INDB 9.30.2013 10-Q
Table of Contents

 
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 September 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 November 1, 2013, there were 22,971,619 shares of the issuer’s common stock outstanding, par value $0.01 per share.
 


Table of Contents

INDEX
 
 
PAGE
 
 
Consolidated Balance Sheets - September 30, 2013 and December 31, 2012
Consolidated Statements of Income - Three and nine months ended September 30, 2013 and 2012
Consolidated Statements of Comprehensive Income -Three and nine months ended September 30, 2013 and 2012
Consolidated Statements of Stockholders’ Equity - Nine months ended September 30, 2013 and 2012
Consolidated Statements of Cash Flows - Nine months ended September 30, 2013 and 2012
 
 
 
 
 
 
 

2
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Exhibit 31.1 – Certification 302
 
Exhibit 31.2 – Certification 302
 
Exhibit 32.1 – Certification 906
 
Exhibit 32.2 – Certification 906
 

3
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT BANK CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited—Dollars in thousands)
 
 
September 30,
2013
 
December 31,
2012
Assets
Cash and due from banks
$
185,111

 
$
98,144

Interest-earning deposits with banks
122,072

 
117,330

Securities

 

Securities available for sale
284,398

 
329,286

Securities held to maturity (fair value $316,597 and $185,824)
317,373

 
178,318

Total securities
601,771

 
507,604

Loans held for sale (at fair value)
10,667

 
48,187

Loans
 
 
 
Commercial and industrial
756,222

 
687,511

Commercial real estate
2,166,281

 
2,122,153

Commercial construction
236,466

 
188,768

Small business
75,273

 
78,594

Residential real estate
496,464

 
612,881

Home equity—1st position
492,732

 
487,246

Home equity—2nd position
311,938

 
314,903

Other consumer
20,653

 
26,955

Total loans
4,556,029

 
4,519,011

Less: allowance for loan losses
(53,562
)
 
(51,834
)
Net loans
4,502,467

 
4,467,177

Federal Home Loan Bank stock
38,674

 
41,767

Bank premises and equipment, net
56,729

 
55,227

Goodwill
150,391

 
150,391

Identifiable intangible assets
10,171

 
11,753

Cash surrender value of life insurance policies
99,805

 
97,261

Other real estate owned & other foreclosed assets
9,364

 
12,150

Other assets
108,242

 
149,994

Total assets
$
5,895,464

 
$
5,756,985

Liabilities and Stockholders' Equity
Deposits
 
 
 
Demand deposits
$
1,339,134

 
$
1,248,394

Savings and interest checking accounts
1,843,795

 
1,691,187

Money market
882,764

 
853,971

Time certificates of deposit of $100,000 and over
282,219

 
317,438

Other time certificates of deposits
409,397

 
435,687

Total deposits
4,757,309

 
4,546,677

Borrowings
 
 
 
Federal Home Loan Bank and other borrowings
189,539

 
283,569

Wholesale repurchase agreements
50,000

 
50,000

Customer repurchase agreements
164,180

 
153,359


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Junior subordinated debentures
73,962

 
74,127

Subordinated debentures
30,000

 
30,000

Total borrowings
507,681

 
591,055

Other liabilities
74,730

 
89,933

Total liabilities
5,339,720

 
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: 22,959,287 shares at September 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)
227

 
225

Shares held in rabbi trust at cost: 177,476 shares at September 30, 2013 and 179,814 shares at December 31, 2012
(3,344
)
 
(3,179
)
Deferred compensation obligation
3,344

 
3,179

Additional paid in capital
274,369

 
269,950

Retained earnings
288,208

 
263,671

Accumulated other comprehensive loss, net of tax
(7,060
)
 
(4,526
)
Total stockholders’ equity
555,744

 
529,320

Total liabilities and stockholders' equity
$
5,895,464

 
$
5,756,985

The accompanying condensed 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
 
Nine Months Ended
 
September 30
 
September 30
 
2013
 
2012
 
2013
 
2012
Interest income
 
 
 
 
 
 
 
Interest on loans
$
47,019

 
$
44,251

 
$
141,717

 
$
131,142

Taxable interest and dividends on securities
3,763

 
3,995

 
10,798

 
12,938

Nontaxable interest and dividends on securities
10

 
20

 
32

 
72

Interest on loans held for sale
156

 
255

 
661

 
541

Interest on federal funds sold
79

 
34

 
134

 
85

Total interest and dividend income
51,027

 
48,555

 
153,342

 
144,778

Interest expense
 
 
 
 
 
 
 
Interest on deposits
2,649

 
2,619

 
7,857

 
8,045

Interest on borrowings
3,182

 
3,098

 
9,812

 
9,413

Total interest expense
5,831

 
5,717

 
17,669

 
17,458

Net interest income
45,196

 
42,838

 
135,673

 
127,320

Provision for loan losses
2,650

 
3,606

 
7,050

 
13,706

Net interest income after provision for loan losses
42,546

 
39,232

 
128,623

 
113,614

Noninterest income
 
 
 
 
 
 
 
Deposit account fees
4,604

 
3,959

 
13,164

 
11,771

Interchange and ATM fees
2,845

 
2,422

 
7,934

 
7,189

Investment management
4,175

 
3,723

 
12,417

 
11,113

Mortgage banking income
1,843

 
1,445

 
5,794

 
4,238

Loan level derivative income
1,331

 
1,047

 
2,679

 
2,747

Increase in cash surrender value of life insurance policies
793

 
757

 
2,325

 
2,211

Gain on extinguishment of debt
763

 
—

 
763

 
—

Proceeds from life insurance policies
—

 
1,307

 
—

 
1,307

Other noninterest income
1,776

 
1,448

 
5,469

 
4,424

Total noninterest income
18,130

 
16,108

 
50,545

 
45,000

Noninterest expenses
 
 
 
 
 
 
 
Salaries and employee benefits
22,654

 
20,704

 
66,963

 
61,915

Occupancy and equipment expenses
4,573

 
4,218

 
14,742

 
12,752

Data processing & facilities management
1,179

 
1,144

 
3,564

 
3,418

Consulting expense
914

 
691

 
2,291

 
1,900

FDIC assessment
898

 
775

 
2,653

 
2,354

Advertising expense
759

 
1,267

 
3,410

 
3,478

Debit card expense
766

 
648

 
2,209

 
1,844

Software maintenance
599

 
491

 
1,878

 
1,467

Telecommunication expense
523

 
479

 
1,726

 
1,763

Merger and acquisition expense
366

 
595

 
2,465

 
1,267

Goodwill impairment
—

 
2,227

 
—

 
2,227

Other noninterest expenses
7,491

 
6,813

 
23,904

 
20,025

Total noninterest expenses
40,722

 
40,052

 
125,805

 
114,410

Income before income taxes
19,954

 
15,288

 
53,363

 
44,204

Provision for income taxes
5,299

 
3,687

 
13,698

 
11,546

Net income
$
14,655

 
$
11,601

 
$
39,665

 
$
32,658

Basic earnings per share
0.64

 
0.54

 
1.73

 
1.51

Diluted earnings per share
0.64

 
0.53

 
1.73

 
1.51

Weighted average common shares (basic)
22,946,308

 
21,654,188

 
22,886,521

 
21,613,157

Common shares equivalents
100,806

 
52,116

 
72,799

 
31,300

Weighted average common shares (diluted)
23,047,114

 
21,706,304

 
22,959,320

 
21,644,457

Cash dividends declared per common share
0.22

 
0.21

 
0.66

 
0.63

The accompanying condensed 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
 
Nine Months Ended
 
September 30
 
September 30
 
2013
 
2012
 
2013
 
2012
Net income
$
14,655

 
$
11,601

 
$
39,665

 
$
32,658

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Unrealized gains (losses) on securities
 
 
 
 
 
 
 
Change in fair value of securities available for sale
(148
)
 
837

 
(5,517
)
 
537

Less: net security losses reclassified into earnings
—

 
—

 
3

 
45

Net change in fair value of securities available for sale
(148
)
 
837

 
(5,514
)
 
582

Unrealized gains (losses) on cash flow hedges
 
 
 
 
 
 
 
Change in fair value of cash flow hedges
(411
)
 
(929
)
 
350

 
(2,125
)
Less: net cash flow hedge losses reclassified into earnings
866

 
810

 
2,557

 
2,371

Net change in fair value of cash flow hedges
455

 
(119
)
 
2,907

 
246

Amortization of certain costs included in net periodic retirement costs
30

 
23

 
73

 
69

Total other comprehensive (loss) income
337

 
741

 
(2,534
)
 
897

Total comprehensive income
$
14,992

 
$
12,342

 
$
37,131

 
$
33,555

The accompanying condensed 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
—

 
—

 
—

 
—

 
—

 
39,665

 
—

 
39,665

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
(2,534
)
 
(2,534
)
Common dividend declared ($0.66 per share)
—

 
—

 
—

 
—

 
—

 
(15,128
)
 
—

 
(15,128
)
Proceeds from exercise of stock options
76,253

 
1

 
—

 
—

 
1,993

 
—

 
—

 
1,994

Tax benefit related to equity award activity
—

 
—

 
—

 
—

 
412

 
—

 
—

 
412

Equity based compensation
—

 
—

 
—

 
—

 
1,923

 
—

 
—

 
1,923

Restricted stock awards issued, net of awards surrendered
89,431

 
1

 
—

 
—

 
(670
)
 
—

 
—

 
(669
)
Shares issued under direct stock purchase plan
19,594

 
—

 
—

 
—

 
656

 
—

 
—

 
656

Deferred compensation obligation
—

 
—

 
(165
)
 
165

 
—

 
—

 
—

 
—

Tax benefit related to deferred compensation distributions
—

 
—

 
—

 
—

 
105

 
—

 
—

 
105

Balance at September 30, 2013
22,959,287

 
$
227

 
$
(3,344
)
 
$
3,344

 
$
274,369

 
$
288,208

 
$
(7,060
)
 
$
555,744

Balance at December 31, 2011
21,499,768

 
$
213

 
$
(2,980
)
 
$
2,980

 
$
233,878

 
$
239,452

 
$
(4,486
)
 
$
469,057

Net income
—

 
—

 
—

 
—

 
—

 
32,658

 
—

 
32,658

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
897

 
897

Common dividend declared ($0.63 per share)
—

 
—

 
—

 
—

 
—

 
(13,629
)
 
—

 
(13,629
)
Proceeds from exercise of stock options
48,976

 
—

 
—

 
—

 
953

 
—

 
—

 
953

Tax benefit related to equity award activity
—

 
—

 
—

 
—

 
153

 
—

 
—

 
153

Equity based compensation
—

 
—

 
—

 
—

 
2,178

 
—

 
—

 
2,178

Restricted stock awards issued, net of awards surrendered
85,254

 
1

 
—

 
—

 
(345
)
 
—

 
—

 
(344
)
Shares issued under direct stock purchase plan
32,928

 
—

 
—

 
—

 
953

 
—

 
—

 
953

Deferred compensation obligation
—

 
—

 
(123
)
 
123

 
—

 
—

 
—

 
—

Tax benefit related to deferred compensation distributions
—

 
—

 
—

 
—

 
89

 
—

 
—

 
89

Balance September 30, 2012
21,666,926

 
$
214

 
$
(3,103
)
 
$
3,103

 
$
237,859

 
$
258,481

 
$
(3,589
)
 
$
492,965

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)
 
 
Nine Months Ended
 
September 30
 
2013
 
2012
Cash flow from operating activities
 
 
 
Net income
$
39,665

 
$
32,658

Adjustments to reconcile net income to cash provided by operating activities
 
 
 
Depreciation and amortization
6,268

 
7,900

Goodwill impairment
—

 
2,227

Provision for loan losses
7,050

 
13,706

Deferred income tax expense (benefit)
5

 
(28
)
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
27

 
(29
)
Gain on extinguishment of debt
(763
)
 
—

Loss on sale of other real estate owned and foreclosed assets
47

 
796

Gain realized from early termination of hedging relationship
—

 
(22
)
Realized gain on sale leaseback transaction
(775
)
 
(775
)
Equity based compensation
1,923

 
2,178

Excess tax benefit related to equity award activity
(412
)
 
(153
)
Increase in cash surrender value of life insurance policies
(2,325
)
 
(3,515
)
Change in fair value on loans held for sale
(274
)
 
(788
)
Proceeds from bank owned life insurance policies
—

 
2,891

Net change in:
 
 
 
Trading assets
—

 
(265
)
Loans held for sale
37,794

 
(21,105
)
Other assets
41,059

 
(11,983
)
Other liabilities
(14,264
)
 
5,740

Total adjustments
75,364

 
(3,149
)
Net cash provided by operating activities
115,029

 
29,509

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
69,732

 
74,524

Purchase of securities available for sale
(34,864
)
 
(83,384
)
Proceeds from maturities and principal repayments of securities held to maturity
39,713

 
41,620

Purchase of securities held to maturity
(179,226
)
 
(24,287
)
Redemption of Federal Home Loan Bank stock
3,093

 
2,290

Purchase of life insurance policies
(219
)
 
(219
)
Net increase in loans
(44,975
)
 
(280,861
)
Purchase of bank premises and equipment
(6,121
)
 
(4,951
)
Proceeds from the sale of bank premises and equipment
19

 
67

Proceeds resulting from early termination of hedging relationship
—

 
22

Proceeds from the sale of other real estate owned and foreclosed assets
7,119

 
4,451

Net cash used in investing activities
(145,560
)
 
(270,728
)

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Cash flows provided by financing activities
 
 
 
Net increase (decrease) in time deposits
(61,509
)
 
257

Net increase in other deposits
272,141

 
240,761

Net increase (decrease) in wholesale and customer repurchase agreements
10,821

 
(7,550
)
Repayment of short term Federal Home Loan Bank advances
(11,695
)
 
(40,000
)
Repayment of long term Federal Home Loan Bank advances
(79,946
)
 
—

Proceeds from exercise of stock options
1,994

 
953

Tax benefit related to equity award activity
412

 
153

Restricted stock awards issued, net of awards surrendered
(669
)
 
(344
)
Tax benefit from deferred compensation distribution
105

 
89

Proceeds from shares issued under direct stock purchase plan
656

 
953

Common dividends paid
(10,070
)
 
(13,164
)
Net cash provided by financing activities
122,240

 
182,108

Net increase (decrease) in cash and cash equivalents
91,709

 
(59,111
)
Cash and cash equivalents at beginning of year
215,474

 
237,504

Cash and cash equivalents at end of period
$
307,183

 
$
178,393

Supplemental schedule of noncash investing and financing activities
 
 
 
Transfer of loans to other real estate owned & foreclosed assets
$
2,346

 
$
5,429

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 September 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. 740 "Income Taxes" Update No. 2013-11. Update No. 2013-11 was issued in July 2013 to eliminate diversity in the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exists at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in the update should be applied prospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

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 did not 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.

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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:

 
September 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
$
20,048

 
$
—

 
$
(449
)
 
$
—

 
$
19,599

 
$
20,053

 
$
769

 
$
—

 
$
—

 
$
20,822

Agency mortgage-backed securities
179,366

 
6,996

 
(3,001
)
 
—

 
183,361

 
209,381

 
12,158

 
(114
)
 
—

 
221,425

Agency collateralized mortgage obligations
61,481

 
472

 
(698
)
 
—

 
61,255

 
67,412

 
1,001

 
(37
)
 
—

 
68,376

Private mortgage-backed securities
2,599

 
—

 
—

 
264

 
2,863

 
3,227

 
—

 
—

 
305

 
3,532

Single issuer trust preferred securities issued by banks
2,222

 
—

 
(49
)
 
—

 
2,173

 
2,255

 
—

 
(15
)
 
—

 
2,240

Pooled trust preferred securities issued by banks and insurers
8,113

 
—

 
(1,900
)
 
(2,242
)
 
3,971

 
8,353

 
—

 
(2,415
)
 
(2,957
)
 
2,981

Marketable securities
10,756

 
671

 
(251
)
 
—

 
11,176

 
9,875

 
92

 
(57
)
 
—

 
9,910

Total available for sale securities
$
284,585

 
$
8,139

 
$
(6,348
)
 
$
(1,978
)
 
$
284,398

 
$
320,556

 
$
14,020

 
$
(2,638
)
 
$
(2,652
)
 
$
329,286

Held to maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
1,012

 
$
57

 
$
—

 
$
—

 
$
1,069

 
$
1,013

 
$
121

 
$
—

 
$
—

 
$
1,134

Agency mortgage-backed securities
115,983

 
2,961

 
(114
)
 
—

 
118,830

 
72,360

 
4,233

 
—

 
—

 
76,593

Agency collateralized mortgage obligations
193,190

 
1,104

 
(5,038
)
 
—

 
189,256

 
97,507

 
2,875

 
(2
)
 
—

 
100,380

State, county, and municipal securities
676

 
11

 
—

 
—

 
687

 
915

 
11

 
—

 
—

 
926

Single issuer trust preferred securities issued by banks
1,507

 
22

 
—

 
—

 
1,529

 
1,516

 
10

 
—

 
—

 
1,526

Corporate debt securities
5,005

 
221

 
—

 
—

 
5,226

 
5,007

 
258

 
—

 
—

 
5,265

Total held to maturity securities
$
317,373

 
$
4,376

 
$
(5,152
)
 
$
—

 
$
316,597

 
$
178,318

 
$
7,508

 
$
(2
)
 
$
—

 
$
185,824

Total
$
601,958

 
$
12,515

 
$
(11,500
)
 
$
(1,978
)
 
$
600,995

 
$
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 did not realize any gain or loss on marketable securities classified as available for sale during the three month periods ending September 30, 2013 and 2012. The Company realized a net loss of $4,000 on marketable securities classified as available for sale during the nine month period ended September 30, 2013 and there were no realized gains or losses during the nine month period ended September 30, 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 September 30, 2013 is presented below:

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Table of Contents


 
Available for Sale
 
Held to Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(Dollars in thousands)
Due in one year or less
$
3

 
$
3

 
$
254

 
$
256

Due after one year to five years
9,151

 
9,647

 
5,936

 
6,192

Due after five years to ten years
81,624

 
80,651

 
18,052

 
18,188

Due after ten years
183,051

 
182,921

 
293,131

 
291,961

Total debt securities
$
273,829

 
$
273,222

 
$
317,373

 
$
316,597

Marketable securities
$
10,756

 
$
11,176

 
$
—

 
$
—

Total
$
284,585

 
$
284,398

 
$
317,373

 
$
316,597

The securities portfolio includes $8.3 million and $7.7 million, respectively, of callable securities in the Company’s investment portfolio at September 30, 2013 and December 31, 2012.
At September 30, 2013 and December 31, 2012, investment securities carried at $361.9 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 September 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:

 
September 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

 
$
19,599

 
$
(449
)
 
$
—

 
$
—

 
$
19,599

 
$
(449
)
Agency mortgage-backed securities
31

 
84,934

 
(2,893
)
 
3,431

 
(222
)
 
88,365

 
(3,115
)
Agency collateralized mortgage obligations
15

 
149,561

 
(5,736
)
 
—

 
—

 
149,561

 
(5,736
)
Single issuer trust preferred securities issued by banks and insurers
2

 
2,173

 
(49
)
 
—

 
—

 
2,173

 
(49
)
Pooled trust preferred securities issued by banks and insurers
2

 
—

 
—

 
2,343

 
(1,900
)
 
2,343

 
(1,900
)
Marketable securities
19

 
5,735

 
(232
)
 
146

 
(19
)
 
5,881

 
(251
)
Total temporarily impaired securities
71

 
$
262,002

 
$
(9,359
)
 
$
5,920

 
$
(2,141
)
 
$
267,922

 
$
(11,500
)


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Table of Contents

 
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 September 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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Table of Contents

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 September 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

 
$
—

 
$
(757
)
 
$
526

 
$
(3,676
)
 
$
(4,433
)
Pooled trust preferred security B
D
 
—

 
—

 
—

 
—

 
(3,481
)
 
(3,481
)
Pooled trust preferred security C
C1
 
506

 
—

 
(307
)
 
199

 
(482
)
 
(789
)
Pooled trust preferred security D
D
 
—

 
—

 
—

 
—

 
(989
)
 
(989
)
Pooled trust preferred security E
C1
 
2,081

 
—

 
(1,178
)
 
903

 
(1,368
)
 
(2,546
)
Pooled trust preferred security F
B
 
1,833

 
(1,028
)
 
—

 
805

 
—

 
—

Pooled trust preferred security G
A1
 
2,410

 
(872
)
 
—

 
1,538

 
—

 
—

Total pooled trust preferred securities
 
 
$
8,113

 
$
(1,900
)
 
$
(2,242
)
 
$
3,971

 
$
(9,996
)
 
$
(12,238
)
Private mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Private mortgage-backed securities-one
2A1
 
$
1,835

 
$
—

 
$
165

 
$
2,000

 
$
(766
)
 
$
(601
)
Private mortgage-backed securities-two
A19
 
764

 
—

 
99

 
863

 
(85
)
 
14

Total private mortgage-backed securities
 
 
$
2,599

 
$
—

 
$
264

 
$
2,863

 
$
(851
)
 
$
(587
)
Total
 
 
$
10,712

 
$
(1,900
)
 
$
(1,978
)
 
$
6,834

 
$
(10,847
)
 
$
(12,825
)
(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%
 
19.20%
 
—%
 
C (Fitch & Moody's)
Trust preferred security B
D
 
56
 
33.08%
 
19.20%
 
—%
 
C (Fitch)
Trust preferred security C
C1
 
47
 
29.29%
 
14.96%
 
—%
 
C (Fitch & Moody's)
Trust preferred security D
D
 
47
 
29.29%
 
14.96%
 
—%
 
C (Fitch)
Trust preferred security E
C1
 
46
 
26.86%
 
15.82%
 
1.10%
 
C (Fitch & Moody's)
Trust preferred security F
B
 
32
 
25.08%
 
17.98%
 
33.20%
 
CC (Fitch)
Trust preferred security G
A1
 
32
 
25.08%
 
17.98%
 
57.55%
 
CCC+ (S&P)
Private mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Private mortgage-backed securities-one
2A1
 
N/A
 
7.80%
 
12.72%
 
—%
 
D (Fitch)
Private mortgage-backed securities-two
A19
 
N/A
 
4.33%
 
7.54%
 
—%
 
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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Table of Contents

The following table shows the total OTTI that the Company recorded for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2013
 
2012
 
2013
 
2012
 
(Dollars in thousands)
Gross change in OTTI recorded on certain investments
$
303

 
$
403

 
$
674

 
$
571

Portion of OTTI recognized in OCI
(303
)
 
(403
)
 
(674
)
 
(647
)
Total credit related OTTI losses recognized in earnings
$
—

 
$
—

 
—
 
$
(76
)
The following table shows the cumulative credit related component of OTTI for the periods indicated:

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

 
—

 
—

 
—

Incurred on securities previously impaired
—

 
—

 
—

 
(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 bifurcate the amount of allowance allocated to each loan category based on the type of impairment analysis as of the periods indicated:

 
September 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
$
756,222

 
$
2,166,281

 
$
236,466

 
$
75,273

 
$
496,464

 
$
804,670

 
$
20,653


$
4,556,029

(1
)
Ending balance: individually evaluated for impairment
$
9,646

 
$
39,805

 
$
100

 
$
2,062

 
$
15,786

 
$
4,131

 
$
1,437

 
$
72,967

  
Ending balance: purchase credit impaired loans
$
—

 
$
18,114

 
$
—

 
$
—

 
$
8,888

 
$
330

 
$
—

 
$
27,332

 
Ending balance: collectively evaluated for impairment
$
746,576

 
$
2,108,362

 
$
236,366

 
$
73,211

 
$
471,790

 
$
800,209

 
$
19,216

 
$
4,455,730

  


17
Table of Contents

 
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
$
—

 
$