Rollforward - INDB 03.31.2015 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, 2015
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, 2015, there were 26,148,263 shares of the issuer’s common stock outstanding, par value $0.01 per share.
 


Table of Contents


 
Table of Contents
 
PAGE
 
 
Consolidated Balance Sheets - March 31, 2015 and December 31, 2014
Consolidated Statements of Income - Three months ended March 31, 2015 and 2014
Consolidated Statements of Comprehensive Income -Three months ended March 31, 2015 and 2014
Consolidated Statements of Stockholders’ Equity - Three months ended March 31, 2015 and 2014
Consolidated Statements of Cash Flows - Three months ended March 31, 2015 and 2014
 
 
 
 
 
 
 

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Table of Contents
 
 
 
 
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 share data)
 
 
March 31,
2015
 
December 31, 2014
Assets
Cash and due from banks
$
108,804

 
$
143,342

Interest-earning deposits with banks
47,470

 
34,912

Securities
 
 
 
Securities - trading
494

 
—

Securities - available for sale
387,038

 
348,554

Securities - held to maturity (fair value $402,322 and $379,699)
394,745

 
375,453

Total securities
782,277

 
724,007

Loans held for sale (at fair value)
9,507

 
6,888

Loans
 
 
 
Commercial and industrial
829,380

 
860,839

Commercial real estate
2,606,444

 
2,347,323

Commercial construction
291,666

 
265,994

Small business
87,709

 
85,247

Residential real estate
681,379

 
530,259

Home equity - first position
519,978

 
513,518

Home equity - subordinate positions
356,938

 
350,345

Other consumer
19,624

 
17,208

   Total loans
5,393,118

 
4,970,733

Less: allowance for loan losses
(54,515
)
 
(55,100
)
Net loans
5,338,603

 
4,915,633

Federal Home Loan Bank stock
37,485

 
33,233

Bank premises and equipment, net
73,315

 
64,074

Goodwill
201,083

 
170,421

Identifiable intangible assets
13,975

 
9,885

Cash surrender value of life insurance policies
131,643

 
109,854

Other real estate owned and other foreclosed assets
6,285

 
7,743

Other assets
160,638

 
144,920

Total assets
$
6,911,085

 
$
6,364,912

Liabilities and Stockholders' Equity
Deposits
 
 
 
Demand deposits
1,603,124

 
1,462,200

Savings and interest checking accounts
2,232,832

 
2,108,486

Money market
1,088,223

 
990,160

Time certificates of deposit of $100,000 and over
304,952

 
254,718

Other time certificates of deposits
441,581

 
394,902

Total deposits
5,670,712

 
5,210,466

Borrowings
 
 
 
Federal Home Loan Bank borrowings
108,246

 
70,080

Customer repurchase agreements and other short-term borrowings
128,138

 
147,890


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Wholesale repurchase agreements
50,000

 
50,000

Junior subordinated debentures
73,631

 
73,685

Subordinated debentures
35,000

 
65,000

Total borrowings
395,015

 
406,655

Other liabilities
112,472

 
107,264

Total liabilities
6,178,199

 
5,724,385

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: 26,123,576 shares at March 31, 2015 and 23,998,738 shares at December 31, 2014 (includes 241,660 and 254,500 shares of unvested participating restricted stock awards, respectively)
259

 
237

Shares held in rabbi trust at cost: 169,262 shares at March 31, 2015 and 176,849 shares at December 31, 2014
(3,700
)
 
(3,666
)
Deferred compensation and other retirement benefit obligations
3,700

 
3,666

Additional paid in capital
399,936

 
311,978

Retained earnings
333,104

 
330,444

Accumulated other comprehensive loss, net of tax
(413
)
 
(2,132
)
Total stockholders’ equity
732,886

 
640,527

Total liabilities and stockholders' equity
$
6,911,085

 
$
6,364,912

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
 
March 31
 
2015
 
2014
Interest income
 
 
 
Interest and fees on loans
$
51,687

 
$
48,204

Taxable interest and dividends on securities
4,627

 
4,650

Nontaxable interest and dividends on securities
34

 
37

Interest on loans held for sale
51

 
51

Interest on federal funds sold and short-term investments
30

 
38

Total interest and dividend income
56,429

 
52,980

Interest expense
 
 
 
Interest on deposits
2,763

 
2,791

Interest on borrowings
2,417

 
2,583

Total interest expense
5,180

 
5,374

Net interest income
51,249

 
47,606

Provision (benefit) for loan losses
(500
)
 
4,502

Net interest income after provision for loan losses
51,749

 
43,104

Noninterest income
 
 
 
Deposit account fees
4,166

 
4,359

Interchange and ATM fees
3,100

 
2,975

Investment management
5,107

 
4,603

Mortgage banking income
1,126

 
487

Gain on life insurance benefits
—

 
1,627

Increase in cash surrender value of life insurance policies
778

 
722

Loan level derivative income
418

 
746

Net gain on sale of equity securities
—

 
91

Other noninterest income
1,862

 
1,906

Total noninterest income
16,557

 
17,516

Noninterest expenses
 
 
 
Salaries and employee benefits
25,288

 
23,080

Occupancy and equipment expenses
6,394

 
6,146

Data processing and facilities management
1,122

 
1,253

FDIC assessment
956

 
905

Advertising expense
834

 
824

Consulting expense
755

 
559

Merger and acquisition expense
10,230

 
77

Software maintenance
625

 
662

Other noninterest expenses
8,773

 
8,381

Total noninterest expenses
54,977

 
41,887

Income before income taxes
13,329

 
18,733

Provision for income taxes
3,869

 
5,350

Net income
$
9,460

 
$
13,383

Basic earnings per share
$
0.38

 
$
0.56

Diluted earnings per share
$
0.38

 
$
0.56

Weighted average common shares (basic)
24,959,865

 
23,819,065

Common shares equivalents
80,215

 
100,173

Weighted average common shares (diluted)
25,040,080

 
23,919,238

Cash dividends declared per common share
$
0.26

 
$
0.24

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
 
March 31
 
2015
 
2014
Net income
$
9,460

 
$
13,383

Other comprehensive income, net of tax
 
 
 
Net change in fair value of securities available for sale
1,561

 
1,917

Net change in fair value of cash flow hedges
82

 
502

Net change in other comprehensive income for defined benefit postretirement plans
76

 
(39
)
Total other comprehensive income
1,719

 
2,380

Total comprehensive income
$
11,179

 
$
15,763

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 and Other Retirement Benefit Obligations
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other
Comprehensive Loss
 
Total
Balance December 31, 2014
23,998,738

 
$
237

 
$
(3,666
)
 
$
3,666

 
$
311,978

 
$
330,444

 
$
(2,132
)
 
$
640,527

Net income
—

 
—

 
—

 
—

 
—

 
9,460

 
—

 
9,460

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
1,719

 
1,719

Common dividend declared ($0.26 per share)
—

 
—

 
—

 
—

 
—

 
(6,800
)
 
—

 
(6,800
)
Common stock issued for acquisition
2,052,137

 
21

 
—

 
—

 
86,394

 
—

 
—

 
86,415

Proceeds from exercise of stock options, net of cash paid
23,436

 
—

 
—

 
—

 
321

 
—

 
—

 
321

Tax benefit related to equity award activity
—

 
—

 
—

 
—

 
337

 
—

 
—

 
337

Stock based compensation
—

 
—

 
—

 
—

 
739

 
—

 
—

 
739

Restricted stock awards issued, net of awards surrendered
33,491

 
1

 
—

 
—

 
(636
)
 
—

 
—

 
(635
)
Shares issued under direct stock purchase plan
15,774

 
—

 
—

 
—

 
638

 
—

 
—

 
638

Deferred compensation and other retirement benefit obligations
—

 
—

 
(34
)
 
34

 
—

 
—

 
—

 
—

Tax benefit related to deferred compensation distributions
—

 
$
—

 
$
—

 
$
—

 
165

 
—

 
—

 
165

Balance March 31, 2015
26,123,576

 
$
259

 
$
(3,700
)
 
$
3,700

 
$
399,936

 
$
333,104

 
$
(413
)
 
$
732,886

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, net of cash paid
7,911

 
—

 
—

 
—

 
133

 
—

 
—

 
133

Tax benefit related to equity award activity
—

 
—

 
—

 
—

 
193

 
—

 
—

 
193

Stock 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 and other retirement benefit obligations
—

 
—

 
(52
)
 
52

 
—

 
—

 
—

 
—

Tax benefit related to deferred compensation distributions
—

 
$
—

 
$
—

 
$
—

 
$
128

 
$
—

 
$
—

 
$
128

Balance March 31, 2014
23,878,056

 
236

 
(3,456
)
 
3,456

 
306,156

 
301,218

 
(5,054
)
 
602,556

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

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INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited—Dollars in thousands)
 
 
Three Months Ended
 
March 31
 
2015
 
2014
Cash flow from operating activities
 
 
 
Net income
$
9,460

 
$
13,383

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
3,145

 
2,757

Provision (benefit) for loan losses
(500
)
 
4,502

Deferred income tax expense
639

 
471

Net gain on sale of securities
—

 
(91
)
Net (gain) loss on fixed assets
(2
)
 
353

Net loss on other real estate owned and foreclosed assets
666

 
184

Realized gain on sale leaseback transaction
(258
)
 
(258
)
Stock based compensation
739

 
677

Excess tax benefit related to equity award activity
(337
)
 
(193
)
Increase in cash surrender value of life insurance policies
(778
)
 
(722
)
Gain on life insurance benefits
—

 
(1,627
)
Change in fair value on loans held for sale
(27
)
 
(51
)
Net change in:
 
 
 
Trading assets
(494
)
 
—

Loans held for sale
(2,592
)
 
2,145

Other assets
3,056

 
1,904

Other liabilities
(5,292
)
 
(8,721
)
Total adjustments
(2,035
)
 
1,330

Net cash provided by operating activities
7,425

 
14,713

Cash flows provided by (used in) investing activities
 
 
 
Proceeds from sales of securities available for sale
—

 
673

Proceeds from maturities and principal repayments of securities available for sale
13,108

 
11,705

Purchases of securities available for sale
(5,846
)
 
(766
)
Proceeds from maturities and principal repayments of securities held to maturity
12,616

 
9,083

Purchases of securities held to maturity
(31,890
)
 
(34,017
)
Investments in low income housing projects
(5,002
)
 
(2,561
)
Purchases of life insurance policies
(92
)
 
(93
)
Proceeds from life insurance policies
—

 
478

Net decrease (increase) in loans
41,330

 
(93,858
)
Cash used in business combinations, net of cash acquired
(13,448
)
 
—

Purchases of bank premises and equipment
(1,481
)
 
(2,455
)
Proceeds from the sale of bank premises and equipment
14

 
756

Proceeds from the sale of other real estate owned and foreclosed assets
1,641

 
642

Net capital improvements to other real estate owned
(665
)
 
(444
)
Net cash provided by (used in) investing activities
10,285

 
(110,857
)
Cash flows provided by (used in) financing activities
 
 
 
Net decrease in time deposits
(19,023
)
 
(18,342
)

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Net increase in other deposits
47,019

 
146,183

Net repayments of short-term Federal Home Loan Bank borrowings
(10,000
)
 
—

Repayments of long-term Federal Home Loan Bank borrowings
(3,000
)
 
—

Net decrease in customer repurchase agreements
(29,752
)
 
(20,803
)
Net increase (decrease) in other short term borrowings
10,000

 
(5,000
)
Repayments of subordinated debentures
(30,000
)
 
—

Proceeds from exercise of stock options, net of cash paid
321

 
133

Restricted stock awards issued, net of awards surrendered
(635
)
 
(472
)
Excess tax benefit from stock based compensation
337

 
193

Tax benefit from deferred compensation distribution
165

 
128

Proceeds from shares issued under direct stock purchase plan
638

 
319

Common dividends paid
(5,760
)
 
(5,237
)
Net cash provided by (used in) financing activities
(39,690
)
 
97,102

Net increase (decrease) in cash and cash equivalents
(21,980
)
 
958

Cash and cash equivalents at beginning of year
178,254

 
216,325

Cash and cash equivalents at end of period
156,274

 
217,283

Supplemental schedule of noncash investing and financing activities
 
 
 
Transfer of loans to other real estate owned & foreclosed assets
$
354

 
$
746

Capital commitment relating to low income housing project investments
$
—

 
$
25,839

In conjunction with the purchase acquisition detailed in note 2 to the consolidated financial statements, assets were acquired and liabilities were assumed as follows
 
 
 
Common stock issued for acquisition
$
86,415

 
$
—

Fair value of assets acquired, net of cash acquired
$
598,376

 
$
—

Fair value of liabilities assumed
$
498,513

 
$
—

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 ("GAAP") 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 GAAP 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, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 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, 2014, filed with the Securities and Exchange Commission.

NOTE 2 - RECENT ACCOUNTING STANDARDS UPDATES

FASB ASC Subtopic 835-30 "Interest - Imputation of Interest" Update No. 2015-03. Update No. 2015-03 was issued in April 2015 to simplify presentation of debt issuance costs. The amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuances costs are not affected by the amendments in this Update. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, 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 810 "Consolidation" Update No. 2015-02. Update No. 2015-02 was issued in February 2015 to respond to stakeholders' concerns about the current accounting for consolidation of certain legal entities. The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, 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 Subtopic 225-20 "Income Statement - Extraordinary and Unusual Items" Update No. 2015-01. Update No. 2015-01 was issued in January 2015 to simplify the income statement presentation requirements in Subtopic 225-20 by eliminating the concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, 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.

    


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NOTE 3 - ACQUISITIONS

Peoples Federal Bancshares, Inc.

On February 20, 2015, the Company completed its acquisition of Peoples Federal Bancshares, Inc. ("Peoples"), the parent of Peoples Federal Saving Bank. The transaction qualified as a tax-free reorganization for federal income tax purposes and Peoples shareholders received, for each share of Peoples common stock, the right to receive either $21.00 in cash per share or 0.5523 shares of the Company's stock (valued at $23.26 per share, based upon the highest trading value of the Company's stock on February 20, 2015 of $42.11). The total deal consideration was $141.8 million and was comprised of 40% cash and 60% stock consideration. The cash consideration was $55.4 million in the aggregate, inclusive of cash paid in lieu of fractional shares. The total stock consideration was $86.4 million and resulted in an increase to the Company's outstanding shares of 2,052,137 shares.

The Company accounted for the acquisition using the acquisition method pursuant to the Business Combinations Topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"). Accordingly, the Company recorded merger and acquisition expenses of $10.2 million during the three months ended March 31, 2015. Additionally, the acquisition method requires the acquirer to recognize the assets acquired and the liabilities assumed at their fair values as of the acquisition date. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the date of the acquisition:
 
Net Assets Acquired at Fair Value
 
(Dollars in thousands)
Assets
 
Cash
$
41,957

Investments
43,585

Loans
463,927

Premises and equipment
9,346

Goodwill
30,662

Core deposit and other intangibles
3,936

Other assets
46,920

Total assets acquired
640,333

Liabilities
 
Deposits
432,250

Borrowings
51,209

Other liabilities
15,054

Total liabilities assumed
498,513

     Purchase price
$
141,820

    
Fair value adjustments to assets acquired and liabilities assumed are generally amortized using either an effective yield or straight-line basis over periods consistent with the average life, useful life and/or contractual term of the related assets and liabilities.
Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:
Cash and Cash Equivalents
The fair values of cash and cash equivalents approximate the respective carrying amounts because the instruments are payable on demand or have short-term maturities.
Investments
The fair values of securities were based on quoted market prices for identical securities received from an independent, nationally-recognized, third-party pricing service. Prices provided by the independent pricing service were based on recent trading activity and other observable information including, but not limited to, market interest rate curves, referenced credit spreads and estimated prepayment rates where applicable.


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Loans
The loans acquired were recorded at fair value without a carryover of the allowance for loan losses. Fair value of the loans is determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected, as adjusted for an estimate of future credit losses and prepayments, and then applying a market-based discount rate to those cash flows. The overall discount on the loans acquired in this transaction was due to anticipated credit loss, as well as considerations for liquidity and market interest rates.

A portion of the loans acquired showed evidence of deterioration of credit quality at the purchase date and it was deemed unlikely that the Bank will be able to collect all contractually required payments. As such, these loans were deemed to be purchased credit impaired ("PCI") and the carrying value and prospective income recognition are predicated upon future cash flows expected to be collected. The following is a summary of these PCI loans associated with the acquisition as of the date acquired:
 
 
(Dollars in thousands)
Contractually required principal and interest at acquisition
 
$
4,358

Contractual cash flows not expected to be collected
 
(1,596
)
Expected cash flows at acquisition
 
2,762

Interest component of expected cash flows
 
(319
)
Basis in PCI loans at acquisition - estimated fair value
 
$
2,443


Premises and Equipment
The fair value of the premises, including land, buildings and improvements, was determined based upon appraisals by licensed real estate appraisers or pending agreed upon sale prices. The appraisals were based upon the best and highest use of the property with final values determined based upon an analysis of the cost, sales comparison and income capitalization approaches for each property appraised.
Core Deposit Intangible
The fair value of the core deposit intangible is derived by comparing the interest rate and servicing costs that the financial institution pays on the core deposit liability versus the current market rate for alternative sources of financing, while factoring in estimates over the remaining life and attrition rate of the deposit accounts. The intangible asset represents the stable and relatively low cost source of funds that the deposits and accompanying relationships provide the Company, when compared to alternative funding sources.
Deposits
The fair value of acquired savings and transaction deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits were determined based on the present value of the contractual cash flows over the remaining period to maturity using a market interest rate.
Borrowings
The fair values of Federal Home Loan Bank ("FHLB") advances were derived based upon the present value of the principal and interest payments using a current market discount rate.

13
Table of Contents

Selected Pro Forma Results
The following summarizes the unaudited pro forma results of operations as if the Company acquired Peoples on January 1, 2015 (2014 amounts represent combined results for the Company and Peoples). The selected pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the acquisition actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period.
 
March 31,
 
2015
 
2014
 
(Dollars in thousands)
Net interest income after provision for loan losses
$
54,407

 
$
47,516

Net income
14,161

 
13,897

Excluded from the pro forma results of operations for the three months ended March 31, 2015 are merger-related costs of $16.6 million recognized by both the Company and Peoples in the aggregate. These costs were primarily made up of contract terminations arising due to the change in control, the acceleration of certain compensation and benefit costs, and other merger expenses.


14
Table of Contents

NOTE 4 - SECURITIES
Trading Securities
As of March 31, 2015, the Company had trading securities of $494,000. These securities are held in a rabbi trust and will be used for future payments associated with the Company’s non-qualified 401(k) Restoration Plan and non-qualified deferred compensation plan.

Available for Sale and Held to Maturity 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, 2015
 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
(Dollars in thousands)
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency securities
$
45,848

 
$
656

 
$
—

 
$
46,504

 
$
41,369

 
$
139

 
$
(22
)
 
$
41,486

Agency mortgage-backed securities
246,148

 
8,098

 
(157
)
 
254,089

 
211,168

 
7,203

 
(693
)
 
217,678

Agency collateralized mortgage obligations
59,896

 
836

 
(444
)
 
60,288

 
63,059

 
599

 
(623
)
 
63,035

State, county, and municipal securities
4,837

 
140

 
—

 
4,977

 
5,106

 
117

 
—

 
5,223

Single issuer trust preferred securities issued by banks
2,901

 
19

 
(10
)
 
2,910

 
2,913

 
12

 
(16
)
 
2,909

Pooled trust preferred securities issued by banks and insurers (1)
7,862

 
179

 
(1,769
)
 
6,272

 
7,906

 
195

 
(1,780
)
 
6,321

Equity securities
11,544

 
674

 
(220
)
 
11,998

 
11,572

 
567

 
(237
)
 
11,902

Total available for sale securities
$
379,036

 
$
10,602

 
$
(2,600
)
 
$
387,038

 
$
343,093

 
$
8,832

 
$
(3,371
)
 
$
348,554

Held to maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
1,010

 
$
79

 
$
—

 
$
1,089

 
$
1,010

 
$
63

 
$
—

 
$
1,073

Agency mortgage-backed securities
164,830

 
6,049

 
—

 
170,879

 
159,522

 
5,422

 
—

 
164,944

Agency collateralized mortgage obligations
221,979

 
3,125

 
(1,787
)
 
223,317

 
207,995

 
2,141

 
(3,478
)
 
206,658

State, county, and municipal securities
424

 
5

 
—

 
429

 
424

 
4

 
—

 
428

Single issuer trust preferred securities issued by banks
1,500

 
8

 
—

 
1,508

 
1,500

 
—

 
(23
)
 
1,477

Corporate debt securities
5,002

 
98

 
—

 
5,100

 
5,002

 
117

 
—

 
5,119

Total held to maturity securities
$
394,745

 
$
9,364

 
$
(1,787
)
 
$
402,322

 
$
375,453

 
$
7,747

 
$
(3,501
)
 
$
379,699

Total
$
773,781

 
$
19,966

 
$
(4,387
)
 
$
789,360

 
$
718,546

 
$
16,579

 
$
(6,872
)
 
$
728,253

(1)    Gross unrealized gains and gross unrealized losses include $146,000 and $230,000 of net non-credit related OTTI at March 31, 2015 and December 31, 2014, respectively.
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 had no realized gains or losses during the three month period ending March 31, 2015 and realized a net gain of $91,000 during the three month period ending March 31, 2014 on equity securities classified as available for sale. There were no gains on sale on the Company's fixed income securities during the periods ending March 31, 2015 and 2014.
 
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, 2015 is presented below:


15
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
$
—

 
$
—

 
$
5,202

 
$
5,300

Due after one year to five years
54,992

 
55,912

 
408

 
423

Due after five to ten years
95,080

 
96,837

 
30,927

 
31,804

Due after ten years
217,420

 
222,291

 
358,208

 
364,795

Total debt securities
$
367,492

 
$
375,040

 
$
394,745

 
$
402,322

Equity securities
$
11,544

 
$
11,998

 
$
—

 
$
—

Total
$
379,036

 
$
387,038

 
$
394,745

 
$
402,322

Inclusive in the table above is $39.1 million of callable securities in the Company’s investment portfolio at March 31, 2015.
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 $327.4 million and $340.0 million at March 31, 2015 and December 31, 2014, respectively.
At March 31, 2015 and December 31, 2014, 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, 2015
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
# of holdings
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(Dollars in thousands)
Agency mortgage-backed securities
12

 
$
7,375

 
$
(40
)
 
$
4,718

 
$
(117
)
 
$
12,093

 
$
(157
)
Agency collateralized mortgage obligations
12

 
7,682

 
(4
)
 
93,437

 
(2,227
)
 
101,119

 
(2,231
)
Single issuer trust preferred securities issued by banks and insurers
1

 
1,076

 
(10
)
 
—

 
—

 
1,076

 
(10
)
Pooled trust preferred securities issued by banks and insurers
2

 
—

 
—

 
2,549

 
(1,444
)
 
2,549

 
(1,444
)
Equity securities
20

 
1,265

 
(77
)
 
4,092

 
(143
)
 
5,357

 
(220
)
Total temporarily impaired securities
47

 
$
17,398

 
$
(131
)
 
$
104,796

 
$
(3,931
)
 
$
122,194

 
$
(4,062
)


16
Table of Contents

 
December 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
22

 
$
21,950

 
$
(22
)
 
$
—

 
$
—

 
$
21,950

 
$
(22
)
Agency mortgage-backed securities
17

 
3,471

 
(1
)
 
42,222

 
(692
)
 
45,693

 
(693
)
Agency collateralized mortgage obligations
14

 
35,083

 
(331
)
 
94,974

 
(3,770
)
 
130,057

 
(4,101
)
Single issuer trust preferred securities issued by banks and insurers
2

 
2,553

 
(39
)
 
—

 
—

 
2,553

 
(39
)
Pooled trust preferred securities issued by banks and insurers
2

 
—

 
—

 
2,681

 
(1,356
)
 
2,681

 
(1,356
)
Equity securities
23

 
1,480

 
(74
)
 
4,072

 
(163
)
 
5,552

 
(237
)
Total temporarily impaired securities
80

 
$
64,537

 
$
(467
)
 
$
143,949

 
$
(5,981
)
 
$
208,486

 
$
(6,448
)
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, 2015:
•
Agency Mortgage-Backed Securities and Collateralized Mortgage Obligations: This portfolio has contractual terms that generally do not permit the issuer to settle the securities at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. Government or one of its agencies.
•
Single Issuer Trust Preferred Securities: This portfolio consists of one security which is below investment grade. The unrealized loss on these securities is attributable to the illiquid nature of the trust preferred market in the current economic environment. Management evaluates various financial metrics for the issuers, including regulatory capital ratios of the issuers.
•
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.

17
Table of Contents

The following table shows the total OTTI that the Company recorded for the periods indicated:
 
Three Months Ended
 
March 31
 
2015
 
2014
 
(Dollars in thousands)
Gross change in OTTI recorded on certain investments
$
84

 
$
833

Portion of OTTI recognized in OCI
(84
)
 
(833
)
Total credit related OTTI recognized in earnings
$
—

 
$
—

The following table shows the cumulative credit related component of OTTI for the periods indicated:
 
Three Months Ended
 
March 31
 
2015
 
2014
 
(Dollars in thousands)
Balance at beginning of period
$
(9,997
)
 
$
(9,997
)
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
)
 
$
(9,997
)


18
Table of Contents




NOTE 5 - LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY
The following tables bifurcate the amount of loans and the allowance allocated to each loan category based on the type of impairment analysis as of the periods indicated:
 
March 31, 2015
 
 
(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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
823,023

 
$
2,561,984

 
$
291,175

 
$
86,682

 
$
655,891

 
$
870,476

 
$
18,431

 
$
5,307,662

  
Individually evaluated for impairment
$
6,357

 
$
32,162

 
$
311

 
$
1,027

 
$
15,827

 
$
6,014

 
$
1,182

 
$
62,880

  
Purchased credit impaired loans
$
—

 
$
12,298

 
$
180

 
$
—

 
$
9,661

 
$
426

 
$
11

 
$
22,576

 
Total loans by group
$
829,380

 
$
2,606,444

 
$
291,666

 
$
87,709

 
$
681,379

 
$
876,916

 
$
19,624

 
$
5,393,118

(1
)


 
December 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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
856,185

 
$
2,304,099

 
$
265,501

 
$
84,159

 
$
505,799

 
$
858,305

 
$
16,335

 
$
4,890,383

 
Individually evaluated for impairment
$
4,654

 
$
30,729

 
$
311

 
$
1,088

 
$
15,055

 
$
5,330

 
$
868

 
$
58,035

  
Purchased credit impaired loans
$
—

 
$
12,495

 
$
182

 
$
—

 
$
9,405

 
$
228

 
$
5

 
$
22,315

 
Total loans by group
$
860,839

 
$
2,347,323

 
$
265,994

 
$
85,247

 
$
530,259

 
$
863,863

 
$
17,208

 
$
4,970,733

(1
)
 
(1)
The amount of net deferred fees included in the ending balance was $3.1 million and $2.8 million at March 31, 2015 and December 31, 2014, respectively.
    


19
Table of Contents

 
Three Months Ended March 31, 2015
 
(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
$
15,573

 
$
25,873

 
$
3,945

 
$
1,171

 
$
2,834

 
$
4,956

 
$
748

 
$
55,100

Charge-offs
(561
)
 
(141
)
 
—

 
(150
)
 
(185
)
 
(161
)
 
(327
)
 
(1,525
)
Recoveries
379

 
685

 
—

 
67

 
45

 
72

 
192

 
1,440

Provision (benefit)
(834
)
 
(132
)
 
197

 
134

 
32

 
39

 
64

 
(500
)
Ending balance
$
14,557

 
$
26,285

 
$
4,142

 
$
1,222

 
$
2,726

 
$
4,906

 
$
677

 
$
54,515

Ending balance: individually evaluated for impairment
$
308

 
$
265

 
$
—

 
$
5

 
$
1,453

 
$
253

 
$
34

 
$
2,318

Ending balance: collectively evaluated for impairment
$
14,249

 
$
26,020

 
$
4,142

 
$
1,217

 
$
1,273

 
$
4,653

 
$
643

 
$
52,197

 
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 (benefit)
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

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 determining the appropriate level of allowance for each segment.  Some of the risk characteristics unique to each loan category include:
Commercial Portfolio
•
Commercial and 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

20
Table of Contents

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 primarily of, 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 or purchase 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 include 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 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 Loss Unlikely: 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,

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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, 2015
Category
Risk
Rating
 
Commercial  and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small Business
 
Total
 
 
 
(Dollars in thousands)
Pass
1 - 6
 
$
760,872

 
$
2,452,783

 
$
272,974

 
$
83,855

 
$
3,570,484

Potential weakness
7
 
43,159

 
83,746

 
18,154

 
2,832

 
147,891

Definite weakness-loss unlikely
8
 
24,950

 
68,669

 
538

 
918

 
95,075

Partial loss probable
9
 
399

 
1,246

 
—

 
104

 
1,749

Definite loss
10
 
—

 
—

 
—

 
—

 
—

Total
 
 
$
829,380

 
$
2,606,444

 
$
291,666

 
$
87,709

 
$
3,815,199


 
 
 
December 31, 2014
Category
Risk
Rating
 
Commercial  and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small Business
 
Total
 
 
 
(Dollars in thousands)
Pass
1 - 6
 
$
801,578

 
$
2,196,109

 
$
248,696

 
$
81,255

 
$
3,327,638

Potential weakness
7
 
37,802

 
82,372

 
15,464

 
2,932

 
138,570

Definite weakness-loss unlikely
8
 
20,241

 
67,571

 
1,834

 
949

 
90,595

Partial loss probable
9
 
1,218

 
1,271

 
—

 
111

 
2,600

Definite loss
10
 
—

 
—

 
—

 
—

 
—

Total
 
 
$
860,839

 
$
2,347,323

 
$
265,994

 
$