INDB 6.30.2014 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 June 30, 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 August 1, 2014, there were 23,912,211 shares of the issuer’s common stock outstanding, par value $0.01 per share.
 


Table of Contents

INDEX
 
Insert Title Here
 
PAGE
 
 
Consolidated Balance Sheets - June 30, 2014 and December 31, 2013
Consolidated Statements of Income - Three and six months ended June 30, 2014 and 2013
Consolidated Statements of Comprehensive Income -Three and six months ended June 30, 2014 and 2013
Consolidated Statements of Stockholders’ Equity - Six months ended June 30, 2014 and 2013
Consolidated Statements of Cash Flows - Six months ended June 30, 2014 and 2013
 
 
 
 
 
 
 

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Insert Title Here
 
 
 
 
Exhibit 31.1 – Certification 302
 
Exhibit 31.2 – Certification 302
 
Exhibit 32.1 – Certification 906
 
Exhibit 32.2 – Certification 906
 

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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT BANK CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited—Dollars in thousands, except per share data)
 
 
June 30,
2014
 
December 31,
2013
Assets
Cash and due from banks
$
119,326

 
$
168,106

Interest-earning deposits with banks
151,538

 
48,219

Securities

 

Securities available for sale
340,081

 
356,862

Securities held to maturity (fair value $376,944 and $346,455)
373,888

 
350,652

Total securities
713,969

 
707,514

Loans held for sale (at fair value)
16,125

 
8,882

Loans
 
 
 
Commercial and industrial
853,327

 
784,202

Commercial real estate
2,300,633

 
2,249,260

Commercial construction
252,222

 
223,859

Small business
78,955

 
77,240

Residential real estate
541,601

 
541,443

Home equity - 1st position
503,149

 
497,075

Home equity - subordinate positions
337,666

 
325,066

Other consumer
17,947

 
20,162

Total loans
4,885,500

 
4,718,307

Less: allowance for loan losses
(54,538
)
 
(53,239
)
Net loans
4,830,962

 
4,665,068

Federal Home Loan Bank stock
37,350

 
39,926

Bank premises and equipment, net
64,166

 
64,950

Goodwill
170,421

 
170,421

Identifiable intangible assets
11,039

 
12,221

Cash surrender value of life insurance policies
98,107

 
100,406

Other real estate owned and other foreclosed assets
9,675

 
7,633

Other assets
125,640

 
105,888

Total assets
$
6,348,318

 
$
6,099,234

Liabilities and Stockholders' Equity
Deposits
 
 
 
Demand deposits
$
1,462,761

 
$
1,369,432

Savings and interest checking accounts
2,096,029

 
1,940,153

Money market
1,036,513

 
933,205

Time certificates of deposit of $100,000 and over
283,171

 
297,984

Other time certificates of deposits
419,687

 
445,644

Total deposits
5,298,161

 
4,986,418

Borrowings
 
 
 
Federal Home Loan Bank borrowings
60,174

 
140,294

Customer repurchase agreements and other short-term borrowings
131,766

 
154,288

Wholesale repurchase agreements
50,000

 
50,000


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Junior subordinated debentures
73,797

 
73,906

Subordinated debentures
30,000

 
30,000

Total borrowings
345,737

 
448,488

Other liabilities
87,931

 
72,788

Total liabilities
5,731,829

 
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: 23,904,072 shares at June 30, 2014 and 23,805,984 shares at December 31, 2013 (includes 262,380 and 268,290 shares of unvested participating restricted stock awards, respectively)
236

 
235

Shares held in rabbi trust at cost: 174,023 shares at June 30, 2014 and 178,765 shares at December 31, 2013
(3,528
)
 
(3,404
)
Deferred compensation obligation
3,528

 
3,404

Additional paid in capital
307,720

 
305,179

Retained earnings
310,226

 
293,560

Accumulated other comprehensive loss, net of tax
(1,693
)
 
(7,434
)
Total stockholders’ equity
616,489

 
591,540

Total liabilities and stockholders' equity
$
6,348,318

 
$
6,099,234

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


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INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited—Dollars in thousands, except per share data)
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2014
 
2013
 
2014
 
2013
Interest income
 
 
 
 
 
 
 
Interest on loans
$
49,393

 
$
47,720

 
$
97,597

 
$
94,699

Taxable interest and dividends on securities
4,690

 
3,506

 
9,340

 
7,035

Nontaxable interest and dividends on securities
37

 
11

 
74

 
22

Interest on loans held for sale
96

 
237

 
147

 
505

Interest on federal funds sold
69

 
21

 
106

 
55

Total interest and dividend income
54,285

 
51,495

 
107,264

 
102,316

Interest expense
 
 
 
 
 
 
 
Interest on deposits
2,789

 
2,543

 
5,579

 
5,208

Interest on borrowings
2,443

 
3,337

 
5,026

 
6,630

Total interest expense
5,232

 
5,880

 
10,605

 
11,838

Net interest income
49,053

 
45,615

 
96,659

 
90,478

Provision for loan losses
2,250

 
3,100

 
6,752

 
4,400

Net interest income after provision for loan losses
46,803

 
42,515

 
89,907

 
86,078

Noninterest income
 
 
 
 
 
 
 
Deposit account fees
4,463

 
4,343

 
8,821

 
8,559

Interchange and ATM fees
3,322

 
2,761

 
6,298

 
5,089

Investment management
5,136

 
4,357

 
9,739

 
8,242

Mortgage banking income
877

 
1,669

 
1,364

 
3,951

Loan level derivative income
324

 
816

 
1,070

 
1,348

Increase in cash surrender value of life insurance policies
721

 
786

 
1,443

 
1,531

Gain on life insurance benefits
337

 
—

 
1,964

 
—

Gain (loss) on sale of equity securities, net
(20
)
 
4

 
71

 
(4
)
Other noninterest income
1,697

 
1,956

 
3,602

 
3,698

Total noninterest income
16,857

 
16,692

 
34,372

 
32,414

Noninterest expenses
 
 
 
 
 
 
 
Salaries and employee benefits
22,843

 
21,594

 
45,923

 
44,309

Occupancy and equipment expenses
5,301

 
4,919

 
11,447

 
10,169

Data processing and facilities management
1,179

 
1,201

 
2,432

 
2,385

FDIC assessment
966

 
934

 
1,871

 
1,755

Advertising expense
1,249

 
1,479

 
2,073

 
2,652

Consulting expense
810

 
666

 
1,368

 
1,377

Debit card expense
528

 
773

 
1,143

 
1,443

Legal fees
319

 
743

 
850

 
1,245

Loss on termination of derivatives
1,122

 
—

 
1,122

 
—

Merger and acquisition expense
—

 
754

 
77

 
2,099

Mortgage operations expense
501

 
715

 
838

 
1,059

Software maintenance
608

 
597

 
1,271

 
1,279

Other noninterest expenses
7,554

 
7,789

 
14,451

 
15,311

Total noninterest expenses
42,980

 
42,164

 
84,866

 
85,083

Income before income taxes
20,680

 
17,043

 
39,413

 
33,409

Provision for income taxes
5,934

 
4,285

 
11,284

 
8,399

Net income
$
14,746

 
$
12,758

 
$
28,129

 
$
25,010

Basic earnings per share
0.62

 
0.56

 
1.18

 
1.09

Diluted earnings per share
0.61

 
0.56

 
1.17

 
1.09

Weighted average common shares (basic)
23,897,413

 
22,888,155

 
23,858,456

 
22,856,132

Common shares equivalents
94,560

 
52,144

 
97,544

 
49,104

Weighted average common shares (diluted)
23,991,973

 
22,940,299

 
23,956,000

 
22,905,236

Cash dividends declared per common share
0.24

 
0.22

 
0.48

 
0.44

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


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INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited—Dollars in thousands)
 
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2014
 
2013
 
2014
 
2013
Net income
$
14,746

 
$
12,758

 
$
28,129

 
$
25,010

Other comprehensive income, net of tax
 
 
 
 
 
 
 
Unrealized gains (losses) on securities
 
 
 
 
 
 
 
Change in fair value of securities available for sale
2,383

 
(4,586
)
 
4,354

 
(5,371
)
Less: net security gains (losses) reclassified into earnings
(12
)
 
3

 
42

 
(3
)
Net change in fair value of securities available for sale
2,395

 
(4,589
)
 
4,312

 
(5,368
)
Unrealized gains (losses) on cash flow hedges
 
 
 
 
 
 
 
Change in fair value of cash flow hedges
(287
)
 
765

 
(464
)
 
763

Less: net cash flow hedge losses reclassified into earnings
(1,292
)
 
(854
)
 
(1,971
)
 
(1,691
)
Net change in fair value of cash flow hedges
1,005

 
1,619

 
1,507

 
2,454

Net gain (loss) during the period and amortization of certain costs included in net periodic retirement costs
(39
)
 
42

 
(78
)
 
43

Total other comprehensive income (loss)
3,361

 
(2,928
)
 
5,741

 
(2,871
)
Total comprehensive income
$
18,107

 
$
9,830

 
$
33,870

 
$
22,139

The accompanying condensed notes are an integral part of these unaudited 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, 2013
23,805,984

 
$
235

 
$
(3,404
)
 
$
3,404

 
$
305,179

 
$
293,560

 
$
(7,434
)
 
$
591,540

Net income
—

 
—

 
—

 
—

 
—

 
28,129

 
—

 
28,129

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
5,741

 
5,741

Common dividend declared ($0.48 per share)
—

 
—

 
—

 
—

 
—

 
(11,463
)
 
—

 
(11,463
)
Proceeds from exercise of stock options
20,609

 
—

 
—

 
—

 
468

 
—

 
—

 
468

Tax benefit related to equity award activity
—

 
—

 
—

 
—

 
449

 
—

 
—

 
449

Equity based compensation
—

 
—

 
—

 
—

 
1,496

 
—

 
—

 
1,496

Restricted stock awards issued, net of awards surrendered
60,495

 
1

 
—

 
—

 
(643
)
 
—

 
—

 
(642
)
Shares issued under direct stock purchase plan
16,984

 
—

 
—

 
—

 
643

 
—

 
—

 
643

Deferred compensation obligation
—

 
—

 
(124
)
 
124

 
—

 
—

 
—

 
—

Tax benefit related to deferred compensation distributions
—

 
—

 
—

 
—

 
128

 
—

 
—

 
128

Balance at June 30, 2014
23,904,072

 
$
236

 
$
(3,528
)
 
$
3,528

 
$
307,720

 
$
310,226

 
$
(1,693
)
 
$
616,489

Balance at December 31, 2012
22,774,009

 
$
225

 
$
(3,179
)
 
$
3,179

 
$
269,950

 
$
263,671

 
$
(4,526
)
 
$
529,320

Net income
—

 
—

 
—

 
—

 
—

 
25,010

 
—

 
25,010

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
(2,871
)
 
(2,871
)
Common dividend declared ($0.44 per share)
—

 
—

 
—

 
—

 
—

 
(10,070
)
 
—

 
(10,070
)
Proceeds from exercise of stock options
30,029

 
—

 
—

 
—

 
744

 
—

 
—

 
744

Tax benefit related to equity award activity
—

 
—

 
—

 
—

 
312

 
—

 
—

 
312

Equity based compensation
—

 
—

 
—

 
—

 
1,389

 
—

 
—

 
1,389

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

 
1

 
—

 
—

 
(669
)
 
—

 
—

 
(668
)
Shares issued under direct stock purchase plan
10,815

 
—

 
—

 
—

 
339

 
—

 
—

 
339

Deferred compensation obligation
—

 
—

 
(115
)
 
115

 
—

 
—

 
—

 
—

Tax benefit related to deferred compensation distributions
—

 
—

 
—

 
—

 
100

 
—

 
—

 
100

Balance June 30, 2013
22,904,284

 
$
226

 
$
(3,294
)
 
$
3,294

 
$
272,165

 
$
278,611

 
$
(7,397
)
 
$
543,605

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

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INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited—Dollars in thousands)
 
 
Six Months Ended
 
June 30
 
2014
 
2013
Cash flow from operating activities
 
 
 
Net income
$
28,129

 
$
25,010

Adjustments to reconcile net income to cash provided by operating activities
 
 
 
Depreciation and amortization
5,744

 
4,152

Provision for loan losses
6,752

 
4,400

Deferred income tax expense
563

 
5

Net (gain) loss on sale of equity securities
(71
)
 
4

Net loss on fixed assets
390

 
28

Loss on termination of derivatives
1,122

 
—

Net loss on sale of other real estate owned and foreclosed assets
232

 
127

Realized gain on sale leaseback transaction
(517
)
 
(517
)
Stock based compensation
1,496

 
1,389

Excess tax benefit related to equity award activity
(449
)
 
(312
)
Increase in cash surrender value of life insurance policies
(1,443
)
 
(1,531
)
Gain on life insurance benefits
(1,964
)
 
—

Change in fair value on loans held for sale
(225
)
 
1,335

Net change in:
 
 
 
Loans held for sale
(7,018
)
 
14,355

Other assets
1,981

 
39,152

Other liabilities
(4,154
)
 
(14,885
)
Total adjustments
2,439

 
47,702

Net cash provided by operating activities
30,568

 
72,712

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

 
169

Proceeds from maturities and principal repayments of securities available for sale
23,510

 
50,709

Purchase of securities available for sale
(868
)
 
(34,878
)
Proceeds from maturities and principal repayments of securities held to maturity
20,216

 
27,535

Purchase of securities held to maturity
(43,493
)
 
(74,834
)
Redemption of Federal Home Loan Bank stock
2,576

 
3,093

Investment in Low Income Housing Projects
(3,748
)
 
—

Purchase of life insurance policies
(101
)
 
(101
)
Proceeds from life insurance policies
5,735

 
—

Net increase in loans
(177,486
)
 
(15,713
)
Purchase of bank premises and equipment
(3,915
)
 
(4,221
)
Proceeds from the sale of bank premises and equipment
759

 
—

Payments on early termination of hedging relationship
(1,122
)
 
—

Proceeds from the sale of other real estate owned and foreclosed assets
2,810

 
5,237

Net capital improvements to other real estate owned
(875
)
 
(1,463
)
Net cash used in investing activities
(175,329
)
 
(44,467
)
Cash flows provided by financing activities
 
 
 

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Net decrease in time deposits
(40,770
)
 
(43,154
)
Net increase in other deposits
352,513

 
172,940

Net proceeds from (repayments of) short-term Federal Home Loan Bank borrowings
(75,000
)
 
305

Repayments of long-term Federal Home Loan Bank borrowings
(5,000
)
 
(9,134
)
Net decrease in customer repurchase agreements
(17,522
)
 
(11,533
)
Net decrease in other borrowings
(5,000
)
 
(12,000
)
Proceeds from exercise of stock options, net of cash paid
468

 
744

Restricted stock awards issued, net of awards surrendered
(642
)
 
(668
)
Excess tax benefit from stock based compensation
449

 
312

Tax benefit from deferred compensation distribution
128

 
100

Proceeds from shares issued under direct stock purchase plan
643

 
339

Common dividends paid
(10,967
)
 
(5,032
)
Net cash provided by financing activities
199,300

 
93,219

Net increase in cash and cash equivalents
54,539

 
121,464

Cash and cash equivalents at beginning of year
216,325

 
215,474

Cash and cash equivalents at end of period
$
270,864

 
$
336,938

Supplemental schedule of noncash investing and financing activities
 
 
 
Transfer of loans to other real estate owned & foreclosed assets
$
4,257

 
$
1,138

Capital commitment relating to Low Income Housing Project investments
$
22,091

 
$
—

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

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION
Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company, incorporated in 1985. The Company is the sole stockholder of Rockland Trust Company (“Rockland Trust” or the “Bank”), a Massachusetts trust company chartered in 1907.
All material intercompany balances and transactions have been eliminated in consolidation. Certain previously reported amounts may have been reclassified to conform to the current year’s presentation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Operating results for the quarter ended June 30, 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 Topic 718 "Compensation - Stock Compensation" Update No. 2014 -12. Update No. 2014-12 was issued in June 2014 to resolve the diverse accounting treatment of share-based payment awards that require, as a condition to vesting, achievement of a specific performance target after the requisite service period. Many reporting entities account for these performance targets as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance target in the estimate of the grant-date fair value of the award, while other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award. This amendment requires that these performance targets that affect vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 "Compensation - Stock Compensation" as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. 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 860 "Transfers and Servicing" Update No. 2014-11. Update No. 2014-11 was issued in June 2014 to respond to stakeholders' concerns about current accounting and disclosures for repurchase agreements and similar transactions.  The amendments in this Update require two accounting changes.  First, the amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting.  Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement.  The amendments in this Update require disclosures for certain transactions comprising (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. For those transactions outstanding at the reporting date, the transferor is required to disclose certain information by type of transaction.  The amendments in this Update also require certain disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. The accounting changes in this Update are effective for public business entities for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application for a public business entity is prohibited. For public business entities, the disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date.  The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2014-09. Update No. 2014-09 was issued in May 2014 to address the previous revenue recognition requirements in U.S. generally accepted accounting principles

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(GAAP) that differ from those in International Financial Reporting Standards (IFRS).  Accordingly, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, the standard is effective for annual and interim periods beginning after December 15, 2016, and calendar year-end public entities will apply it in the quarter that ends March 31, 2017.  Early adoption is not permitted.  We are currently assessing the potential impact of this amendment on our consolidated financial statements.
    
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.


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Table of Contents

NOTE 3 – SECURITIES
The following table presents a summary of the amortized cost, gross unrealized holding gains and losses, other-than-temporary impairment recorded in other comprehensive income and fair value of securities available for sale and securities held to maturity for the periods below:
 
June 30, 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
$
41,346

 
$
120

 
$
(29
)
 
$
—

 
$
41,437

 
$
41,331

 
$
3

 
$
(885
)
 
$
—

 
$
40,449

Agency mortgage-backed securities
213,894

 
7,530

 
(1,369
)
 
—

 
220,055

 
232,742

 
6,405

 
(4,556
)
 
—

 
234,591

Agency collateralized mortgage obligations
53,941

 
296

 
(965
)
 
—

 
53,272

 
58,765

 
490

 
(1,102
)
 
—

 
58,153

State, county, and municipal securities
5,145

 
113

 
—

 
—

 
5,258

 
5,439

 
1

 
(28
)
 
—

 
5,412

Single issuer trust preferred securities issued by banks
2,937

 
52

 
—

 
—

 
2,989

 
2,960

 
14

 
(22
)
 
—

 
2,952

Pooled trust preferred securities issued by banks and insurers
7,984

 
—

 
(1,594
)
 
(1,299
)
 
5,091

 
8,083

 
—

 
(1,913
)
 
(2,329
)
 
3,841

Equity securities
11,157

 
989

 
(167
)
 
—

 
11,979

 
10,997

 
762

 
(295
)
 
—

 
11,464

Total available for sale securities
$
336,404

 
$
9,100

 
$
(4,124
)
 
$
(1,299
)
 
$
340,081

 
$
360,317

 
$
7,675

 
$
(8,801
)
 
$
(2,329
)
 
$
356,862

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

 
$
57

 
$
—

 
$
—

 
$
1,068

 
$
1,011

 
$
31

 
$
—

 
$
—

 
$
1,042

Agency mortgage-backed securities
170,217

 
4,704

 
—

 
—

 
174,921

 
155,067

 
1,917

 
(1,033
)
 
—

 
155,951

Agency collateralized mortgage obligations
195,478

 
2,404

 
(4,346
)
 
—

 
193,536

 
187,388

 
824

 
(6,176
)
 
—

 
182,036

State, county, and municipal securities
678

 
6

 
—

 
—

 
684

 
678

 
7

 
—

 
—

 
685

Single issuer trust preferred securities issued by banks
1,500

 
27

 
—

 
—

 
1,527

 
1,503

 
23

 
—

 
—

 
1,526

Corporate debt securities
5,004

 
204

 
—

 
—

 
5,208

 
5,005

 
210

 
—

 
—

 
5,215

Total held to maturity securities
$
373,888

 
$
7,402

 
$
(4,346
)
 
$
—

 
$
376,944

 
$
350,652

 
$
3,012

 
$
(7,209
)
 
$
—

 
$
346,455

Total
$
710,292

 
$
16,502

 
$
(8,470
)
 
$
(1,299
)
 
$
717,025

 
$
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 loss of $20,000 and a net gain $71,000 on equity securities classified as available for sale during the three and six month periods ending June 30, 2014, respectively. The Company realized a gain of $4,000 and a net loss of $4,000 on marketable securities classified as available for sale during the three and six month periods ending June 30, 2013, respectively. There were no gains or losses realized on sale of nonequity securities for the periods ending June 30, 2014 and 2013.
 

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Table of Contents

The actual maturities of certain securities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. A schedule of the contractual maturities of securities available for sale and securities held to maturity as of June 30, 2014 is presented below:

 
Available for Sale
 
Held to Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(Dollars in thousands)
Due in one year or less
$
181

 
$
192

 
$
454

 
$
457

Due after one year to five years
39,096

 
40,229

 
5,569

 
5,798

Due after five years to ten years
68,541

 
68,048

 
26,720

 
27,086

Due after ten years
217,429

 
219,633

 
341,145

 
343,603

Total debt securities
$
325,247

 
$
328,102

 
$
373,888

 
$
376,944

Equity securities
$
11,157

 
$
11,979

 
$
—

 
$
—

Total
$
336,404

 
$
340,081

 
$
373,888

 
$
376,944

Inclusive in the table above is $33.9 million of callable securities in the Company’s investment portfolio at June 30, 2014.
The carrying value of securities pledged to secure public funds, repurchase agreements and for other purposes, as required or permitted by law, was $365.7 million and $360.1 million at June 30, 2014 and December 31, 2013, respectively.
At June 30, 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:
 
June 30, 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
3

 
$
493

 
$
(2
)
 
$
9,981

 
$
(27
)
 
$
10,474

 
$
(29
)
Agency mortgage-backed securities
34

 
665

 
(6
)
 
46,015

 
(1,363
)
 
46,680

 
(1,369
)
Agency collateralized mortgage obligations
15

 
42,761

 
(502
)
 
100,254

 
(4,809
)
 
143,015

 
(5,311
)
Pooled trust preferred securities issued by banks and insurers
7

 
—

 
—

 
2,520

 
(1,594
)
 
2,520

 
(1,594
)
Equity securities
8

 
71

 
(2
)
 
1,462

 
(165
)
 
1,533

 
(167
)
Total temporarily impaired securities
67

 
$
43,990

 
$
(512
)
 
$
160,232

 
$
(7,958
)
 
$
204,222

 
$
(8,470
)


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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 June 30, 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.

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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
 
Six Months Ended
 
June 30
 
June 30
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Gross change in OTTI recorded on certain investments
$
196

 
$
90

 
$
1,029

 
$
371

Portion of OTTI recognized in OCI
(196
)
 
(90
)
 
(1,029
)
 
(371
)
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
 
Six Months Ended
 
June 30
 
June 30
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Balance at beginning of period
$
(9,997
)
 
$
(10,847
)
 
$
(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
)
 
$
(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:
 
June 30, 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
$
853,327

 
$
2,300,633

 
$
252,222

 
$
78,955

 
$
541,601

 
$
840,815

 
$
17,947


$
4,885,500

(1
)
Individually evaluated for impairment
$
6,796

 
$
30,472

 
$
—

 
$
1,474

 
$
15,829

 
$
5,473

 
$
1,026

 
$
61,070

  
Purchase credit impaired loans
$
—

 
$
17,425

 
$
188

 
$
—

 
$
10,055

 
$
310

 
$
6

 
$
27,984

 
Collectively evaluated for impairment
$
846,531

 
$
2,252,736

 
$
252,034

 
$
77,481

 
$
515,717

 
$
835,032

 
$
16,915

 
$
4,796,446

  

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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 $2.6 million and $2.3 million at June 30, 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 June 30, 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
$
15,601

 
$
24,917

 
$
3,570

 
$
1,207

 
$
2,829

 
$
4,758

 
$
747

 
$
53,629

Charge-offs
(470
)
 
(660
)
 
—

 
(128
)
 
(326
)
 
(308
)
 
(258
)
 
(2,150
)
Recoveries
128

 
197

 
—

 
92

 
190

 
55

 
147

 
809

Provision
670

 
641

 
187

 
(17
)
 
186

 
464

 
119

 
2,250

Ending balance
$
15,929

 
$
25,095

 
$
3,757

 
$
1,154

 
$
2,879

 
$
4,969

 
$
755

 
$
54,538


 
Three Months Ended June 30, 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
$
13,443

 
$
22,569

 
$
3,139

 
$
1,244

 
$
3,048

 
$
7,716

 
$
747

 
$
51,906

Charge-offs
(1,302
)
 
(196
)
 
—

 
(276
)
 
(186
)
 
(257
)
 
(260
)
 
(2,477
)
Recoveries
103

 
8

 
—

 
37

 
86

 
30

 
183

 
447

Provision
2,081

 
648

 
283

 
290

 
11

 
(222
)
 
9

 
3,100

Ending balance
$
14,325

 
$
23,029

 
$
3,422

 
$
1,295

 
$
2,959

 
$
7,267

 
$
679

 
$
52,976


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Table of Contents


 
Six Months Ended June 30, 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
(1,253
)
 
(3,582
)