INDB 06.30.2015 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 June 30, 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 August 3, 2015, there were 26,205,818 shares of the issuer’s common stock outstanding, par value $0.01 per share.
 


Table of Contents


 
Table of Contents
 
PAGE
 
 
Consolidated Balance Sheets - June 30, 2015 and December 31, 2014
Consolidated Statements of Income - Three and six months ended June 30, 2015 and 2014
Consolidated Statements of Comprehensive Income -Three and six months ended June 30, 2015 and 2014
Consolidated Statements of Stockholders’ Equity - Six months ended June 30, 2015 and 2014
Consolidated Statements of Cash Flows - Six months ended June 30, 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)
 
 
June 30,
2015
 
December 31, 2014
Assets
Cash and due from banks
$
100,054

 
$
143,342

Interest-earning deposits with banks
295,722

 
34,912

Securities
 
 
 
Securities - trading
489

 
—

Securities - available for sale
375,001

 
348,554

Securities - held to maturity (fair value $431,778 and $379,699)
428,339

 
375,453

Total securities
803,829

 
724,007

Loans held for sale (at fair value)
10,728

 
6,888

Loans
 
 
 
Commercial and industrial
873,105

 
860,839

Commercial real estate
2,630,062

 
2,347,323

Commercial construction
278,692

 
265,994

Small business
91,367

 
85,247

Residential real estate
653,370

 
530,259

Home equity - first position
526,370

 
513,518

Home equity - subordinate positions
364,523

 
350,345

Other consumer
17,293

 
17,208

   Total loans
5,434,782

 
4,970,733

Less: allowance for loan losses
(54,995
)
 
(55,100
)
Net loans
5,379,787

 
4,915,633

Federal Home Loan Bank stock
37,485

 
33,233

Bank premises and equipment, net
74,143

 
64,074

Goodwill
201,083

 
170,421

Identifiable intangible assets
13,248

 
9,885

Cash surrender value of life insurance policies
132,600

 
109,854

Other real estate owned and other foreclosed assets
5,124

 
7,743

Other assets
142,118

 
144,920

Total assets
$
7,195,921

 
$
6,364,912

Liabilities and Stockholders' Equity
Deposits
 
 
 
Demand deposits
1,832,971

 
1,462,200

Savings and interest checking accounts
2,285,968

 
2,108,486

Money market
1,125,888

 
990,160

Time certificates of deposit of $100,000 and over
295,738

 
254,718

Other time certificates of deposits
429,965

 
394,902

Total deposits
5,970,530

 
5,210,466

Borrowings
 
 
 
Federal Home Loan Bank borrowings
108,190

 
70,080

Customer repurchase agreements and other short-term borrowings
119,439

 
147,890


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Wholesale repurchase agreements
50,000

 
50,000

Junior subordinated debentures
73,576

 
73,685

Subordinated debentures
35,000

 
65,000

Total borrowings
386,205

 
406,655

Other liabilities
95,869

 
107,264

Total liabilities
6,452,604

 
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: 26,158,826 shares at June 30, 2015 and 23,998,738 shares at December 31, 2014 (includes 243,710 and 254,500 shares of unvested participating restricted stock awards, respectively)
259

 
237

Shares held in rabbi trust at cost: 171,286 shares at June 30, 2015 and 176,849 shares at December 31, 2014
(3,785
)
 
(3,666
)
Deferred compensation and other retirement benefit obligations
3,785

 
3,666

Additional paid in capital
401,437

 
311,978

Retained earnings
343,757

 
330,444

Accumulated other comprehensive loss, net of tax
(2,136
)
 
(2,132
)
Total stockholders’ equity
743,317

 
640,527

Total liabilities and stockholders' equity
$
7,195,921

 
$
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
 
Six Months Ended
 
June 30
 
June 30
 
2015
 
2014
 
2015
 
2014
Interest income
 
 
 
 
 
 
 
Interest and fees on loans
$
54,016

 
$
49,393

 
$
105,704

 
$
97,597

Taxable interest and dividends on securities
4,852

 
4,690

 
9,479

 
9,340

Nontaxable interest and dividends on securities
30

 
37

 
64

 
74

Interest on loans held for sale
58

 
96

 
109

 
147

Interest on federal funds sold and short-term investments
60

 
69

 
91

 
106

Total interest and dividend income
59,016

 
54,285

 
115,447

 
107,264

Interest expense
 
 
 
 
 
 
 
Interest on deposits
2,922

 
2,789

 
5,685

 
5,579

Interest on borrowings
2,347

 
2,443

 
4,765

 
5,026

Total interest expense
5,269

 
5,232

 
10,450

 
10,605

Net interest income
53,747

 
49,053

 
104,997

 
96,659

Provision for loan losses
700

 
2,250

 
200

 
6,752

Net interest income after provision for loan losses
53,047

 
46,803

 
104,797

 
89,907

Noninterest income
 
 
 
 
 
 
 
Deposit account fees
4,465

 
4,463

 
8,631

 
8,821

Interchange and ATM fees
3,767

 
3,322

 
6,868

 
6,298

Investment management
5,528

 
5,136

 
10,635

 
9,739

Mortgage banking income
1,226

 
877

 
2,352

 
1,364

Gain on life insurance benefits
—

 
337

 
—

 
1,964

Gain (loss) on sale of equity securities
19

 
(20
)
 
19

 
71

Gain on sale of fixed income securities
798

 
—

 
798

 
—

Increase in cash surrender value of life insurance policies
949

 
721

 
1,727

 
1,443

Loan level derivative income
1,430

 
324

 
1,848

 
1,070

Other noninterest income
2,079

 
1,697

 
3,939

 
3,602

Total noninterest income
20,261

 
16,857

 
36,817

 
34,372

Noninterest expenses
 
 
 
 
 
 
 
Salaries and employee benefits
26,318

 
22,843

 
51,606

 
45,923

Occupancy and equipment expenses
5,672

 
5,301

 
12,066

 
11,447

Data processing and facilities management
1,228

 
1,179

 
2,350

 
2,432

FDIC assessment
1,017

 
966

 
1,973

 
1,871

Advertising expense
1,853

 
1,249

 
2,687

 
2,073

Consulting expense
829

 
810

 
1,585

 
1,368

Loss on sale of equity securities
8

 
—

 
8

 
—

Loss on sale of fixed income securities
1,124

 
—

 
1,124

 
—

Loss on termination of derivatives
—

 
1,122

 
—

 
1,122

Merger and acquisition expense
271

 
—

 
10,501

 
77

Other noninterest expenses
10,324

 
9,510

 
19,722

 
18,553

Total noninterest expenses
48,644

 
42,980

 
103,622

 
84,866

Income before income taxes
24,664

 
20,680

 
37,992

 
39,413

Provision for income taxes
7,213

 
5,934

 
11,082

 
11,284

Net income
$
17,451

 
$
14,746

 
$
26,910

 
$
28,129

Basic earnings per share
$
0.67

 
$
0.62

 
$
1.05

 
$
1.18

Diluted earnings per share
$
0.67

 
$
0.61

 
$
1.05

 
$
1.17

Weighted average common shares (basic)
26,149,593

 
23,897,413

 
25,558,016

 
23,858,456

Common shares equivalents
71,819

 
94,560

 
76,626

 
97,544

Weighted average common shares (diluted)
26,221,412

 
23,991,973

 
25,634,642

 
23,956,000

Cash dividends declared per common share
$
0.26

 
$
0.24

 
$
0.52

 
$
0.48

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
 
2015
 
2014
 
2015
 
2014
Net income
$
17,451

 
$
14,746

 
$
26,910

 
$
28,129

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Net change in fair value of securities available for sale
(2,228
)
 
2,395

 
(667
)
 
4,312

Net change in fair value of cash flow hedges
382

 
1,005

 
464

 
1,507

Net change in other comprehensive income for defined benefit postretirement plans
123

 
(39
)
 
199

 
(78
)
Total other comprehensive income (loss)
(1,723
)
 
3,361

 
(4
)
 
5,741

Total comprehensive income
$
15,728

 
$
18,107

 
$
26,906

 
$
33,870

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
—

 
—

 
—

 
—

 
—

 
26,910

 
—

 
26,910

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
(4
)
 
(4
)
Common dividend declared ($0.52 per share)
—

 
—

 
—

 
—

 
—

 
(13,597
)
 
—

 
(13,597
)
Common stock issued for acquisition
2,052,137

 
21

 
—

 
—

 
86,394

 
—

 
—

 
86,415

Proceeds from exercise of stock options, net of cash paid
40,314

 
—

 
—

 
—

 
311

 
—

 
—

 
311

Tax benefit related to equity award activity
—

 
—

 
—

 
—

 
546

 
—

 
—

 
546

Stock based compensation
—

 
—

 
—

 
—

 
1,362

 
—

 
—

 
1,362

Restricted stock awards issued, net of awards surrendered
36,101

 
1

 
—

 
—

 
(646
)
 
—

 
—

 
(645
)
Shares issued under direct stock purchase plan
31,536

 
—

 
—

 
—

 
1,327

 
—

 
—

 
1,327

Deferred compensation and other retirement benefit obligations
—

 
—

 
(119
)
 
119

 


 
—

 
—

 
—

Tax benefit related to deferred compensation distributions
—

 
$
—

 
$
—

 
$
—

 
165

 
—

 
—

 
165

Balance June 30, 2015
26,158,826

 
$
259

 
$
(3,785
)
 
$
3,785

 
$
401,437

 
$
343,757

 
$
(2,136
)
 
$
743,317

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance 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, net of cash paid
20,609

 
—

 
—

 
—

 
468

 
—

 
—

 
468

Tax benefit related to equity award activity
—

 
—

 
—

 
—

 
449

 
—

 
—

 
449

Stock 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 and other retirement benefit obligations
—

 
—

 
(124
)
 
124

 
—

 
—

 
—

 
—

Tax benefit related to deferred compensation distributions
—

 
$
—

 
$
—

 
$
—

 
$
128

 
$
—

 
$
—

 
$
128

Balance June 30, 2014
23,904,072

 
236

 
(3,528
)
 
3,528

 
307,720

 
310,226

 
(1,693
)
 
616,489

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
 
2015
 
2014
Cash flow from operating activities
 
 
 
Net income
$
26,910

 
$
28,129

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
6,388

 
6,153

Provision for loan losses
200

 
6,752

Deferred income tax expense
5,372

 
563

Net (gain) loss on sale of securities
315

 
(71
)
Net loss on fixed assets
110

 
390

Loss on termination of derivatives
—

 
1,122

Net loss on other real estate owned and foreclosed assets
630

 
232

Realized gain on sale leaseback transaction
(517
)
 
(517
)
Stock based compensation
1,362

 
1,496

Excess tax benefit related to equity award activity
(546
)
 
(449
)
Increase in cash surrender value of life insurance policies
(1,727
)
 
(1,443
)
Gain on life insurance benefits
—

 
(1,964
)
Change in fair value on loans held for sale
(184
)
 
(225
)
Net change in:
 
 
 
Trading assets
(489
)
 
—

Loans held for sale
(3,656
)
 
(7,018
)
Other assets
16,057

 
1,572

Other liabilities
(12,353
)
 
(4,154
)
Total adjustments
10,962

 
2,439

Net cash provided by operating activities
37,872

 
30,568

Cash flows used in investing activities
 
 
 
Proceeds from sales of securities available for sale
14,344

 
673

Proceeds from maturities and principal repayments of securities available for sale
34,849

 
23,510

Purchases of securities available for sale
(34,193
)
 
(868
)
Proceeds from maturities and principal repayments of securities held to maturity
29,030

 
20,216

Purchases of securities held to maturity
(81,859
)
 
(43,493
)
Redemption of Federal Home Loan Bank stock
—

 
2,576

Investments in low income housing projects
(12,272
)
 
(3,748
)
Purchases of life insurance policies
(100
)
 
(101
)
Proceeds from life insurance policies
—

 
5,735

Net increase in loans
(1,137
)
 
(177,486
)
Cash used in business combinations, net of cash acquired
(13,448
)
 
—

Purchases of bank premises and equipment
(4,537
)
 
(3,915
)
Proceeds from the sale of bank premises and equipment
347

 
759

Payments on early termination of hedging relationship
—

 
(1,122
)
Proceeds from the sale of other real estate owned and foreclosed assets
3,879

 
2,810

Net capital improvements to other real estate owned
(765
)
 
(875
)

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Net cash used in investing activities
(65,862
)
 
(175,329
)
Cash flows provided by financing activities
 
 
 
Net decrease in time deposits
(39,853
)
 
(40,770
)
Net increase in other deposits
367,667

 
352,513

Net repayments of short-term Federal Home Loan Bank borrowings
(10,000
)
 
(75,000
)
Repayments of long-term Federal Home Loan Bank borrowings
(3,000
)
 
(5,000
)
Net decrease in customer repurchase agreements
(28,451
)
 
(17,522
)
Net decrease in other short term borrowings
—

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

Net proceeds from exercise of stock options
311

 
468

Restricted stock awards issued, net of awards surrendered
(645
)
 
(642
)
Excess tax benefit from stock based compensation
546

 
449

Tax benefit from deferred compensation distribution
165

 
128

Proceeds from shares issued under direct stock purchase plan
1,327

 
643

Common dividends paid
(12,555
)
 
(10,967
)
Net cash provided by financing activities
245,512

 
199,300

Net increase in cash and cash equivalents
217,522

 
54,539

Cash and cash equivalents at beginning of year
178,254

 
216,325

Cash and cash equivalents at end of period
395,776

 
270,864

Supplemental schedule of noncash investing and financing activities
 
 
 
Transfer of loans to other real estate owned & foreclosed assets
$
983

 
$
4,257

Other net transfers to other real estate owned
$
142

 
$
—

Increase (decrease) in capital commitments relating to low income housing project investments
$
(1,055
)
 
$
25,840

In conjunction with the purchase acquisition detailed in note 3 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 June 30, 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 Topic 805 "Business Combinations - Pushdown Accounting" Update No. 2015-08. Update No. 2015-08 was issued in May 2015 to remove references and to amend certain previously issued pushdown accounting guidance. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

FASB ASC Subtopic 350-40 "Intangibles - Goodwill and Other - Internal - Use Software" Update No. 2015-05. Update No. 2015-05 was issued in April 2015 to provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change current account for service contracts. 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 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

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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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Table of Contents

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 $271,000 and $10.5 million during the three and six months ended June 30, 2015, respectively. 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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Table of Contents

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 Company 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.

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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.
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Net interest income after provision for loan losses
$
53,047

 
$
51,273

 
$
107,455

 
$
98,789

Net income
17,606

 
15,285

 
31,766

 
29,182

Excluded from the pro forma results of operations for the three and six months ended June 30, 2015 are merger-related costs of $271,000 and $16.7 million, respectively, 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.


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Table of Contents

NOTE 4 - SECURITIES
Trading Securities

As of June 30, 2015, the Company had trading securities of $489,000. 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:
 
June 30, 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
$
39,375

 
$
351

 
$
—

 
$
39,726

 
$
41,369

 
$
139

 
$
(22
)
 
$
41,486

Agency mortgage-backed securities
226,438

 
5,436

 
(877
)
 
230,997

 
211,168

 
7,203

 
(693
)
 
217,678

Agency collateralized mortgage obligations
55,241

 
477

 
(516
)
 
55,202

 
63,059

 
599

 
(623
)
 
63,035

State, county, and municipal securities
4,571

 
97

 
—

 
4,668

 
5,106

 
117

 
—

 
5,223

Single issuer trust preferred securities issued by banks
2,889

 
11

 
(28
)
 
2,872

 
2,913

 
12

 
(16
)
 
2,909

Pooled trust preferred securities issued by banks and insurers (1)
2,246

 
—

 
(651
)
 
1,595

 
7,906

 
195

 
(1,780
)
 
6,321

Small business administration pooled securities

26,632

 
—

 
(135
)
 
26,497

 
—

 
—

 
—

 
—

Equity securities
13,201

 
579

 
(336
)
 
13,444

 
11,572

 
567

 
(237
)
 
11,902

Total available for sale securities
$
370,593

 
$
6,951

 
$
(2,543
)
 
$
375,001

 
$
343,093

 
$
8,832

 
$
(3,371
)
 
$
348,554

Held to maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
1,009

 
$
61

 
$
—

 
$
1,070

 
$
1,010

 
$
63

 
$
—

 
$
1,073

Agency mortgage-backed securities
158,432

 
4,011

 
(69
)
 
162,374

 
159,522

 
5,422

 
—

 
164,944

Agency collateralized mortgage obligations
224,994

 
1,885

 
(2,754
)
 
224,125

 
198,220

 
1,842

 
(3,478
)
 
196,584

State, county, and municipal securities
225

 
2

 
—

 
227

 
424

 
4

 
—

 
428

Single issuer trust preferred securities issued by banks
1,500

 
—

 
—

 
1,500

 
1,500

 
—

 
(23
)
 
1,477

Small business administration pooled securities

37,178

 
341

 
(103
)
 
37,416

 
9,775

 
299

 
—

 
10,074

Corporate debt securities
5,001

 
65

 
—

 
5,066

 
5,002

 
117

 
—

 
5,119

Total held to maturity securities
$
428,339

 
$
6,365

 
$
(2,926
)
 
$
431,778

 
$
375,453

 
$
7,747

 
$
(3,501
)
 
$
379,699

Total
$
798,932

 
$
13,316

 
$
(5,469
)
 
$
806,779

 
$
718,546

 
$
16,579

 
$
(6,872
)
 
$
728,253

(1)    Gross unrealized gains and gross unrealized losses include $230,000 of net non-credit related other-than-temporary impairment ("OTTI") at December 31, 2014. There was no non-credit related OTTI at June 30, 2015.
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 loss of $8,000 and a gain of $19,000 on equity securities classified as available for sale during the three and six month periods ending June 30, 2015. The Company realized a net loss of $20,000 and a net gain of $71,000 on equity securities classified as available for sale during the three and six month period ending June 30, 2014, respectively. The Company realized a loss of $1.1 million and a gain of $798,000 on the sale of the Company's fixed income securities during the three and six month periods ending June 30, 2015. There were no gains or losses on sale on the Company's fixed income securities during the respective periods ending June 30, 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 June 30, 2015 is presented below:


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Table of Contents

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

 
$
—

 
$
5,226

 
$
5,293

Due after one year to five years
46,469

 
47,097

 
149

 
152

Due after five to ten years
92,147

 
92,354

 
29,960

 
30,547

Due after ten years
218,776

 
222,106

 
393,004

 
395,786

Total debt securities
$
357,392

 
$
361,557

 
$
428,339

 
$
431,778

Equity securities
$
13,201

 
$
13,444

 
$
—

 
$
—

Total
$
370,593

 
$
375,001

 
$
428,339

 
$
431,778

Inclusive in the table above is $27.6 million of callable securities in the Company’s investment portfolio at June 30, 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 $317.6 million and $340.0 million at June 30, 2015 and December 31, 2014, respectively.
At June 30, 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:
 
June 30, 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
40

 
$
76,234

 
$
(766
)
 
$
4,542

 
$
(180
)
 
$
80,776

 
$
(946
)
Agency collateralized mortgage obligations
14

 
45,813

 
(329
)
 
88,668

 
(2,941
)
 
134,481

 
(3,270
)
Single issuer trust preferred securities issued by banks and insurers
2

 
2,113

 
(28
)
 
—

 
—

 
2,113

 
(28
)
Pooled trust preferred securities issued by banks and insurers
1

 
—

 
—

 
1,595

 
(651
)
 
1,595

 
(651
)
Small business administration pooled securities
3

 
39,349

 
(238
)
 
—

 
—

 
39,349

 
(238
)
Equity securities
26

 
2,717

 
(123
)
 
4,330

 
(213
)
 
7,047

 
(336
)
Total temporarily impaired securities
86

 
$
166,226

 
$
(1,484
)
 
$
99,135

 
$
(3,985
)
 
$
265,361

 
$
(5,469
)


17
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 June 30, 2015:
•
Agency Mortgage-Backed Securities, Agency Collateralized Mortgage Obligations and Small Business Administration Pooled Securities: These portfolios have 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 carry the implicitly or, in some cases the explicit guarantee of the U.S. Government or one of its agencies.
•
Single Issuer Trust Preferred Securities: This portfolio consists of two securities, one of 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 one below investment grade security which is performing. The unrealized loss on this security 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
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Gross change in OTTI recorded on certain investments
$
—

 
$
196

 
$
84

 
$
1,029

Portion of OTTI recognized in OCI
—

 
(196
)
 
(84
)
 
(1,029
)
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
 
Six Months Ended
 
June 30
 
June 30
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Balance at beginning of period
$
(9,997
)
 
$
(9,997
)
 
$
(9,997
)
 
$
(9,997
)
Add
 
 
 
 
 
 
 
Incurred on securities not previously impaired
—

 
—

 
—

 
—

Incurred on securities previously impaired
—

 
—

 
—

 
—

Less
 
 
 
 
 
 
 
Securities sold during the period
9,997

 
—

 
9,997

 
—

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
)


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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:
 
June 30, 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
$
867,695

 
$
2,588,279

 
$
278,205

 
$
90,481

 
$
629,556

 
$
884,588

 
$
15,618

 
$
5,354,422

  
Individually evaluated for impairment
$
5,410

 
$
29,562

 
$
309

 
$
886

 
$
14,940

 
$
5,895

 
$
1,664

 
$
58,666

  
Purchased credit impaired loans
$
—

 
$
12,221

 
$
178

 
$
—

 
$
8,874

 
$
410

 
$
11

 
$
21,694

 
Total loans by group
$
873,105

 
$
2,630,062

 
$
278,692

 
$
91,367

 
$
653,370

 
$
890,893

 
$
17,293

 
$
5,434,782

(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 $3.5 million and $2.8 million at June 30, 2015 and December 31, 2014, respectively.
The following tables summarize changes in allowance for loan losses by loan category for the periods indicated:
 
Three Months Ended June 30, 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
$
14,557

 
$
26,285

 
$
4,142

 
$
1,222

 
$
2,726

 
$
4,906

 
$
677

 
$
54,515

Charge-offs
(473
)
 
(67
)
 
—

 
(47
)
 
(17
)
 
(248
)
 
(247
)
 
(1,099
)
Recoveries
502

 
169

 
—

 
66

 
1

 
31

 
110

 
879

Provision
693

 
(28
)
 
(71
)
 
7

 
(159
)
 
182

 
76

 
700

Ending balance
$
15,279

 
$
26,359

 
$
4,071

 
$
1,248

 
$
2,551

 
$
4,871

 
$
616

 
$
54,995



20
Table of Contents

 
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