,055
Other liabilities	75,227			89,933
Total liabilities	5,308,990			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: 22,904,284 shares at June 30, 2013 and 22,774,009 shares at December 31, 2012 (includes 271,390 and 264,124 shares of unvested participating restricted stock awards, respectively)	226			225
Shares held in rabbi trust at cost 175,618 shares at June 30, 2013 and 179,814 shares at December 31, 2012	(3,294		)	(3,179		)
Deferred compensation obligation	3,294			3,179
Additional paid in capital	272,165			269,950
Retained earnings	278,611			263,671
Accumulated other comprehensive loss, net of tax	(7,397		)	(4,526		)
Total stockholders’ equity	543,605			529,320
Total liabilities and stockholders' equity	$	5,852,595		$	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				Six Months Ended
	June 30				June 30
	2013		2012		2013		2012
Interest income
Interest on loans	$	47,720	$	43,813	$	94,699	$	86,891
Taxable interest and dividends on securities	3,506		4,415		7,035		8,942
Nontaxable interest and dividends on securities	11		23		22		52
Interest on loans held for sale	237		156		505		286
Interest on federal funds sold	21		19		55		51
Total interest and dividend income	51,495		48,426		102,316		96,222
Interest expense
Interest on deposits	2,543		2,687		5,208		5,426
Interest on borrowings	3,337		3,111		6,630		6,316
Total interest expense	5,880		5,798		11,838		11,742
Net interest income	45,615		42,628		90,478		84,480
Provision for loan losses	3,100		8,500		4,400		10,100
Net interest income after provision for loan losses	42,515		34,128		86,078		74,380
Noninterest income
Deposit account fees	4,343		3,923		8,559		7,812
Interchange and ATM fees	2,761		2,399		5,089		4,767
Investment management	4,357		3,827		8,242		7,390
Mortgage banking income	1,669		1,463		3,951		2,793
Increase in cash surrender value of life insurance policies	786		741		1,531		1,454
Loan level derivative income	816		1,371		1,348		1,699
Other noninterest income	1,960		1,259		3,694		2,978
Total noninterest income	16,692		14,983		32,414		28,893
Noninterest expenses
Salaries and employee benefits	21,594		19,775		44,309		41,211
Occupancy and equipment expenses	4,919		4,234		10,169		8,534
Advertising expense	1,479		1,473		2,652		2,210
Data processing & facilities management	1,201		1,099		2,385		2,274
FDIC assessment	934		830		1,755		1,579
Debit card expense	773		637		1,443		1,196
Merger and acquisition expense	754		672		2,099		672
Mortgage operations expense	715		60		1,059		102
Consulting expense	666		583		1,377		1,209
Telecommunication expense	548		666		1,203		1,284
Other noninterest expenses	8,581		6,970		16,632		14,085
Total noninterest expenses	42,164		36,999		85,083		74,356
Income before income taxes	17,043		12,112		33,409		28,917
Provision for income taxes	4,285		3,238		8,399		7,860
Net income	$	12,758	$	8,874	$	25,010	$	21,057
Basic earnings per share	0.56		0.41		1.09		0.98
Diluted earnings per share	0.56		0.41		1.09		0.97
Weighted average common shares (basic)	22,888,155		21,623,827		22,856,132		21,592,416
Common shares equivalents	52,144		20,377		49,104		22,251
Weighted average common shares (diluted)	22,940,299		21,644,204		22,905,236		21,614,667
Cash dividends declared per common share	0.22		0.21		0.44		0.42

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						Six Months Ended
	June 30						June 30
	2013			2012			2013			2012
Net income	$	12,758		$	8,874		$	25,010		$	21,057
Other comprehensive income (loss), net of tax
Unrealized losses on securities
Change in fair value of securities available for sale	(4,592		)	(139		)	(5,371		)	(300		)
Less: net security losses reclassified into earnings	3			45			3			45
Net change in fair value of securities available for sale	(4,589		)	(94		)	(5,368		)	(255		)
Unrealized gains (losses) on cash flow hedges
Change in fair value of cash flow hedges	765			(1,227		)	763			(1,196		)
Less: net cash flow hedge gains (losses) reclassified into earnings	854			796			1,691			1,561
Net change in fair value of cash flow hedges	1,619			(431		)	2,454			365
Amortization of certain costs included in net periodic retirement costs	42			23			43			46
Total other comprehensive (loss) income	(2,928		)	(502		)	(2,871		)	156
Total comprehensive income	$	9,830		$	8,372		$	22,139		$	21,213

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	—	—		—			—		—			25,010			—			25,010
Other comprehensive loss	—	—		—			—		—			—			(2,871		)	(2,871		)
Common dividend declared ($0.44 per share)	—	—		—			—		—			(10,070		)	—			(10,070		)
Proceeds from exercise of stock options	30,029	—		—			—		744			—			—			744
Tax benefit related to equity award activity	—	—		—			—		312			—			—			312
Equity based compensation	—	—		—			—		1,389			—			—			1,389
Restricted stock awards issued, net of awards surrendered	89,431	1		—			—		(669		)	—			—			(668		)
Shares issued under direct stock purchase plan	10,815	—		—			—		339			—			—			339
Deferred compensation obligation	—	—		(115		)	115		—			—			—			—
Tax benefit related to deferred compensation distributions	—	—		—			—		100			—			—			100
Balance at June 30, 2013	22,904,284	$	226	$	(3,294	)	$	3,294	$	272,165		$	278,611		$	(7,397	)	$	543,605
Balance at 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 issued, 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

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)



	Six Months Ended
	June 30
	2013			2012
Cash flow from operating activities
Net income	$	25,010		$	21,057
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization	4,141			5,346
Provision for loan losses	4,400			10,100
Deferred income tax expense (benefit)	5			(19		)
Net loss on sale of investments	4			—
Loss on write-down of investments in securities available for sale	—			76
Loss (gain) on sale of fixed assets	28			(16		)
Loss on sale of other real estate owned and foreclosed assets	127			290
Gain realized from early termination of hedging relationship	—			(22		)
Realized gain on sale leaseback transaction	(517		)	(517		)
Stock based compensation	1,389			1,551
Excess tax benefit related to equity award activity	(312		)	(59		)
Increase in cash surrender value of life insurance policies	(1,531		)	(1,451		)
Change in fair value on loans held for sale	1,335			(112		)
Net change in:
Trading assets	—			(265		)
Loans held for sale	14,355			(1,698		)
Other assets	37,689			(4,975		)
Other liabilities	(14,885		)	831
Total adjustments	46,228			9,060
Net cash provided by operating activities	71,238			30,117
Cash flows used in investing activities
Proceeds from sales of securities available for sale	169			—
Proceeds from maturities and principal repayments of securities available for sale	50,709			46,434
Purchase of securities available for sale	(34,878		)	(71,699		)
Proceeds from maturities and principal repayments of securities held to maturity	27,535			25,944
Purchase of securities held to maturity	(74,834		)	(9,975		)
Redemption of Federal Home Loan Bank stock	3,093			2,290
Proceeds from (purchase of) life insurance policies	(101		)	63
Net increase in loans	(15,713		)	(202,505		)
Purchase of bank premises and equipment	(4,221		)	(3,889		)
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	5,237			1,801
Net cash used in investing activities	(43,004		)	(211,484		)
Cash flows provided by financing activities
Net increase (decrease) in time deposits	(43,154		)	9,373
Net increase in other deposits	172,940			191,931

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Net decrease in wholesale and customer repurchase agreements	(11,533		)	(21,290		)
Net advance of short term Federal Home Loan Bank advances	(11,695		)	(40,000		)
Net repayment of long term Federal Home Loan Bank advances	(9,123		)	—
Proceeds from exercise of stock options	744			459
Tax benefit related to equity award activity	312			59
Restricted stock awards issued, net of awards surrendered	(668		)	(344		)
Tax benefit from deferred compensation distribution	100			86
Shares issued under direct stock purchase plan	339			591
Common dividends paid	(5,032		)	(8,623		)
Net cash provided by financing activities	93,230			132,242
Net increase (decrease) in cash and cash equivalents	121,464			(49,125		)
Cash and cash equivalents at beginning of year	215,474			237,504
Cash and cash equivalents at end of period	$	336,938		$	188,379
Supplemental schedule of noncash investing and financing activities
Transfer of loans to foreclosed assets	$	1,138		$	5,136
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 June 30, 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. 815 "Derivatives and Hedging" Update No. 2013-10. Update No. 2013-10 was issued in July 2013 to provide guidance on the risks that are permitted to be hedged in a fair value or cash flow hedge. Among those risks for financial assets and financial liabilities is the risk of changes in a hedged item's fair value or a hedged transaction's cash flows attributable to changes in the designated benchmark interest rate (referred to as interest rate risk). In the United States, currently only the interest rates on direct Treasury obligations of the U.S. government (UST) and, for practical reasons, the London Interbank Offered Rate (LIBOR) swap rate are considered benchmark interest rates. The amendments in this update permit the Fed Funds Effective Swap Rate (OIS) to now be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

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:



	June 30, 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	$	20,050	$	—	$	(457	)	$	—		$	19,593	$	20,053	$	769	$	—		$	—		$	20,822
Agency mortgage-backed securities	193,741		7,425		(2,865		)	—			198,301		209,381		12,158		(114		)	—			221,425
Agency collateralized mortgage obligations	66,087		612		(603		)	—			66,096		67,412		1,001		(37		)	—			68,376
Private mortgage-backed securities	2,820		—		—			216			3,036		3,227		—		—			305			3,532
Single issuer trust preferred securities issued by banks	2,233		11		—			—			2,244		2,255		—		(15		)	—			2,240
Pooled trust preferred securities issued by banks and insurers	8,158		—		(2,044		)	(2,497		)	3,617		8,353		—		(2,415		)	(2,957		)	2,981
Marketable securities	10,771		464		(267		)	—			10,968		9,875		92		(57		)	—			9,910
Total available for sale securities	$	303,860	$	8,512	$	(6,236	)	$	(2,281	)	$	303,855	$	320,556	$	14,020	$	(2,638	)	$	(2,652	)	$	329,286
Held to maturity securities
U.S. Treasury securities	$	1,012	$	62	$	—		$	—		$	1,074	$	1,013	$	121	$	—		$	—		$	1,134
Agency mortgage-backed securities	56,889		1,980		—			—			58,869		72,360		4,233		—			—			76,593
Agency collateralized mortgage obligations	159,945		1,632		(3,366		)	—			158,211		97,507		2,875		(2		)	—			100,380
State, county, and municipal securities	916		10		—			—			926		915		11		—			—			926
Single issuer trust preferred securities issued by banks	1,510		20		—			—			1,530		1,516		10		—			—			1,526
Corporate debt securities	5,006		235		—			—			5,241		5,007		258		—			—			5,265
Total held to maturity securities	$	225,278	$	3,939	$	(3,366	)	$	—		$	225,851	$	178,318	$	7,508	$	(2	)	$	—		$	185,824
Total	$	529,138	$	12,451	$	(9,602	)	$	(2,281	)	$	529,706	$	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. The Company realized a gain of $4,000 and a net loss of $4,000 of marketable securities classified as available for sale during the three and six month periods ended June 30, 2013.

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, 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	$	63	$	65	$	240	$	241
Due after one year to five years	10,495		11,038		6,318		6,597
Due after five years to ten years	81,294		80,377		1,012		1,074
Due after ten years	201,237		201,407		217,708		217,939
Total debt securities	$	293,089	$	292,887	$	225,278	$	225,851
Marketable securities	$	10,771	$	10,968	$	—	$	—
Total	$	303,860	$	303,855	$	225,278	$	225,851

The securities portfolio includes $8.0 million and $7.7 million, respectively, of callable securities in the Company’s investment portfolio at June 30, 2013 and December 31, 2012.

At June 30, 2013 and December 31, 2012, investment securities carried at $353.4 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 June 30, 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 ("OTTI")

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, 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)
U.S. Government agency securities	2	19,593		(457		)	—		—			19,593		(457		)
Agency mortgage-backed securities	33	$	76,840	$	(2,865	)	$	—	$	—		$	76,840	$	(2,865	)
Agency collateralized mortgage obligations	13	132,729		(3,969		)	—		—			132,729		(3,969		)
Pooled trust preferred securities issued by banks and insurers	2	—		—			2,244		(2,044		)	2,244		(2,044		)
Marketable securities	26	$	6,258	$	(267	)	$	—	$	—		$	6,258	$	(267	)
Total temporarily impaired securities	76	$	235,420	$	(7,558	)	$	2,244	$	(2,044	)	$	237,664	$	(9,602	)

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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 June 30, 2013:

•

U.S. Government Agency Securities: Government Agency bonds have historically been considered to be of high credit quality. The bonds in the bank's portfolio consist of debt obligations of the Federal Home Loan Bank and the Federal Farm Credit Banks. Because these firms are owned by shareholders and not part of the federal government, these bonds are not backed by the government's “full faith and credit” guarantee and are therefore subject to credit and default risk. The risk of default on these entities are considered low and the credit quality is currently well above investment grade. As such, the decline in market value of these securities is attributable to changes in interest rates and not credit quality.

•

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.


•	Single Issuer Trust Preferred Securities: This portfolio consist of two securities, both of which are below investment grade. The unrealized loss on these securities is attributable to the illiquid nature of the trust preferred market in the current economic environment. Management evaluates various financial metrics for each of the issuers, including regulatory capital ratios of issuers.

•

Pooled Trust Preferred Securities: This portfolio consists of two securities, both of which are below investment grade. 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.

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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, 2013, 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)/Recovery			Fair Value		Total Cumulative Credit Related Other-Than- Temporary Impairment			Total Cumulative Other-Than- Temporary (Impairment)/Recovery to Date
	(Dollars in thousands)
Pooled trust preferred securities
Pooled trust preferred security A	C1	$	1,283	$	—		$	(851	)	$	432	$	(3,676	)	$	(4,527	)
Pooled trust preferred security B	D	—		—			—			—		(3,481		)	(3,481		)
Pooled trust preferred security C	C1	506		—			(319		)	187		(482		)	(801		)
Pooled trust preferred security D	D	—		—			—			—		(990		)	(990		)
Pooled trust preferred security E	C1	2,081		—			(1,327		)	754		(1,368		)	(2,695		)
Pooled trust preferred security F	B	1,878		(1,082		)	—			796		—			—
Pooled trust preferred security G	A1	2,410		(962		)	—			1,448		—			—
Total pooled trust preferred securities		$	8,158	$	(2,044	)	$	(2,497	)	$	3,617	$	(9,997	)	$	(12,494	)
Private mortgage-backed securities
Private mortgage-backed securities-one	2A1	$	1,974	$	—		$	125		$	2,099	$	(766	)	$	(641	)
Private mortgage-backed securities-two	A19	846		—			91			937		(85		)	6
Total private mortgage-backed securities		$	2,820	$	—		$	216		$	3,036	$	(851	)	$	(635	)
Total		$	10,978	$	(2,044	)	$	(2,281	)	$	6,653	$	(10,848	)	$	(13,129	)


(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	56	33.08%	20.64%	—%	C (Fitch & Moody's)
Trust preferred security B	D	56	33.08%	20.64%	—%	C (Fitch)
Trust preferred security C	C1	47	29.29%	15.20%	—%	C (Fitch & Moody's)
Trust preferred security D	D	47	29.29%	15.20%	—%	C (Fitch)
Trust preferred security E	C1	46	26.86%	16.73%	0.66%	C (Fitch & Moody's)
Trust preferred security F	B	32	25.08%	18.83%	30.90%	CC (Fitch)
Trust preferred security G	A1	32	25.08%	18.83%	55.89%	CCC+ (S&P)
Private mortgage-backed securities
Private mortgage-backed securities-one	2A1	N/A	6.53%	13.12%	—%	D (Fitch)
Private mortgage-backed securities-two	A19	N/A	4.18%	7.32%	—%	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						Six Months Ended
	June 30						June 30
	2013			2012			2013			2012
	(Dollars in thousands)
Gross change in OTTI recorded on certain investments (gain/(losses))	$	90		$	(106	)	$	371		$	168
Portion of OTTI gains (losses) recognized in OCI	(90		)	30			(371		)	(244		)
Total credit related OTTI losses recognized in earnings	$	—		$	(76	)	—			$	(76	)

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



	Three Months Ended						Six Months Ended
	June 30						June 30
	2013			2012			2013			2012
	(Dollars in thousands)
Balance at beginning of period	$	(10,847	)	$	(10,771	)	$	(10,847	)	$	(10,771	)
Add
Incurred on securities not previously impaired	—			—			—			—
Incurred on securities previously impaired	—			(76		)	—			(76		)
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	)	$	(10,847	)	$	(10,847	)	$	(10,847	)

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 the type of impairment analysis as of the periods indicated:



	June 30, 2013
	(Dollars in thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Home Equity		Other Consumer		Total
Financing receivables
Ending balance: total loans by group	$	742,343	$	2,150,833	$	231,719	$	77,283	$	513,551	$	792,450	$	21,932	$	4,530,111	(1	)
Ending balance: individually evaluated for impairment	$	9,759	$	36,439	$	1,608	$	2,039	$	15,883	$	4,069	$	1,584	$	71,381
Ending balance: purchase credit impaired loans	$	—	$	18,304	$	—	$	—	$	8,991	$	380	$	—	$	27,675
Ending balance: collectively evaluated for impairment	$	732,584	$	2,096,090	$	230,111	$	75,244	$	488,677	$	788,001	$	20,348	$	4,431,055

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	December 31, 2012
	(Dollars in thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		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 $2.6 million and $3.1 million at June 30, 2013 and December 31, 2012, respectively.

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