Edgar Filing: INDEPENDENT BANK CORP

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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, 2016

Commission File Number: 1-9047

___________________________________________________

Independent Bank Corp.

(Exact name of registrant as specified in its charter)

___________________________________________________



Massachusetts	04-2870273
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Office Address: 2036 Washington Street, Hanover Massachusetts 02339

Mailing Address: 288 Union Street, Rockland, Massachusetts 02370

(Address of principal executive offices, including zip code)

(781) 878-6100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer	x	Accelerated Filer	o

Non-accelerated Filer	o	Smaller Reporting Company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 1, 2016, there were 26,328,686 shares of the issuer’s common stock outstanding, par value $0.01 per share.

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	PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - June 30, 2016 and December 31, 2015	4
Consolidated Statements of Income - Three and six months ended June 30, 2016 and 2015	6
Consolidated Statements of Comprehensive Income -Three and six months ended June 30, 2016 and 2015	7
Consolidated Statements of Stockholders’ Equity - Six months ended June 30, 2016 and 2015	8
Consolidated Statements of Cash Flows - Six months ended June 30, 2016 and 2015	9

Notes to Consolidated Financial Statements - June 30, 2016

Note 1 - Basis of Presentation	11
Note 2 - Recent Accounting Standards Updates	11
Note 3 - Securities	14
Note 4 - Loans, Allowance for Loan Losses, and Credit Quality	18
Note 5 - Earnings Per Share	30
Note 6 - Stock Based Compensation	31
Note 7 - Repurchase Agreements	31
Note 8 - Derivative and Hedging Activities	32
Note 9 - Balance Sheet Offsetting	36
Note 10 - Fair Value Measurements	37
Note 11 - Comprehensive Income/(Loss)	45
Note 12 - Commitments and Contingencies	46
Note 13 - Low Income Housing Project Investments	47

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
Table 1 - Closed Residential Real Estate Loans	58
Table 2 - Residential Mortgage Loan Sales	58
Table 3 - Mortgage Servicing Asset	59
Table 4 - Nonperforming Assets	63
Table 5 - Activity in Nonperforming Assets	64
Table 6 - Troubled Debt Restructurings	64
Table 7 - Activity in Troubled Debt Restructurings	64
Table 8 - Interest Income - Nonaccrual Loans and Troubled Debt Restructurings	65
Table 9 - Summary of Changes in the Allowance for Loan Losses	67
Table 10 - Summary of Allocation of the Allowance for Loan Losses	68
Table 11 - Borrowings	69
Table 12 - Company and Bank’s Capital Amounts and Ratios	70
Table 13 - Summary of Results of Operations	72
Table 14 - Average Balance, Interest Earned/Paid & Average Yields Quarter-to-Date	73
Table 15 - Average Balance, Interest Earned/Paid & Average Yields Year-to-Date	75
Table 16 - Volume Rate Analysis	77
Table 17 - Noninterest Income - Three and Six Months Ended	80

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Table 18 - Noninterest Expense - Three and Six Months Ended	81
Table 19 - Tax Provision and Applicable Tax Rates	83
Table 20 - New Markets Tax Credit Recognition Schedule	83
Table 21 - Interest Rate Sensitivity	85
Table 22 - Sources of Liquidity	87



Item 3. Quantitative and Qualitative Disclosures About Market Risk	87
Item 4. Controls and Procedures	87

PART II. OTHER INFORMATION	88
Item 1. Legal Proceedings	88
Item 1A. Risk Factors	88
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	88
Item 3. Defaults Upon Senior Securities	88
Item 4. Mine Safety Disclosures	88
Item 5. Other Information	88
Item 6. Exhibits	88
Signatures	90

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, 2016			December 31 2015
Assets
Cash and due from banks	$	102,397		$	84,813
Interest-earning deposits with banks	229,740			190,952
Securities
Securities - trading	799			356
Securities - available for sale	389,824			367,249
Securities - held to maturity (fair value $451,920 and $478,749)	438,656			477,507
Total securities	829,279			845,112
Loans held for sale (at fair value)	12,927			5,990
Loans
Commercial and industrial	875,164			843,276
Commercial real estate	2,727,143			2,653,434
Commercial construction	367,559			373,368
Small business	111,035			96,246
Residential real estate	628,348			638,606
Home equity - first position	554,624			543,092
Home equity - subordinate positions	393,952			384,711
Other consumer	16,428			14,988
Total loans	5,674,253			5,547,721
Less: allowance for loan losses	(57,727		)	(55,825		)
Net loans	5,616,526			5,491,896
Federal Home Loan Bank stock	11,304			14,431
Bank premises and equipment, net	76,173			75,663
Goodwill	201,083			201,083
Other intangible assets	10,443			11,826
Cash surrender value of life insurance policies	136,724			134,627
Other real estate owned and other foreclosed assets	1,845			2,159
Other assets	190,425			150,917
Total assets	$	7,418,866		$	7,209,469
Liabilities and Stockholders' Equity
Deposits
Demand deposits	1,908,986			1,846,593
Savings and interest checking accounts	2,469,162			2,370,141
Money market	1,175,669			1,089,139
Time certificates of deposit of $100,000 and over	263,490			274,701
Other time certificates of deposits	380,585			410,129
Total deposits	6,197,892			5,990,703
Borrowings
Federal Home Loan Bank borrowings	50,833			102,080
Customer repurchase agreements and other short-term borrowings	139,716			133,958

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Junior subordinated debentures (less unamortized debt issuance costs of $147 and $158)	73,207			73,306
Subordinated debentures (less unamortized debt issuance costs of $388 and $411)	34,612			34,589
Total borrowings	298,368			343,933
Other liabilities	118,709			103,370
Total liabilities	6,614,969			6,438,006
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: 26,309,887 shares at June 30, 2016 and 26,236,352 shares at December 31, 2015 (includes 223,393 and 230,900 shares of unvested participating restricted stock awards, respectively)	261			260
Shares held in rabbi trust at cost: 167,287 shares at June 30, 2016 and 173,378 shares at December 31, 2015	(4,113		)	(3,958		)
Deferred compensation and other retirement benefit obligations	4,113			3,958
Additional paid in capital	408,155			405,486
Retained earnings	391,898			368,169
Accumulated other comprehensive income (loss), net of tax	3,583			(2,452		)
Total stockholders’ equity	803,897			771,463
Total liabilities and stockholders' equity	$	7,418,866		$	7,209,469

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 share and per share data)



	Three Months Ended				Six Months Ended
	June 30				June 30
	2016		2015		2016		2015
Interest income
Interest and fees on loans	$	55,636	$	54,016	$	109,905	$	105,704
Taxable interest and dividends on securities	5,269		4,852		10,466		9,479
Nontaxable interest and dividends on securities	29		30		61		64
Interest on loans held for sale	57		58		89		109
Interest on federal funds sold and short-term investments	169		60		380		91
Total interest and dividend income	61,160		59,016		120,901		115,447
Interest expense
Interest on deposits	2,738		2,922		5,606		5,685
Interest on borrowings	1,889		2,347		3,871		4,765
Total interest expense	4,627		5,269		9,477		10,450
Net interest income	56,533		53,747		111,424		104,997
Provision for loan losses	600		700		1,125		200
Net interest income after provision for loan losses	55,933		53,047		110,299		104,797
Noninterest income
Deposit account fees	4,471		4,465		8,941		8,631
Interchange and ATM fees	4,136		3,767		7,860		6,868
Investment management	5,734		5,528		10,737		10,635
Mortgage banking income	1,363		1,226		2,495		2,352
Gain on sale of equity securities	5		19		5		19
Gain on sale of fixed income securities	—		798		—		798
Increase in cash surrender value of life insurance policies	982		949		1,996		1,727
Loan level derivative income	2,095		1,430		3,817		1,848
Other noninterest income	2,309		2,079		4,399		3,939
Total noninterest income	21,095		20,261		40,250		36,817
Noninterest expenses
Salaries and employee benefits	26,977		26,318		54,166		51,606
Occupancy and equipment expenses	5,667		5,672		11,494		12,066
Data processing and facilities management	1,225		1,228		2,431		2,350
FDIC assessment	920		1,017		1,930		1,973
Advertising expense	1,223		1,853		2,480		2,687
Consulting expense	864		829		1,465		1,585
Loss on extinguishment of debt	—		—		437		122
Loss on sale of equity securities	3		8		32		8
Loss on sale of fixed income securities	—		1,124		—		1,124
Merger and acquisition expense	206		271		540		10,501
Software maintenance	735		677		1,489		1,302
Other noninterest expenses	9,326		9,647		17,164		18,298
Total noninterest expenses	47,146		48,644		93,628		103,622
Income before income taxes	29,882		24,664		56,921		37,992
Provision for income taxes	9,508		7,213		17,936		11,082
Net income	$	20,374	$	17,451	$	38,985	$	26,910
Basic earnings per share	$	0.77	$	0.67	$	1.48	$	1.05
Diluted earnings per share	$	0.77	$	0.67	$	1.48	$	1.05
Weighted average common shares (basic)	26,304,129		26,149,593		26,289,726		25,558,016
Common shares equivalents	47,885		71,819		45,679		76,626
Weighted average common shares (diluted)	26,352,014		26,221,412		26,335,405		25,634,642
Cash dividends declared per common share	$	0.29	$	0.26	$	0.58	$	0.52

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
	2016			2015			2016			2015
Net income	$	20,374		$	17,451		$	38,985		$	26,910
Other comprehensive income (loss), net of tax
Net change in fair value of securities available for sale	1,854			(2,228		)	5,935			(667		)
Net change in fair value of cash flow hedges	(144		)	382			(21		)	464
Net change in other comprehensive income for defined benefit postretirement plans	61			123			121			199
Total other comprehensive income (loss)	1,771			(1,723		)	6,035			(4		)
Total comprehensive income	$	22,145		$	15,728		$	45,020		$	26,906

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 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 Income (Loss)			Total
Balance December 31, 2015	26,236,352	$	260	$	(3,958	)	$	3,958	$	405,486		$	368,169		$	(2,452	)	$	771,463
Net income	—	—		—			—		—			38,985			—			38,985
Other comprehensive income	—	—		—			—		—			—			6,035			6,035
Common dividend declared ($0.58 per share)	—	—		—			—		—			(15,256		)	—			(15,256		)
Proceeds from exercise of stock options, net of cash paid	6,652	—		—			—		144			—			—			144
Tax benefit related to equity award activity	—	—		—			—		327			—			—			327
Stock based compensation	—	—		—			—		1,633			—			—			1,633
Restricted stock awards issued, net of awards surrendered	42,967	1		—			—		(674		)	—			—			(673		)
Shares issued under direct stock purchase plan	23,916	—		—			—		1,060			—			—			1,060
Deferred compensation and other retirement benefit obligations	—	—		(155		)	155					—			—			—
Tax benefit related to deferred compensation distributions	—	—		—			—		179			—			—			179
Balance June 30, 2016	26,309,887	$	261	$	(4,113	)	$	4,113	$	408,155		$	391,898		$	3,583		$	803,897

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

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
	2016			2015
Cash flow from operating activities
Net income	$	38,985		$	26,910
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	7,242			6,431
Provision for loan losses	1,125			200
Deferred income tax expense	415			5,372
Net loss on sale of securities	27			315
Net loss on fixed assets	13			110
Loss on extinguishment of debt	437			122
Net loss on other real estate owned and foreclosed assets	41			630
Realized gain on sale leaseback transaction	(517		)	(517		)
Stock based compensation	1,633			1,362
Excess tax benefit related to equity award activity	(327		)	(546		)
Increase in cash surrender value of life insurance policies	(1,996		)	(1,727		)
Change in fair value on loans held for sale	(13		)	(184		)
Net change in:
Trading assets	(443		)	(489		)
Loans held for sale	(6,924		)	(3,656		)
Other assets	(45,265		)	16,066
Other liabilities	19,615			(12,527		)
Total adjustments	(24,937		)	10,962
Net cash provided by operating activities	14,048			37,872
Cash flows used in investing activities
Proceeds from sales of securities available for sale	285			14,344
Proceeds from maturities and principal repayments of securities available for sale	32,625			34,849
Purchases of securities available for sale	(46,358		)	(34,193		)
Proceeds from maturities and principal repayments of securities held to maturity	39,028			29,030
Purchases of securities held to maturity	—			(81,859		)
Redemption of Federal Home Loan Bank stock	3,127			—
Investments in low income housing projects	(4,431		)	(12,272		)
Purchases of life insurance policies	(101		)	(100		)
Net increase in loans	(126,406		)	(1,137		)
Cash used in business combinations, net of cash acquired	—			(13,448		)
Purchases of bank premises and equipment	(4,003		)	(4,537		)
Proceeds from the sale of bank premises and equipment	14			347
Proceeds from the sale of other real estate owned and foreclosed assets	795			3,879
Net payments relating to other real estate owned and foreclosed assets	(145		)	(765		)
Net cash used in investing activities	(105,570		)	(65,862		)
Cash flows provided by financing activities
Net decrease in time deposits	(40,755		)	(39,853		)

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Net increase in other deposits	247,944			367,667
Net repayments of short-term Federal Home Loan Bank borrowings	—			(10,000		)
Repayments of long-term Federal Home Loan Bank borrowings	(51,641		)	(3,000		)
Net increase (decrease) in customer repurchase agreements	5,758			(28,451		)
Repayments of subordinated debentures	—			(30,000		)
Net proceeds from exercise of stock options	144			311
Restricted stock awards issued, net of awards surrendered	(673		)	(645		)
Excess tax benefit from stock based compensation	327			546
Tax benefit from deferred compensation distribution	179			165
Proceeds from shares issued under direct stock purchase plan	1,060			1,327
Common dividends paid	(14,449		)	(12,555		)
Net cash provided by financing activities	147,894			245,512
Net increase in cash and cash equivalents	56,372			217,522
Cash and cash equivalents at beginning of year	275,765			178,254
Cash and cash equivalents at end of period	332,137			395,776
Supplemental schedule of noncash investing and financing activities
Transfer of loans to other real estate owned & foreclosed assets	$	377		$	983
Other net transfers to other real estate owned	$	—		$	142
Net decrease in capital commitments relating to low income housing project investments	$	180		$	1,055
In conjunction with the Peoples Federal Bancshares, Inc. acquisition, 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 notes 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, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or any other interim period.

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission.

NOTE 2 - RECENT ACCOUNTING STANDARDS UPDATES

FASB ASC Topic 326 "Financial Instruments - Credit Losses" Update No. 2016-13. Update No. 2016-13 was issued in June 2016 to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with earlier adoption permitted as of fiscal years beginning after December 15, 2018, including interim periods with those fiscal years. The Company is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position.

FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2016-12. Update No. 2016-12 was issued in May 2016. This update does not affect the core principle of the guidance. It only affects the narrow aspects of Topic 606, such as assessing the collectability criterion, presentation of sales tax and other similar taxes collected from customers, noncash consideration, contract modifications at transition, completed contracts at transition, and other technical corrections. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 31, 2017. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

FASB ASC Topic 605 "Revenue Recognition" and Topic 815 "Derivatives and Hedging" Update No. 2016-11. Update No. 2016-11 was issued in May 2016 and is a rescission of SEC guidance because of ASU Updates 2014-09 and 2014-16 pursuant to staff announcements at the March 3, 2016 Emerging Issues Task Force meeting. The amendments in this update are effective upon adoption of Topic 606 "Revenue from Contracts with Customers." The Company is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position.

FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2016-10. Update No. 2016-10 was issued in April 2016 and affects entities that enter into contracts with customers to transfer goods or services (that are an output of the entity's ordinary activities) in exchange for consideration. The amendments in this update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 31, 2017. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim

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reporting periods within that reporting period. The Company is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position.

FASB ASC Topic 718 "Compensation - Stock Compensation" Update No. 2016-09. Update No. 2016-09 was issued in March 2016 and affects all entities that issue share-based awards to their employees. This update was issued as part of the FASB’s simplification initiative. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position.

FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2016-08. Update No. 2016-08 was issued in March 2016 and affects entities that enter into contracts with customers to transfer goods or services (that are an output of the entity's ordinary activities) in exchange for consideration. The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The amendments in this update do not change the core principle of the guidance. The effective date and transition requirements for the amendments are the same as the effective date and transitions requirements of Update No. 2014-09, which were originally finalized for public companies effective for fiscal years beginning after December 15, 2016. However, this effective date was subsequently deferred for another year. The Company is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position.

FASB ASC Topic 323 "Investments -Equity Method and Joint Ventures" Update No. 2016-07. Update No. 2016-07 was issued in March 2016 and eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. 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 815 "Derivative and Hedging - Contingent Put and Call Options in Debt Instruments" Update No. 2016-6. Update No. 2016-6 was issued in March 2016 to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. An entity has an option to apply the amendments in this update on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

FASB ASC Topic 815 "Derivative and Hedging - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships" Update No. 2016-05. Update No. 2016-05 was issued in March 2016 and applies to all reporting entities for which there is a change in the counterpart to a derivative instrument that has been designated as a hedging instrument under Topic 815. The amendments in this update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria (including those in paragraphs 815-20-35-14 through 35-18) continue to be met. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. An entity has an option to apply the amendments in this update on either a prospective

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basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

FASB ASC Topic 842 "Leases" Update No. 2016-02. Update No. 2016-02 was issued in February 2016 and affects any entity that enters into a lease (as that term is defined in this update), with some specified scope exemptions. The core principle of this update is that a lessee should recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The recognition, measurement, and presentation of expenses and cash flows arising from a lease have not significantly changed from previous GAAP. In addition, the accounting applied by a lessor is largely unchanged from that applied under previous GAAP. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position.

FASB ASC Topic 825-10 "Financial Instruments - Overall Recognition and Measurement of Financial Assets and Financial Liabilities" Update No. 2016-01. Update No. 2016-01 was issued in January 2016 to amend the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the update retains many current requirements, it significantly revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The update also amends certain disclosure requirements associated with the fair value of financial instruments and various other aspects of recognition, measurement, presentation and disclosure of financial instruments. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for only certain guidance. The Company is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position.

Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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 were adopted by the Company effective January 1, 2016, with applicable prior period presentation updated as well. The adoption of this standard did not 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 were adopted by the Company effective January 1, 2016. The adoption of this standard did not have a material impact on the Company's consolidated financial position.

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NOTE 3 - SECURITIES

Trading Securities

The Company had trading securities of $799,000 and $356,000 as of June 30, 2016 and December 31, 2015, respectively. 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 and gross unrealized holding gains and losses recorded in other comprehensive income and fair value of securities available for sale and securities held to maturity for the periods below:



	June 30, 2016									December 31, 2015
	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	$	26,988	$	953	$	—		$	27,941	$	29,958	$	261	$	(4	)	$	30,215
Agency mortgage-backed securities	186,221		8,230		(3		)	194,448		207,693		4,227		(983		)	210,937
Agency collateralized mortgage obligations	102,381		1,712		(123		)	103,970		64,157		179		(752		)	63,584
State, county, and municipal securities	4,267		129		—			4,396		4,543		116		—			4,659
Single issuer trust preferred securities issued by banks	2,337		5		(78		)	2,264		2,865		8		(81		)	2,792
Pooled trust preferred securities issued by banks and insurers	2,209		—		(703		)	1,506		2,217		—		(645		)	1,572
Small business administration pooled securities	39,252		1,212		—			40,464		40,472		87		(110		)	40,449
Equity securities	14,367		755		(287		)	14,835		13,235		374		(568		)	13,041
Total available for sale securities	$	378,022	$	12,996	$	(1,194	)	$	389,824	$	365,140	$	5,252	$	(3,143	)	$	367,249
Held to maturity securities
U.S. Treasury securities	$	1,008	$	92	$	—		$	1,100	$	1,009	$	55	$	—		$	1,064
Agency mortgage-backed securities	155,468		6,974		—			162,442		167,134		3,460		(219		)	170,375
Agency collateralized mortgage obligations	247,313		5,316		(446		)	252,183		267,348		1,195		(3,652		)	264,891
State, county, and municipal securities	—		—		—			—		225		2		—			227
Single issuer trust preferred securities issued by banks	1,500		46		—			1,546		1,500		22		—			1,522
Small business administration pooled securities	33,367		1,282		—			34,649		35,291		437		(64		)	35,664
Corporate debt securities	—		—		—			—		5,000		6		—			5,006
Total held to maturity securities	$	438,656	$	13,710	$	(446	)	$	451,920	$	477,507	$	5,177	$	(3,935	)	$	478,749
Total	$	816,678	$	26,706	$	(1,640	)	$	841,744	$	842,647	$	10,429	$	(7,078	)	$	845,998

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale.

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, 2016 is presented below:

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	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	—	$	—	$	32	$	32
Due after one year to five years	24,601		25,143		16,186		16,973
Due after five to ten years	96,138		99,926		26,469		27,595
Due after ten years	242,916		249,920		395,969		407,320
Total debt securities	$	363,655	$	374,989	$	438,656	$	451,920
Equity securities	$	14,367	$	14,835	$	—	$	—
Total	$	378,022	$	389,824	$	438,656	$	451,920

Inclusive in the table above is $14.4 million of callable securities in the Company’s investment portfolio at June 30, 2016.

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 $450.4 million and $444.8 million at June 30, 2016 and December 31, 2015, respectively.

At June 30, 2016 and December 31, 2015, 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, 2016
		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	1	$	434	$	(3	)	$	—	$	—		$	434	$	(3	)
Agency collateralized mortgage obligations	7	—		—			54,467		(569		)	54,467		(569		)
Single issuer trust preferred securities issued by banks and insurers	2	—		—			2,014		(78		)	2,014		(78		)
Pooled trust preferred securities issued by banks and insurers	1	—		—			1,506		(703		)	1,506		(703		)
Equity securities	25	408		(22		)	6,391		(265		)	6,799		(287		)
Total temporarily impaired securities	36	$	842	$	(25	)	$	64,378	$	(1,615	)	$	65,220	$	(1,640	)

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	December 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)
U.S.government agency securities	3	$	1,990	$	(4	)	$	—	$	—		$	1,990	$	(4	)
Agency mortgage-backed securities	57	112,648		(1,062		)	4,297		(140		)	116,945		(1,202		)
Agency collateralized mortgage obligations	23	147,707		(1,420		)	80,927		(2,984		)	228,634		(4,404		)
Single issuer trust preferred securities issued by banks and insurers	2	1,018		(33		)	1,018		(48		)	2,036		(81		)
Pooled trust preferred securities issued by banks and insurers	1	—		—			1,572		(645		)	1,572		(645		)
Small business administration pooled securities	3	37,986		(174		)	—		—			37,986		(174		)
Equity securities	34	3,481		(189		)	4,971		(379		)	8,452		(568		)
Total temporarily impaired securities	123	$	304,830	$	(2,882	)	$	92,785	$	(4,196	)	$	397,615	$	(7,078	)

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, 2016:

•

Agency Mortgage-Backed Securities and Agency Collateralized Mortgage Obligations: 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 are either implicitly or explicitly guaranteed by 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. The Company has the ability and intent to hold these equity securities until a recovery of fair value.

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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
	2016		2015		2016		2015
	(Dollars in thousands)
Gross change in OTTI recorded on certain investments	$	—	$	—	$	—	$	84
Portion of OTTI recognized in OCI	—		—		—		(84		)
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
	2016		2015			2016		2015
	(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	—		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	$	—	$	—		$	—	$	—

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NOTE 4 - 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, 2016
	(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	$	870,533	$	2,697,559	$	367,559	$	109,958	$	604,724	$	942,604	$	15,942	$	5,608,879
Individually evaluated for impairment	$	4,631	$	18,775	$	—	$	1,077	$	14,642	$	5,764	$	484	$	45,373
Purchased credit impaired loans	$	—	$	10,809	$	—	$	—	$	8,982	$	208	$	2	$	20,001
Total loans by group	$	875,164	$	2,727,143	$	367,559	$	111,035	$	628,348	$	948,576	$	16,428	$	5,674,253	(1	)



	December 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	$	838,129	$	2,619,294	$	373,064	$	95,225	$	614,014	$	921,563	$	14,427	$	5,475,716
Individually evaluated for impairment	$	5,147	$	22,986	$	304	$	1,021	$	15,405	$	5,989	$	558	$	51,410
Purchased credit impaired loans	$	—	$	11,154	$	—	$	—	$	9,187	$	251	$	3	$	20,595
Total loans by group	$	843,276	$	2,653,434	$	373,368	$	96,246	$	638,606	$	927,803	$	14,988	$	5,547,721	(1	)


(1)	The amount of net deferred fees on loans and net unamortized discounts on acquired loans not deemed to be purchased credit impaired ("PCI") included in the ending balance was $10.6 million and $10.9 million at June 30, 2016 and December 31, 2015 respectively.

The following tables summarize changes in allowance for loan losses by loan category for the periods indicated:



	Three Months Ended June 30, 2016
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction		Small Business			Residential Real Estate			Home Equity			Other Consumer			Total
Allowance for loan losses
Beginning balance	$	13,485		$	28,595		$	5,100	$	1,341		$	2,567		$	4,915		$	429		$	56,432
Charge-offs	(2		)	(25		)	—		(30		)	(8		)	(190		)	(322		)	(577		)
Recoveries	649			223			—		73			51			26			250			1,272
Provision (benefit)	(105		)	218			116		57			(32		)	235			111			600
Ending balance	$	14,027		$	29,011		$	5,216	$	1,441		$	2,578		$	4,986		$	468		$	57,727

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	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 (benefit)	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



	Six Months Ended June 30, 2016
	(Dollars in thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Home Equity		Other Consumer		Total
Allowance for loan losses
Beginning balance	$	13,802	$	27,327	$	5,366	$	1,264	$	2,590	$	4,889	$	587	$	55,825
Charge-offs	(4