INDB 3.31.2014 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 March 31, 2014
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
x
Accelerated Filer
o
 
 
 
 
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, 2014, there were 23,898,755 shares of the issuer’s common stock outstanding, par value $0.01 per share.
 


Table of Contents

INDEX
 
 
PAGE
 
 
Consolidated Balance Sheets - March 31, 2014 and December 31, 2013
Consolidated Statements of Income - Three months ended March 31, 2014 and 2013
Consolidated Statements of Comprehensive Income -Three months ended March 31, 2014 and 2013
Consolidated Statements of Stockholders’ Equity - Three months ended March 31, 2014 and 2013
Consolidated Statements of Cash Flows - Three months ended March 31, 2014 and 2013
 
 
 
 
 
 
 

2
Table of Contents

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

3
Table of Contents

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT BANK CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited—Dollars in thousands)
 
 
March 31,
2014
 
December 31,
2013
Assets
Cash and due from banks
$
142,349

 
$
168,106

Interest-earning deposits with banks
74,934

 
48,219

Securities

 

Securities available for sale
348,258

 
356,862

Securities held to maturity (fair value $374,530 and $346,455)
375,556

 
350,652

Total securities
723,814

 
707,514

Loans held for sale (at fair value)
6,788

 
8,882

Loans
 
 
 
Commercial and industrial
822,509

 
784,202

Commercial real estate
2,282,939

 
2,249,260

Commercial construction
239,536

 
223,859

Small business
78,147

 
77,240

Residential real estate
538,626

 
541,443

Home equity - 1st position
499,095

 
497,075

Home equity - subordinate positions
328,190

 
325,066

Other consumer
18,227

 
20,162

Total loans
4,807,269

 
4,718,307

Less: allowance for loan losses
(53,629
)
 
(53,239
)
Net loans
4,753,640

 
4,665,068

Federal Home Loan Bank stock
39,926

 
39,926

Bank premises and equipment, net
64,433

 
64,950

Goodwill
170,421

 
170,421

Identifiable intangible assets
11,630

 
12,221

Cash surrender value of life insurance policies
97,839

 
100,406

Other real estate owned and other foreclosed assets
7,997

 
7,633

Other assets
132,149

 
105,888

Total assets
$
6,225,920

 
$
6,099,234

Liabilities and Stockholders' Equity
Deposits
 
 
 
Demand deposits
$
1,399,717

 
$
1,369,432

Savings and interest checking accounts
2,032,204

 
1,940,153

Money market
957,052

 
933,205

Time certificates of deposit of $100,000 and over
292,956

 
297,984

Other time certificates of deposits
432,330

 
445,644

Total deposits
5,114,259

 
4,986,418

Borrowings
 
 
 
Federal Home Loan Bank borrowings
140,228

 
140,294

Customer repurchase agreements and other short-term borrowings
128,485

 
154,288

Wholesale repurchase agreements
50,000

 
50,000


4
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Junior subordinated debentures
73,852

 
73,906

Subordinated debentures
30,000

 
30,000

Total borrowings
422,565

 
448,488

Other liabilities
86,540

 
72,788

Total liabilities
5,623,364

 
5,507,694

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: 23,878,056 shares at March 31, 2014 and 23,805,984 shares at December 31, 2013 (includes 284,453 and 268,290 shares of unvested participating restricted stock awards, respectively)
236

 
235

Shares held in rabbi trust at cost: 172,048 shares at March 31, 2014 and 178,765 shares at December 31, 2013
(3,456
)
 
(3,404
)
Deferred compensation obligation
3,456

 
3,404

Additional paid in capital
306,156

 
305,179

Retained earnings
301,218

 
293,560

Accumulated other comprehensive loss, net of tax
(5,054
)
 
(7,434
)
Total stockholders’ equity
602,556

 
591,540

Total liabilities and stockholders' equity
$
6,225,920

 
$
6,099,234

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


5
Table of Contents

INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited—Dollars in thousands, except per share data)
 
Three Months Ended
 
March 31
 
2014
 
2013
Interest income
 
 
 
Interest on loans
$
48,204

 
$
46,978

Taxable interest and dividends on securities
4,650

 
3,529

Nontaxable interest and dividends on securities
37

 
11

Interest on loans held for sale
51

 
268

Interest on federal funds sold
38

 
34

Total interest and dividend income
52,980

 
50,820

Interest expense
 
 
 
Interest on deposits
2,791

 
2,665

Interest on borrowings
2,583

 
3,293

Total interest expense
5,374

 
5,958

Net interest income
47,606

 
44,862

Provision for loan losses
4,502

 
1,300

Net interest income after provision for loan losses
43,104

 
43,562

Noninterest income
 
 
 
Deposit account fees
4,359

 
4,217

Interchange and ATM fees
2,975

 
2,328

Investment management
4,603

 
3,884

Mortgage banking income
487

 
2,281

Loan level derivative income
746

 
532

Increase in cash surrender value of life insurance policies
722

 
746

Gain on life insurance benefits
1,627

 
—

Net gain on sale of equity securities
91

 
—

Other noninterest income
1,906

 
1,736

Total noninterest income
17,516

 
15,724

Noninterest expenses
 
 
 
Salaries and employee benefits
23,080

 
22,715

Occupancy and equipment expenses
6,146

 
5,249

Data processing and facilities management
1,253

 
1,184

FDIC assessment
905

 
821

Advertising expense
824

 
1,172

Consulting expense
559

 
710

Debit card expense
614

 
670

Merger and acquisition expense
77

 
1,345

Software maintenance
662

 
681

Telecommunication expense
548

 
655

Other noninterest expenses
7,219

 
7,718

Total noninterest expenses
41,887

 
42,920

Income before income taxes
18,733

 
16,366

Provision for income taxes
5,350

 
4,114

Net income
$
13,383

 
$
12,252

Basic earnings per share
0.56

 
0.54

Diluted earnings per share
0.56

 
0.54

Weighted average common shares (basic)
23,819,065

 
22,823,753

Common shares equivalents
100,173

 
46,040

Weighted average common shares (diluted)
23,919,238

 
22,869,793

Cash dividends declared per common share
0.24

 
0.22

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


6
Table of Contents

INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited—Dollars in thousands)
 
 
Three Months Ended
 
March 31
 
2014
 
2013
Net income
$
13,383

 
$
12,252

Other comprehensive income, net of tax
 
 
 
Unrealized gains (losses) on securities
 
 
 
Change in fair value of securities available for sale
1,971

 
(777
)
Less: net security gains reclassified into earnings
54

 
—

Net change in fair value of securities available for sale
1,917

 
(777
)
Unrealized gains (losses) on cash flow hedges
 
 
 
Change in fair value of cash flow hedges
(177
)
 
(3
)
Less: net cash flow hedge losses reclassified into earnings
(679
)
 
(836
)
Net change in fair value of cash flow hedges
502

 
833

Net gain (loss) during the period and amortization of certain costs included in net periodic retirement costs
(39
)
 
1

Total other comprehensive income
2,380

 
57

Total comprehensive income
$
15,763

 
$
12,309

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


7
Table of Contents

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, 2013
23,805,984

 
$
235

 
$
(3,404
)
 
$
3,404

 
$
305,179

 
$
293,560

 
$
(7,434
)
 
$
591,540

Net income
—

 
—

 
—

 
—

 
—

 
13,383

 
—

 
13,383

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
2,380

 
2,380

Common dividend declared ($0.24 per share)
—

 
—

 
—

 
—

 
—

 
(5,725
)
 
—

 
(5,725
)
Proceeds from exercise of stock options
7,911

 
—

 
—

 
—

 
133

 
—

 
—

 
133

Tax benefit related to equity award activity
—

 
—

 
—

 
—

 
193

 
—

 
—

 
193

Equity based compensation
—

 
—

 
—

 
—

 
677

 
—

 
—

 
677

Restricted stock awards issued, net of awards surrendered
55,761

 
1

 
—

 
—

 
(473
)
 
—

 
—

 
(472
)
Shares issued under direct stock purchase plan
8,400

 
—

 
—

 
—

 
319

 
—

 
—

 
319

Deferred compensation obligation
—

 
—

 
(52
)
 
52

 
—

 
—

 
—

 
—

Tax benefit related to deferred compensation distributions
—

 
—

 
—

 
—

 
128

 
—

 
—

 
128

Balance at March 31, 2014
23,878,056

 
$
236

 
$
(3,456
)
 
$
3,456

 
$
306,156

 
$
301,218

 
$
(5,054
)
 
$
602,556

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 March 31, 2013
22,871,347

 
$
226

 
$
(3,198
)
 
$
3,198

 
$
270,927

 
$
270,891

 
$
(4,469
)
 
$
537,575

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

8
Table of Contents

INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited—Dollars in thousands)
 
 
Three Months Ended
 
March 31
 
2014
 
2013
Cash flow from operating activities
 
 
 
Net income
$
13,383

 
$
12,252

Adjustments to reconcile net income to cash provided by operating activities
 
 
 
Depreciation and amortization
2,671

 
2,064

Provision for loan losses
4,502

 
1,300

Deferred income tax expense
471

 
2

Net gain on sale of equity securities
(91
)
 
—

Net loss on fixed assets
353

 
28

Net loss on sale of other real estate owned and foreclosed assets
184

 
198

Realized gain on sale leaseback transaction
(258
)
 
(258
)
Stock based compensation
677

 
760

Excess tax benefit related to equity award activity
(193
)
 
(166
)
Increase in cash surrender value of life insurance policies
(722
)
 
(746
)
Gain on life insurance benefits
(1,627
)
 
—

Change in fair value on loans held for sale
(51
)
 
140

Net change in:
 
 
 
Loans held for sale
2,145

 
11,257

Other assets
1,991

 
11,394

Other liabilities
(8,722
)
 
(11,862
)
Total adjustments
1,330

 
14,111

Net cash provided by operating activities
14,713

 
26,363

Cash flows used in investing activities
 
 
 
Proceeds from sales of securities available for sale
673

 
—

Proceeds from maturities and principal repayments of securities available for sale
11,705

 
26,708

Purchase of securities available for sale
(766
)
 
(34,725
)
Proceeds from maturities and principal repayments of securities held to maturity
9,083

 
13,950

Purchase of securities held to maturity
(34,017
)
 
(44,902
)
Redemption of Federal Home Loan Bank stock
—

 
3,093

Investment in Low Income Housing Projects
(2,561
)
 
—

Purchase of life insurance policies
(93
)
 
(93
)
Proceeds from life insurance policies
478

 
—

Net (increase) decrease in loans
(93,858
)
 
29,167

Purchase of bank premises and equipment
(2,455
)
 
(1,478
)
Proceeds from the sale of bank premises and equipment
756

 
—

Proceeds from the sale of other real estate owned and foreclosed assets
642

 
1,206

Capital improvements to other real estate owned
(444
)
 
(304
)
Net cash used in investing activities
(110,857
)
 
(7,378
)
Cash flows provided by (used in) financing activities
 
 
 
Net increase (decrease) in time deposits
(18,342
)
 
15,141

Net increase (decrease) in other deposits
146,183

 
(10,408
)

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Net increase in short-term Federal Home Loan Bank borrowings
—

 
305

Repayments of long-term Federal Home Loan Bank borrowings
—

 
(9,134
)
Net decrease in customer repurchase agreements
(20,803
)
 
(23,741
)
Net decrease in other borrowings
(5,000
)
 
(7,000
)
Proceeds from exercise of stock options, net of cash paid
133

 
451

Restricted stock awards issued, net of awards surrendered
(472
)
 
(507
)
Excess tax benefit from stock based compensation
193

 
166

Tax benefit from deferred compensation distribution
128

 
100

Proceeds from shares issued under direct stock purchase plan
319

 
8

Common dividends paid
(5,237
)
 
—

Net cash provided by (used in) financing activities
97,102

 
(34,619
)
Net increase (decrease) in cash and cash equivalents
958

 
(15,634
)
Cash and cash equivalents at beginning of year
216,325

 
215,474

Cash and cash equivalents at end of period
$
217,283

 
$
199,840

Supplemental schedule of noncash investing and financing activities
 
 
 
Transfer of loans to other real estate owned & foreclosed assets
$
746

 
$
771

Capital commitment relating to Low Income Housing Project investments
$
23,279

 
$
—

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

10
Table of Contents

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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 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, 2013, filed with the Securities and Exchange Commission.

NOTE 2 – RECENT ACCOUNTING STANDARDS UPDATES

FASB ASC Subtopic 310-40 "Receivables - Troubled Debt Restructurings by Creditors" Update No. 2014-04. Update No. 2014-04 was issued in January 2014 to reduce diversity by clarifying when an in substance repossession of foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. 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, 2014. 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. 323 "Investments - Equity Method and Joint Ventures" Update No. 2014-01. Update No. 2014-01 was issued in January 2014 to provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credit. The amendments in this update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component to income tax expense (benefit). The amendments in the update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted and the Company chose to early adopt this guidance effective January 1, 2014. The adoption of this standard did not have a material impact on the Company's consolidated financial position.


11
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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, 2014
 
December 31, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
Other
 
Other-Than-
Temporary
Impairment
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
Other
 
Other-Than-
Temporary
Impairment
 
Fair
Value
 
(Dollars in thousands)
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency securities
$
41,335

 
$
4

 
$
(415
)
 
$
—

 
$
40,924

 
$
41,331

 
$
3

 
$
(885
)
 
$
—

 
$
40,449

Agency mortgage-backed securities
223,304

 
6,339

 
(2,878
)
 
—

 
226,765

 
232,742

 
6,405

 
(4,556
)
 
—

 
234,591

Agency collateralized mortgage obligations
56,277

 
259

 
(1,081
)
 
—

 
55,455

 
58,765

 
490

 
(1,102
)
 
—

 
58,153

State, county, and municipal securities
5,415

 
36

 
(1
)
 
—

 
5,450

 
5,439

 
1

 
(28
)
 
—

 
5,412

Single issuer trust preferred securities issued by banks
2,949

 
68

 
—

 
—

 
3,017

 
2,960

 
14

 
(22
)
 
—

 
2,952

Pooled trust preferred securities issued by banks and insurers
8,044

 
—

 
(1,583
)
 
(1,494
)
 
4,967

 
8,083

 
—

 
(1,913
)
 
(2,329
)
 
3,841

Equity securities
11,182

 
745

 
(247
)
 
—

 
11,680

 
10,997

 
762

 
(295
)
 
—

 
11,464

Total available for sale securities
$
348,506

 
$
7,451

 
$
(6,205
)
 
$
(1,494
)
 
$
348,258

 
$
360,317

 
$
7,675

 
$
(8,801
)
 
$
(2,329
)
 
$
356,862

Held to maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
1,011

 
$
42

 
$
—

 
$
—

 
$
1,053

 
$
1,011

 
$
31

 
$
—

 
$
—

 
$
1,042

Agency mortgage-backed securities
175,069

 
2,523

 
(255
)
 
—

 
177,337

 
155,067

 
1,917

 
(1,033
)
 
—

 
155,951

Agency collateralized mortgage obligations
192,293

 
1,627

 
(5,214
)
 
—

 
188,706

 
187,388

 
824

 
(6,176
)
 
—

 
182,036

State, county, and municipal securities
678

 
11

 
—

 
—

 
689

 
678

 
7

 
—

 
—

 
685

Single issuer trust preferred securities issued by banks
1,501

 
25

 
—

 
—

 
1,526

 
1,503

 
23

 
—

 
—

 
1,526

Corporate debt securities
5,004

 
215

 
—

 
—

 
5,219

 
5,005

 
210

 
—

 
—

 
5,215

Total held to maturity securities
$
375,556

 
$
4,443

 
$
(5,469
)
 
$
—

 
$
374,530

 
$
350,652

 
$
3,012

 
$
(7,209
)
 
$
—

 
$
346,455

Total
$
724,062

 
$
11,894

 
$
(11,674
)
 
$
(1,494
)
 
$
722,788

 
$
710,969

 
$
10,687

 
$
(16,010
)
 
$
(2,329
)
 
$
703,317

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 net gain of $91,000 on equity securities classified as available for sale during the three month period ending March 31, 2014. The Company did not realize any gain or loss on equity securities classified as available for sale during the three month period ending March 31, 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 March 31, 2014 is presented below:

12
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
$
—

 
$
—

 
$
255

 
$
256

Due after one year to five years
36,382

 
37,193

 
5,821

 
6,071

Due after five years to ten years
74,283

 
72,842

 
27,163

 
27,354

Due after ten years
226,659

 
226,543

 
342,317

 
340,849

Total debt securities
$
337,324

 
$
336,578

 
$
375,556

 
$
374,530

Equity securities
$
11,182

 
$
11,680

 
$
—

 
$
—

Total
$
348,506

 
$
348,258

 
$
375,556

 
$
374,530

Inclusive in the table above is $33.9 million of callable securities in the Company’s investment portfolio at March 31, 2014.
The carrying value of securities pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law, was $358.3 million and $360.1 million at March 31, 2014 and December 31, 2013, respectively.
At March 31, 2014 and December 31, 2013, 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:
 
March 31, 2014
 
 
 
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
38

 
$
38,961

 
$
(415
)
 
$
—

 
$
—

 
$
38,961

 
$
(415
)
Agency mortgage-backed securities
110

 
165,251

 
(2,797
)
 
6,193

 
(336
)
 
171,444

 
(3,133
)
Agency collateralized mortgage obligations
15

 
125,217

 
(4,766
)
 
21,186

 
(1,529
)
 
146,403

 
(6,295
)
State, county, and municipal securities
1

 
289

 
(1
)
 
—

 
—

 
289

 
(1
)
Pooled trust preferred securities issued by banks and insurers
2

 
—

 
—

 
2,593

 
(1,583
)
 
2,593

 
(1,583
)
Equity securities
16

 
2,262

 
(58
)
 
3,593

 
(189
)
 
5,855

 
(247
)
Total temporarily impaired securities
182

 
$
331,980

 
$
(8,037
)
 
$
33,565

 
$
(3,637
)
 
$
365,545

 
$
(11,674
)


13
Table of Contents

 
December 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)
U.S. government agency securities
39

 
$
39,950

 
$
(885
)
 
$
—

 
$
—

 
$
39,950

 
$
(885
)
Agency mortgage-backed securities
124

 
202,004

 
(5,217
)
 
5,108

 
(372
)
 
207,112

 
(5,589
)
Agency collateralized mortgage obligations
19

 
183,721

 
(7,278
)
 
—

 
—

 
183,721

 
(7,278
)
State, county, and municipal securities
13

 
3,838

 
(28
)
 
—

 
—

 
3,838

 
(28
)
Single issuer trust preferred securities issued by banks and insurers
2

 
1,341

 
(22
)
 
—

 
—

 
1,341

 
(22
)
Pooled trust preferred securities issued by banks and insurers
2

 
—

 
—

 
2,300

 
(1,913
)
 
2,300

 
(1,913
)
Equity securities
22

 
2,376

 
(90
)
 
3,520

 
(205
)
 
5,896

 
(295
)
Total temporarily impaired securities
221

 
$
433,230

 
$
(13,520
)
 
$
10,928

 
$
(2,490
)
 
$
444,158

 
$
(16,010
)
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, 2014:
•
U.S. Government Agency Securities, 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 both of which are performing. 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.
•
Equity Securities: This portfolio consists of mutual funds and other equity investments. During some periods, the mutual funds in the Company’s investment portfolio may have unrealized losses resulting from market fluctuations as well as the risk premium associated with that particular asset class. For example, emerging market equities tend to trade at a higher risk premium than U.S. government bonds and thus, will fluctuate to a greater degree on both the upside and the downside. In the context of a well-diversified portfolio, however, the correlation amongst the various asset classes represented by the funds serves to minimize downside risk. The Company evaluates each mutual fund in the portfolio regularly and measures performance on both an absolute and relative basis. A reasonable recovery period for positions with an unrealized loss is based on management’s assessment of general economic data, trends within a particular asset class, valuations, earnings forecasts and bond durations.

14
Table of Contents

The following table shows the total OTTI that the Company recorded for the periods indicated:
 
Three Months Ended
 
March 31
 
2014
 
2013
 
(Dollars in thousands)
Gross change in OTTI recorded on certain investments
$
833

 
$
281

Portion of OTTI recognized in OCI
(833
)
 
(281
)
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
 
2014
 
2013
 
(Dollars in thousands)
Balance at beginning of period
$
(9,997
)
 
$
(10,847
)
Add
 
 
 
Incurred on securities not previously impaired
—

 
—

Incurred on securities previously impaired
—

 
—

Less
 
 
 
Securities sold during the period
—

 
—

Reclassification due to changes in Company’s intent
—

 
—

Increases in cash flow expected to be collected
—

 
—

Balance at end of period
$
(9,997
)
 
$
(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:
 
March 31, 2014
 
 
(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
$
822,509

 
$
2,282,939

 
$
239,536

 
$
78,147

 
$
538,626

 
$
827,285

 
$
18,227


$
4,807,269

(1
)
Individually evaluated for impairment
$
8,554

 
$
37,076

 
$
100

 
$
1,852

 
$
16,602

 
$
5,133

 
$
1,186

 
$
70,503

  
Purchase credit impaired loans
$
1

 
$
18,439

 
$
192

 
$
—

 
$
10,170

 
$
315

 
$
14

 
$
29,131

 
Collectively evaluated for impairment
$
813,954

 
$
2,227,424

 
$
239,244

 
$
76,295

 
$
511,854

 
$
821,837

 
$
17,027

 
$
4,707,635

  

15
Table of Contents

 
December 31, 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
$
784,202

 
$
2,249,260

 
$
223,859

 
$
77,240

 
$
541,443

 
$
822,141

 
$
20,162

 
$
4,718,307

(1
)
Individually evaluated for impairment
$
9,148

 
$
39,516

 
$
100

 
$
1,903

 
$
15,200

 
$
4,890

 
$
1,298

 
$
72,055

  
Purchase credit impaired loans
$
1

 
$
18,612

 
$
197

 
$
—

 
$
10,389

 
$
326

 
$
19

 
$
29,544

 
Collectively evaluated for impairment
$
775,053

 
$
2,191,132

 
$
223,562

 
$
75,337

 
$
515,854

 
$
816,925

 
$
18,845

 
$
4,616,708

  
 
(1)
The amount of net deferred fees included in the ending balance was $2.3 million at both March 31, 2014 and December 31, 2013.
The following tables summarize changes in allowance for loan losses by loan category for the periods indicated:
 
Three Months Ended March 31, 2014
 
(Dollars in thousands)
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 
Other Consumer
 
Total
Allowance for loan losses
 
Beginning balance
$
15,622

 
$
24,541

 
$
3,371

 
$
1,215

 
$
2,760

 
$
5,036

 
$
694

 
$
53,239

Charge-offs
(783
)
 
(2,922
)
 
—

 
(268
)
 
(128
)
 
(94
)
 
(371
)
 
(4,566
)
Recoveries
79

 
68

 
—

 
47

 
—

 
93

 
167

 
454

Provision
683

 
3,230

 
199

 
213

 
197

 
(277
)
 
257

 
4,502

Ending balance
$
15,601

 
$
24,917

 
$
3,570

 
$
1,207

 
$
2,829

 
$
4,758

 
$
747

 
$
53,629

Ending balance: Individually evaluated for impairment
$
647

 
$
369

 
$
—

 
$
109

 
$
1,641

 
$
114

 
$
62

 
$
2,942

Ending balance: Collectively evaluated for impairment
$
14,954

 
$
24,548

 
$
3,570

 
$
1,098

 
$
1,188

 
$
4,644

 
$
685

 
$
50,687

 
Three Months Ended March 31, 2013
 
(Dollars in thousands)
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

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: Collectively evaluated for impairment
$
12,672

 
$
22,184

 
$
3,139

 
$
1,131

 
$
1,471

 
$
7,658

 
$
628

 
$
48,883

For the purpose of estimating the allowance for loan losses, management segregates the loan portfolio into the portfolio segments detailed in the above tables.  Each of these loan categories possesses unique risk characteristics that are considered when

16
Table of Contents

determining the appropriate level of allowance for each segment.  Some of the risk characteristics unique to each loan category include:
Commercial Portfolio
•
Commercial & Industrial: Loans in this category consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment.  Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant & equipment, or real estate, if applicable. Repayment sources consist of: primarily, operating cash flow, and secondarily, liquidation of assets.
•
Commercial Real Estate: Loans in this category consist of mortgage loans to finance investment in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties.  Loans are typically written with amortizing payment structures.  Collateral values are determined based upon third party appraisals and evaluations.  Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources consist of: primarily, cash flow from operating leases and rents, and secondarily, liquidation of assets.
•
Commercial Construction: Loans in this category consist of short-term construction loans, revolving and nonrevolving credit lines and construction/permanent loans to finance the acquisition, development and construction or rehabilitation of real property.  Project types include: residential 1-4 family condominium and multi-family homes, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties.  Loans may be written with nonamortizing or hybrid payment structures depending upon the type of project.  Collateral values are determined based upon third party appraisals and evaluations.  Loan to value ratios at origination are governed by established policy and regulatory guidelines.  Repayment sources vary depending upon the type of project and may consist of: sale or lease of units, operating cash flows or liquidation of other assets.
•
Small Business: Loans in this category consist of revolving, term loan and mortgage obligations extended to sole proprietors and small businesses for purposes of financing working capital and/or capital investment.  Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant & equipment, or real estate if applicable.  Repayment sources consist of: primarily, operating cash flows, and secondarily, liquidation of assets.
For the commercial portfolio it is the Bank’s policy to obtain personal guarantees for payment from individuals holding material ownership interests of the borrowing entities.
Consumer Portfolio
•
Residential Real Estate: Residential mortgage loans held in the Bank’s portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors such as current and expected income, employment status, current assets, other financial resources, credit history and the value of the collateral.  Collateral consists of mortgage liens on 1-4 family residential properties.  The Company does not originate sub-prime loans.
•
Home Equity: Home equity loans and lines are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied 1-4 family homes, condominiums or vacation homes or on nonowner occupied 1-4 family homes with more restrictive loan to value requirements. The home equity loan has a fixed rate and is billed in equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed in interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Additionally, the Bank has the option of renewing the line of credit for additional draw periods.  Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan to value ratios within established policy guidelines.
•
Other Consumer: Other consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection.  Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines.  These loans may be secured or unsecured.
Credit Quality
The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as delinquent, impaired, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. If a restructured loan meets certain criteria, it may be categorized as a troubled debt restructuring (“TDR”).
The Company reviews numerous credit quality indicators when assessing the risk in its loan portfolio. For the commercial portfolio, the Company utilizes a 10-point commercial risk-rating system, which assigns a risk-grade to each borrower based on

17
Table of Contents

a number of quantitative and qualitative factors associated with a commercial loan transaction. Factors considered include industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral, and other considerations. The risk-ratings categories are defined as follows:
•
1- 6 Rating — Pass: Risk-rating grades “1” through “6” comprise those loans ranging from ‘Substantially Risk Free’ which indicates borrowers are of unquestioned credit standing and the pinnacle of credit quality, well established companies with a very strong financial condition, and loans fully secured by cash collateral, through ‘Acceptable Risk’, which indicates borrowers may exhibit declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average or below average asset quality, margins and market share. Collateral coverage is protective.
•
7 Rating — Potential Weakness: Borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Bank’s asset and position. While potentially weak, currently these borrowers are marginally acceptable; no loss of principal or interest is envisioned.
•
8 Rating — Definite Weakness: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. Loan may be inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. However, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation.
•
9 Rating — Partial Loss Probable: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt with the added provision that the weaknesses make collection of the debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely.
•
10 Rating — Definite Loss: Borrowers deemed incapable of repayment. Loans to such borrowers are considered uncollectible and of such little value that continuation as active assets of the Bank is not warranted.
The credit quality of the commercial loan portfolio is actively monitored and any changes in credit quality are reflected in risk-rating changes. Risk-ratings are assigned or reviewed for all new loans, when advancing significant additions to existing relationships (over $50,000), at least quarterly for all actively managed loans, and any time a significant event occurs, including at renewal of the loan.
The Company utilizes a comprehensive strategy for monitoring commercial credit quality. Borrowers are required to provide updated financial information at least annually which is carefully evaluated for any changes in credit quality. Larger loan relationships are subject to a full annual credit review by an experienced credit analysis group. Additionally, the Company retains an independent loan review firm to evaluate the credit quality of the commercial loan portfolio. The independent loan review process achieves significant penetration into the commercial loan portfolio and reports the results of these reviews to the Audit Committee of the Board of Directors on a quarterly basis.
The following table details the amount of outstanding principal balances relative to each of the risk-rating categories for the Company’s commercial portfolio:
 
 
 
March 31, 2014
Category
Risk
Rating
 
Commercial  and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small Business
 
Total
 
 
 
(Dollars in thousands)
Pass
1 - 6
 
$
752,417

 
$
2,096,405

 
$
223,947

 
$
73,045

 
$
3,145,814

Potential weakness
7
 
44,354

 
104,090

 
10,929

 
3,086

 
162,459

Definite weakness-loss unlikely
8
 
23,303

 
72,774

 
4,560

 
1,846

 
102,483

Partial loss probable
9
 
2,435

 
9,670

 
100

 
170

 
12,375

Definite loss
10
 
—

 
—

 
—

 
—

 
—

Total
 
 
$
822,509

 
$
2,282,939

 
$
239,536

 
$
78,147

 
$
3,423,131



18
Table of Contents

 
 
 
December 31, 2013
Category
Risk
Rating
 
Commercial  and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small Business
 
Total
 
 
 
(Dollars in thousands)
Pass
1 - 6
 
$
736,996

 
$
2,068,995

 
$
210,372

 
$
71,514

 
$
3,087,877

Potential weakness
7
 
21,841

 
91,984

 
8,608

 
3,031

 
125,464

Definite weakness-loss unlikely
8
 
24,409

 
85,767

 
4,779

 
2,552

 
117,507

Partial loss probable
9
 
956

 
2,514

 
100

 
143

 
3,713

Definite loss
10
 
—

 
—

 
—

 
—

 
—

Total
 
 
$
784,202

 
$
2,249,260

 
$
223,859

 
$
77,240

 
$
3,334,561

For the Company’s consumer portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. However, the Company does supplement performance data with current Fair Isaac Corporation (“FICO”) and Loan to Value (“LTV”) estimates. Current FICO data is purchased and appended to all consumer loans on a quarterly basis. In addition, automated valuation services and broker opinions of value are used to supplement original value data for the residential and home equity portfolios, periodically. The following table shows the weighted average FICO scores and the weighted average combined LTV ratios as of the periods indicated below:
 
March 31,
2014
 
December 31,
2013
Residential portfolio
 
 
 
FICO score (re-scored) (1)
738

 
738

LTV (re-valued) (2)
67.1
%
 
67.0
%
Home equity portfolio
 
 
 
FICO score (re-scored) (1)
764

 
763

LTV (re-valued) (2)
53.1
%
 
53.0
%
 
(1)
The average FICO scores for March 31, 2014 are based upon rescores available from February 28, 2014 and origination score data for loans booked between March 1, 2014 and March 31, 2014. The average FICO scores for December 31, 2013 are based upon rescores available from November 30, 2013 and origination score data for loans booked between December 1, 2013 and December 31, 2013.
(2)
The combined LTV ratios for March 31, 2014 are based upon updated automated valuations as of February 28, 2013 and origination value data for loans booked between March 1, 2013 and March 31, 2014. The combined LTV ratios for December 31, 2013 are based upon updated automated valuations as of February 28, 2013 and origination value data for loans booked from March 1, 2013 through December 31, 2013. For home equity loans and lines in a subordinate lien, the LTV data represents a combined LTV, taking into account the senior lien data for loans and lines.
The Bank’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. Delinquent loans are managed by a team of seasoned collection specialists and the Bank seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. As a general rule, loans more than 90 days past due with respect to principal or interest are classified as nonaccrual loans. As permitted by banking regulations, certain consumer loans 90 days or more past due may continue to accrue interest. The Company also may use discretion regarding other loans over 90 days delinquent if the loan is well secured and in process of collection. Set forth is information regarding the Company’s nonaccrual, delinquent, TDRs, and impaired loans at the period shown.

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The following table shows nonaccrual loans at the dates indicated:

 
March 31, 2014
 
December 31, 2013
 
(Dollars in thousands)
Commercial and industrial
$
3,299

 
$
4,178

Commercial real estate
13,870

 
11,734

Commercial construction
100

 
100