Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________________ 
FORM 10-Q
___________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
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,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer
x
Accelerated Filer
o
 
 
 
 
Non-accelerated Filer
o
Smaller Reporting Company
o
 
 
 
 
 
 
Emerging Growth Company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Acts. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of May 1, 2018, there were 27,524,228 shares of the issuer’s common stock outstanding, par value $0.01 per share.
 


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Table of Contents
 
PAGE
 
 
 
 
Condensed Notes to Consolidated Financial Statements - March 31, 2018
 
 
 

Table of Contents

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)
 
 
March 31,
2018
 
December 31
2017
Assets
Cash and due from banks
$
102,623

 
$
103,485

Interest-earning deposits with banks
62,925

 
109,631

Securities
 
 
 
Trading
1,601

 
1,324

Equities
20,075

 
—

Available for sale
445,750

 
447,498

Held to maturity (fair value $517,555 and $494,194)
528,861

 
497,688

Total securities
996,287

 
946,510

Loans held for sale (at fair value)
3,937

 
4,768

Loans
 
 
 
Commercial and industrial
903,214

 
888,528

Commercial real estate
3,102,271

 
3,116,561

Commercial construction
400,934

 
401,797

Small business
133,666

 
132,370

Residential real estate
761,331

 
754,329

Home equity - first position
617,164

 
612,990

Home equity - subordinate positions
434,288

 
439,098

Other consumer
9,188

 
9,880

   Total loans
6,362,056

 
6,355,553

Less: allowance for loan losses
(60,862
)
 
(60,643
)
Net loans
6,301,194

 
6,294,910

Federal Home Loan Bank stock
13,027

 
11,597

Bank premises and equipment, net
95,214

 
94,722

Goodwill
231,806

 
231,806

Other intangible assets
8,462

 
9,341

Cash surrender value of life insurance policies
152,568

 
151,528

Other real estate owned and other foreclosed assets
358

 
612

Other assets
122,009

 
123,119

Total assets
$
8,090,410

 
$
8,082,029

Liabilities and Stockholders' Equity
Deposits
 
 
 
Demand deposits
$
2,167,361

 
$
2,159,396

Savings and interest checking accounts
2,606,257

 
2,599,922

Money market
1,323,138

 
1,325,634

Time certificates of deposit of $100,000 and over
293,266

 
278,531

Other time certificates of deposits
361,489

 
365,770

Total deposits
6,751,511

 
6,729,253

Borrowings
 
 
 

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Federal Home Loan Bank borrowings
53,257

 
53,264

Customer repurchase agreements
137,914

 
162,679

Junior subordinated debentures (less unamortized debt issuance costs of $124 and $125)
73,075

 
73,073

Subordinated debentures (less unamortized debt issuance costs of $307 and $318)
34,693

 
34,682

Total borrowings
298,939

 
323,698

Other liabilities
83,901

 
85,269

Total liabilities
7,134,351

 
7,138,220

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: 27,512,328 shares at March 31, 2018 and 27,450,190 shares at December 31, 2017 (includes 169,904 and 177,191 shares of unvested participating restricted stock awards, respectively)
273

 
273

Value of shares held in rabbi trust at cost: 155,373 shares at March 31, 2018 and 164,438 shares at December 31, 2017
(4,591
)
 
(4,590
)
Deferred compensation and other retirement benefit obligations
4,591

 
4,590

Additional paid in capital
479,715

 
479,430

Retained earnings
484,266

 
465,937

Accumulated other comprehensive loss, net of tax
(8,195
)
 
(1,831
)
Total stockholders’ equity
956,059

 
943,809

Total liabilities and stockholders' equity
$
8,090,410

 
$
8,082,029

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


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INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited—Dollars in thousands, except per share data)
 
Three Months Ended
 
March 31
 
2018
 
2017
Interest income
 
 
 
Interest and fees on loans
$
67,184

 
$
58,793

Taxable interest and dividends on securities
6,219

 
5,367

Nontaxable interest and dividends on securities
16

 
26

Interest on loans held for sale
19

 
14

Interest on federal funds sold and short-term investments
311

 
207

Total interest and dividend income
73,749

 
64,407

Interest expense
 
 
 
Interest on deposits
3,935

 
2,767

Interest on borrowings
1,343

 
1,440

Total interest expense
5,278

 
4,207

Net interest income
68,471

 
60,200

Provision for loan losses
500

 
600

Net interest income after provision for loan losses
67,971

 
59,600

Noninterest income
 
 
 
Deposit account fees
4,431

 
4,544

Interchange and ATM fees
4,173

 
3,922

Investment management
6,142

 
5,614

Mortgage banking income
870

 
957

Gain on sale of equity securities
—

 
4

Increase in cash surrender value of life insurance policies
947

 
964

Loan level derivative income
447

 
606

Other noninterest income
2,853

 
2,301

Total noninterest income
19,863

 
18,912

Noninterest expenses
 
 
 
Salaries and employee benefits
31,100

 
28,324

Occupancy and equipment expenses
7,408

 
6,158

Data processing and facilities management
1,286

 
1,272

FDIC assessment
798

 
783

Advertising expense
1,123

 
1,294

Loss on sale of equity securities
—

 
3

Merger and acquisition expense
—

 
484

Software maintenance
972

 
930

Other noninterest expenses
10,764

 
9,525

Total noninterest expenses
53,451

 
48,773

Income before income taxes
34,383

 
29,739

Provision for income taxes
6,828

 
9,014

Net income
$
27,555

 
$
20,725

Basic earnings per share
$
1.00

 
$
0.77

Diluted earnings per share
$
1.00

 
$
0.76

Weighted average common shares (basic)
27,486,573

 
27,029,640

Common share equivalents
67,381

 
81,283

Weighted average common shares (diluted)
27,553,954

 
27,110,923

Cash dividends declared per common share
$
0.38

 
$
0.32

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

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INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited—Dollars in thousands)
 
 
Three Months Ended
 
March 31
 
2018
 
2017
Net income
$
27,555

 
$
20,725

Other comprehensive income (loss), net of tax
 
 
 
Net change in fair value of securities available for sale
(5,468
)
 
531

Net change in fair value of cash flow hedges
215

 
89

Net change in other comprehensive income for defined benefit postretirement plans
117

 
78

Total other comprehensive income (loss)
(5,136
)
 
698

Total comprehensive income
$
22,419

 
$
21,423

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, 2017
27,450,190

 
$
273

 
$
(4,590
)
 
$
4,590

 
$
479,430

 
$
465,937

 
$
(1,831
)
 
$
943,809

Opening balance reclassification (1)
—

 
—

 
—

 
—

 
—

 
397

 
(397
)
 
—

Cumulative effect accounting adjustment (2)
—

 
—

 
—

 
—

 
—

 
831

 
(831
)
 
—

Net income
—

 
—

 
—

 
—

 
—

 
27,555

 
—

 
27,555

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
(5,136
)
 
(5,136
)
Common dividend declared ($0.38 per share)
—

 
—

 
—

 
—

 
—

 
(10,454
)
 
—

 
(10,454
)
Proceeds from exercise of stock options, net of cash paid
19,256

 
—

 
—

 
—

 
143

 
—

 
—

 
143

Stock based compensation
—

 
—

 
—

 
—

 
1,041

 
—

 
—

 
1,041

Restricted stock awards issued, net of awards surrendered
36,961

 
—

 
—

 
—

 
(1,318
)
 
—

 
—

 
(1,318
)
Shares issued under direct stock purchase plan
5,921

 
—

 
—

 
—

 
419

 
—

 
—

 
419

Deferred compensation and other retirement benefit obligations
—

 
—

 
(1
)
 
1

 
—

 
—

 
—

 
—

Balance March 31, 2018
27,512,328

 
$
273

 
$
(4,591
)
 
$
4,591

 
$
479,715

 
$
484,266

 
$
(8,195
)
 
$
956,059

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2016
27,005,813

 
$
268

 
$
(4,277
)
 
$
4,277

 
$
451,664

 
$
414,095

 
$
(1,337
)
 
$
864,690

Cumulative effect accounting adjustment (3)
—

 
—

 
—

 
—

 
542

 
(365
)
 
—

 
177

Net income
—

 
—

 
—

 
—

 
—

 
20,725

 
—

 
20,725

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
698

 
698

Common dividend declared ($0.32 per share)
—

 
—

 
—

 
—

 
—

 
(8,653
)
 
—

 
(8,653
)
Proceeds from exercise of stock options, net of cash paid
7,688

 
—

 
—

 
—

 
143

 
—

 
—

 
143

Stock based compensation
—

 
—

 
—

 
—

 
643

 
—

 
—

 
643

Restricted stock awards issued, net of awards surrendered
27,534

 
1

 
—

 
—

 
(1,337
)
 
—

 
—

 
(1,336
)
Shares issued under direct stock purchase plan
5,733

 
—

 
—

 
—

 
393

 
—

 
—

 
393

Deferred compensation and other retirement benefit obligations
—

 
—

 
(53
)
 
53

 
—

 
—

 
—

 
—

Balance March 31, 2017
27,046,768

 
$
269

 
$
(4,330
)
 
$
4,330

 
$
452,048

 
$
425,802

 
$
(639
)
 
$
877,480

(1)
Represents adjustment needed to reflect the cumulative impact on retained earnings for reclassification of the income tax effects attributable to accumulated other comprehensive income, as a result of the Tax Cuts and Jobs Act (the "Tax Act"). Pursuant to the Company's adoption of Accounting Standards Update 2018-02, the Company has elected to reclassify amounts stranded in other comprehensive income to retained earnings.
(2)
Represents adjustment needed to reflect the cumulative impact on retained earnings for the classification and measurement of investments in equity securities. Pursuant to the Company's adoption of Accounting Standards Update 2016-01, the Company's investments in equity securities will no longer be classified as available for sale, therefore the Company was required to reclassify the net unrealized gain recognized on the change in fair value of these equity securities from other comprehensive income to retained earnings.
(3)
Represents adjustment needed to reflect the cumulative impact on retained earnings for previously recognized stock based compensation, which included an adjustment for estimated forfeitures. Pursuant to the Company's adoption of Accounting Standards Update 2016-09, the Company has elected to recognize stock based compensation without inclusion of a forfeiture estimate, and as such has recognized this adjustment to present retained earnings consistent with this election.
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.

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INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited—Dollars in thousands)
 
 
Three Months Ended
 
March 31
 
2018
 
2017
Cash flow from operating activities
 
 
 
Net income
$
27,555

 
$
20,725

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
4,181

 
3,557

Provision for loan losses
500

 
600

Deferred income tax expense
359

 
709

Net unrealized loss on equity securities
485

 
—

Net gain on sale of securities
—

 
(1
)
Net (gain) loss on bank premises and equipment
(7
)
 
4

Net (gain) loss on other real estate owned and foreclosed assets
1

 
(29
)
Realized gain on sale leaseback transaction
(258
)
 
(258
)
Stock based compensation
1,041

 
643

Increase in cash surrender value of life insurance policies
(947
)
 
(964
)
Change in fair value on loans held for sale
26

 
147

Net change in:
 
 
 
Trading assets
(277
)
 
(485
)
Loans held for sale
805

 
2,594

Other assets
2,594

 
18,384

Other liabilities
(2,175
)
 
(8,192
)
Total adjustments
6,328

 
16,709

Net cash provided by operating activities
33,883

 
37,434

Cash flows used in investing activities
 
 
 
Purchases of equity securities
(78
)
 
—

Proceeds from sales of securities available for sale
—

 
16

Proceeds from maturities and principal repayments of securities available for sale
11,040

 
12,107

Purchases of securities available for sale
(37,201
)
 
(49,617
)
Proceeds from maturities and principal repayments of securities held to maturity
22,888

 
19,101

Purchases of securities held to maturity
(53,995
)
 
(34,090
)
Net purchases of Federal Home Loan Bank stock
(1,430
)
 
—

Investments in low income housing projects
(1,213
)
 
(3,437
)
Purchases of life insurance policies
(93
)
 
(93
)
Net increase in loans
(6,856
)
 
(64,997
)
Purchases of bank premises and equipment
(2,803
)
 
(5,457
)
Proceeds from the sale of bank premises and equipment
52

 
27

Proceeds from the sale of other real estate owned and foreclosed assets
253

 
1,255

Net cash used in investing activities
(69,436
)
 
(125,185
)
Cash flows provided by financing activities
 
 
 
Net increase (decrease) in time deposits
10,486

 
(33,219
)
Net increase in other deposits
11,804

 
91,721

Net decrease in customer repurchase agreements
(24,765
)
 
(31,141
)

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Net proceeds from exercise of stock options
143

 
143

Restricted stock awards issued, net of awards surrendered
(1,318
)
 
(1,336
)
Proceeds from shares issued under direct stock purchase plan
419

 
393

Common dividends paid
(8,784
)
 
(7,832
)
Net cash provided by (used in) financing activities
(12,015
)
 
18,729

Net decrease in cash and cash equivalents
(47,568
)
 
(69,022
)
Cash and cash equivalents at beginning of year
213,116

 
289,095

Cash and cash equivalents at end of period
$
165,548

 
$
220,073

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

 
$
457

Net increase in capital commitments relating to low income housing project investments
$
9

 
$
60

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 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. Results for the quarter ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 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, 2017, filed with the Securities and Exchange Commission.

NOTE 2 - RECENT ACCOUNTING STANDARDS UPDATES

Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of 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 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 in the process of reviewing its current lease agreements to assess the impact of the adoption of this standard.
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 companies, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon adoption of this standard on January 1, 2018, there was no material impact on the Company's consolidated financial position.

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NOTE 3 - SECURITIES
Trading Securities
The Company had trading securities of $1.6 million and $1.3 million as of March 31, 2018 and December 31, 2017, respectively. These securities are held in a rabbi trust and will be used for future payments associated with the Company’s nonqualified 401(k) Restoration Plan and Nonqualified Deferred Compensation Plan.
Equity Securities
The Company had equity securities of $20.1 million as of March 31, 2018. These securities consist primarily of mutual funds held in a rabbi trust and will be used for future payments associated with the Company’s supplemental executive retirement plans. These securities were previously classified as available for sale and were reclassified as equity securities due to a change in accounting guidance effective January 1, 2018. The equity securities were $20.6 million as of December 31, 2017 and are reflected accordingly as available for sale in the table below.
Available for Sale and Held to Maturity Securities
The following table presents a summary of the amortized cost, gross unrealized gains and losses and fair value of securities available for sale and securities held to maturity for the periods indicated:
 
March 31, 2018
 
December 31, 2017
 
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
$
35,478

 
$
—

 
$
(535
)
 
$
34,943

 
$
35,475

 
$
86

 
$
(131
)
 
$
35,430

Agency mortgage-backed securities
226,111

 
1,266

 
(4,166
)
 
223,211

 
214,934

 
1,897

 
(1,067
)
 
215,764

Agency collateralized mortgage obligations
139,433

 
73

 
(4,314
)
 
135,192

 
124,098

 
78

 
(2,164
)
 
122,012

State, county, and municipal securities
2,232

 
22

 
—

 
2,254

 
2,237

 
37

 
—

 
2,274

Single issuer trust preferred securities issued by banks
2,002

 
3

 
—

 
2,005

 
2,012

 
4

 
—

 
2,016

Pooled trust preferred securities issued by banks and insurers
2,173

 
—

 
(518
)
 
1,655

 
2,179

 
—

 
(539
)
 
1,640

Small business administration pooled securities
47,434

 
—

 
(944
)
 
46,490

 
47,852

 
44

 
(118
)
 
47,778

Equity securities
—

 
—

 
—

 
—

 
19,432

 
1,594

 
(442
)
 
20,584

Total available for sale securities
$
454,863

 
$
1,364

 
$
(10,477
)
 
$
445,750

 
$
448,219

 
$
3,740

 
$
(4,461
)
 
$
447,498

Held to maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
1,005

 
$
16

 
$
—

 
$
1,021

 
$
1,006

 
$
29

 
$
—

 
$
1,035

Agency mortgage-backed securities
192,961

 
474

 
(3,026
)
 
190,409

 
204,768

 
1,791

 
(736
)
 
205,823

Agency collateralized mortgage obligations
306,395

 
126

 
(8,703
)
 
297,818

 
262,998

 
397

 
(4,987
)
 
258,408

Single issuer trust preferred securities issued by banks
1,500

 
21

 
—

 
1,521

 
1,500

 
29

 
—

 
1,529

Small business administration pooled securities
27,000

 
95

 
(309
)
 
26,786

 
27,416

 
183

 
(200
)
 
27,399

Total held to maturity securities
$
528,861

 
$
732

 
$
(12,038
)
 
$
517,555

 
$
497,688

 
$
2,429

 
$
(5,923
)
 
$
494,194

Total
$
983,724

 
$
2,096

 
$
(22,515
)
 
$
963,305

 
$
945,907

 
$
6,169

 
$
(10,384
)
 
$
941,692

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 March 31, 2018 is presented below:


12
Table of Contents

 
Due in one year or less
 
Due after one year to five years
 
Due after five to ten years
 
Due after ten years
 
Total
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(Dollars in thousands)
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency securities
$
2,997

 
$
2,995

 
$
20,016

 
$
19,860

 
$
12,465

 
$
12,088

 
$
—

 
$
—

 
$
35,478

 
$
34,943

Agency mortgage-backed securities
84

 
85

 
43,016

 
42,235

 
97,629

 
96,201

 
85,382

 
84,690

 
226,111

 
223,211

Agency collateralized mortgage obligations
8

 
8

 
—

 
—

 
—

 
—

 
139,425

 
135,184

 
139,433

 
135,192

State, county, and municipal securities
—

 
—

 
1,026

 
1,028

 
1,206

 
1,226

 
—

 
—

 
2,232

 
2,254

Single issuer trust preferred securities issued by banks
—

 
—

 
—

 
—

 
—

 
—

 
2,002

 
2,005

 
2,002

 
2,005

Pooled trust preferred securities issued by banks and insurers
—

 
—

 
—

 
—

 
—

 
—

 
2,173

 
1,655

 
2,173

 
1,655

Small business administration pooled securities
—

 
—

 
—

 
—

 
—

 
—

 
47,434

 
46,490

 
47,434

 
46,490

Total available for sale securities
$
3,089

 
$
3,088

 
$
64,058

 
$
63,123

 
$
111,300

 
$
109,515

 
$
276,416

 
$
270,024

 
$
454,863

 
$
445,750

Held to maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
—

 
$
—

 
$
1,005

 
$
1,021

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,005

 
$
1,021

Agency mortgage-backed securities
—

 
—

 
9,052

 
8,932

 
14,057

 
14,146

 
169,852

 
167,331

 
192,961

 
190,409

Agency collateralized mortgage obligations
—

 
—

 
—

 
—

 
1,426

 
1,423

 
304,969

 
296,395

 
306,395

 
297,818

Single issuer trust preferred securities issued by banks
—

 
—

 
—

 
—

 
—

 
—

 
1,500

 
1,521

 
1,500

 
1,521

Small business administration pooled securities
—

 
—

 
—

 
—

 
—

 
—

 
27,000

 
26,786

 
27,000

 
26,786

Total held to maturity securities
$
—

 
$
—

 
$
10,057

 
$
9,953

 
$
15,483

 
$
15,569

 
$
503,321

 
$
492,033

 
$
528,861

 
$
517,555

Inclusive in the table above is $7.4 million of callable securities at March 31, 2018.
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 $552.7 million and $547.2 million at March 31, 2018 and December 31, 2017, respectively.
At March 31, 2018 and December 31, 2017, 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, 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:

13
Table of Contents

 
March 31, 2018
 
 
 
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
6

 
$
34,943

 
$
(535
)
 
$
—

 
$
—

 
$
34,943

 
$
(535
)
Agency mortgage-backed securities
140

 
338,326

 
(6,624
)
 
14,205

 
(568
)
 
352,531

 
(7,192
)
Agency collateralized mortgage obligations
51

 
244,572

 
(5,384
)
 
150,834

 
(7,633
)
 
395,406

 
(13,017
)
Pooled trust preferred securities issued by banks and insurers
1

 
—

 
—

 
1,655

 
(518
)
 
1,655

 
(518
)
Small business administration pooled securities
6

 
56,839

 
(1,074
)
 
9,569

 
(179
)
 
66,408

 
(1,253
)
Total temporarily impaired securities
204

 
$
674,680

 
$
(13,617
)
 
$
176,263

 
$
(8,898
)
 
$
850,943

 
$
(22,515
)

 
December 31, 2017
 
 
 
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
4

 
$
24,343

 
$
(131
)
 
$
—

 
$
—

 
$
24,343

 
$
(131
)
Agency mortgage-backed securities
84

 
235,411

 
(1,493
)
 
14,886

 
(310
)
 
250,297

 
(1,803
)
Agency collateralized mortgage obligations
42

 
178,142

 
(1,579
)
 
159,506

 
(5,572
)
 
337,648

 
(7,151
)
Pooled trust preferred securities issued by banks and insurers
1

 
—

 
—

 
1,640

 
(539
)
 
1,640

 
(539
)
Small business administration pooled securities
4

 
34,553

 
(223
)
 
9,647

 
(95
)
 
44,200

 
(318
)
Equity securities
28

 
3,290

 
(39
)
 
7,619

 
(403
)
 
10,909

 
(442
)
Total temporarily impaired securities
163

 
$
475,739

 
$
(3,465
)
 
$
193,298

 
$
(6,919
)
 
$
669,037

 
$
(10,384
)
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 each security before the recovery of its amortized cost basis. As a result, the Company does not consider these investments to be OTTI and accordingly, there was no OTTI recorded and no cumulative credit related component of OTTI for the three months ended March 31, 2018 and 2017.
The Company made this determination by reviewing various qualitative and quantitative factors regarding each investment category, such as current market conditions, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, and current analysts’ evaluations.
As a result of the Company’s review of these qualitative and quantitative factors, the causes of the impairments listed in the table above by category are as follows at March 31, 2018:
•
U.S. Government Agency Securities, 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 are implicitly guaranteed by the U.S. Government or one of its agencies.
•
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 in the current economic and regulatory 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.



14
Table of Contents

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:
 
March 31, 2018
 
 
(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
$
870,110

 
$
3,079,910

 
$
400,934

 
$
132,813

 
$
742,744

 
$
1,044,316

 
$
8,896

 
$
6,279,723

  
Individually evaluated for impairment
$
33,104

 
$
16,470

 
$
—

 
$
853

 
$
13,278

 
$
6,926

 
$
292

 
$
70,923

  
Purchased credit impaired loans
$
—

 
$
5,891

 
$
—

 
$
—

 
$
5,309

 
$
210

 
$
—

 
$
11,410

 
Total loans by group
$
903,214

 
$
3,102,271

 
$
400,934

 
$
133,666

 
$
761,331

 
$
1,051,452

 
$
9,188

 
$
6,362,056

(1
)
 
December 31, 2017
 
 
(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
$
853,885

 
$
3,093,945

 
$
401,797

 
$
131,667

 
$
733,809

 
$
1,045,053

 
$
9,573

 
$
6,269,729

 
Individually evaluated for impairment
$
34,643

 
$
16,638

 
$
—

 
$
703

 
$
13,684

 
$
6,826

 
$
307

 
$
72,801

  
Purchased credit impaired loans
$
—

 
$
5,978

 
$
—

 
$
—

 
$
6,836

 
$
209

 
$
—

 
$
13,023

 
Total loans by group
$
888,528

 
$
3,116,561

 
$
401,797

 
$
132,370

 
$
754,329

 
$
1,052,088

 
$
9,880

 
$
6,355,553

(1
)
 
(1)
The amount of net deferred costs on originated loans included in the ending balance was $6.4 million and $6.1 million at March 31, 2018 and December 31, 2017, respectively. Net unamortized discounts on acquired loans not deemed to be purchased credit impaired ("PCI") included in the ending balance was $9.1 million and $9.4 million at March 31, 2018 and December 31, 2017, respectively.
    













15
Table of Contents

The following tables summarize changes in allowance for loan losses by loan category for the periods indicated:
 
Three Months Ended March 31, 2018
 
(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
$
13,256

 
$
31,453

 
$
5,698

 
$
1,577

 
$
2,822

 
$
5,390

 
$
447

 
$
60,643

Charge-offs
(133
)
 
—

 
—

 
(24
)
 
(39
)
 
(79
)
 
(318
)
 
(593
)
Recoveries
12

 
20

 
—

 
9

 
2

 
34

 
235

 
312

Provision (benefit)
398

 
(14
)
 
(19
)
 
31

 
52

 
14

 
38

 
500

Ending balance
$
13,533

 
$
31,459

 
$
5,679

 
$
1,593

 
$
2,837

 
$
5,359

 
$
402

 
$
60,862

Ending balance: collectively evaluated for impairment
$
13,524

 
$
31,422

 
$
5,679

 
$
1,590

 
$
1,893

 
$
5,111

 
$
386

 
$
59,605

Ending balance: individually evaluated for impairment
$
9

 
$
37

 
$
—

 
$
3

 
$
944

 
$
248

 
$
16

 
$
1,257

 
Three Months Ended March 31, 2017
 
(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
$
16,921

 
$
30,369

 
$
4,522

 
$
1,502

 
$
2,621

 
$
5,238

 
$
393

 
$
61,566

Charge-offs
—

 
—

 
—

 
(70
)
 
(23
)
 
(14
)
 
(401
)
 
(508
)
Recoveries
187

 
31

 
—

 
66

 
12

 
76

 
288

 
660

Provision (benefit)
(590
)
 
343

 
501

 
35

 
106

 
45

 
160

 
600

Ending balance
$
16,518

 
$
30,743

 
$
5,023

 
$
1,533

 
$
2,716

 
$
5,345

 
$
440

 
$
62,318

Ending balance: collectively evaluated for impairment
$
12,960

 
$
30,570

 
$
5,023

 
$
1,531

 
$
1,650

 
$
5,110

 
$
419

 
$
57,263

Ending balance: individually evaluated for impairment
$
3,558

 
$
173

 
$
—

 
$
2

 
$
1,066

 
$
235

 
$
21

 
$
5,055

For the purpose of estimating the allowance for loan losses, management segregates the loan portfolio into the portfolio segments detailed in the above tables.  Each of these loan categories possesses unique risk characteristics that are considered when determining the appropriate level of allowance for each segment.  Some of the risk characteristics unique to each loan category include:
Commercial Portfolio
•
Commercial and Industrial: Loans in this category consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment.  Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant and equipment, or real estate, if applicable. Repayment sources consist of primarily, operating cash flow, and secondarily, liquidation of assets.
•
Commercial Real Estate: Loans in this category consist of mortgage loans to finance investment in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties.  Loans are typically written with amortizing payment structures.  Collateral values are determined based upon third party appraisals and evaluations.  Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources consist of, primarily, cash flow from operating leases and rents and, secondarily, liquidation of assets.
•
Commercial Construction: Loans in this category consist of short-term construction loans, revolving and nonrevolving credit lines and construction/permanent loans to finance the acquisition, development and construction or rehabilitation of real property.  Project types include residential 1-4 family, condominium and multi-family homes, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties.  Loans may be written with nonamortizing or hybrid payment structures depending upon the type of project.  Collateral values are determined based upon third party appraisals and evaluations.  Loan to value ratios at origination are governed by established policy and regulatory guidelines.  Repayment sources vary depending upon the type of project and may consist of sale or lease of units, operating cash flows or liquidation of other assets.

16
Table of Contents

•
Small Business: Loans in this category consist of revolving, term loan and mortgage obligations extended to sole proprietors and small businesses for purposes of financing working capital and/or capital investment.  Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, or real estate if applicable.  Repayment sources consist primarily of operating cash flows and, secondarily, liquidation of assets.
For the commercial portfolio it is the Company’s policy to obtain personal guarantees for payment from individuals holding material ownership interests of the borrowing entities.
Consumer Portfolio
•
Residential Real Estate: Residential mortgage loans held in the Company’s portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors such as current and expected income, employment status, current assets, other financial resources, credit history and the value of the collateral.  Collateral consists of mortgage liens on 1-4 family residential properties.  Residential mortgage loans also include loans to construct owner-occupied 1-4 family residential properties.
•
Home Equity: Home equity loans and credit lines are made to qualified individuals and are primarily secured by senior or junior mortgage liens on owner-occupied 1-4 family homes, condominiums or vacation homes. Each home equity loan has a fixed rate and is billed in equal payments comprised of principal and interest. Each home equity line of credit has a variable rate and is billed in interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the then outstanding principal balance plus all accrued interest over a predetermined repayment period, as set forth in the note. Additionally, the Company has the option of renewing each line of credit for additional draw periods.  Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan to value ratios within established policy guidelines.
•
Other Consumer: Other consumer loan products include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, debt consolidation, personal expenses or overdraft protection.  Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines.  These loans may be secured or unsecured.
Credit Quality
The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as adversely risk-rated, delinquent, impaired, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. If a restructured loan meets certain criteria, it may be categorized as a troubled debt restructuring (“TDR”).
The Company reviews numerous credit quality indicators when assessing the risk in its loan portfolio. For the commercial portfolio, the Company utilizes a 10-point credit risk-rating system, which assigns a risk-grade to each loan obligation based on a number of quantitative and qualitative factors associated with a commercial or small business loan transaction. Factors considered include industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral, and other considerations. The risk-ratings categories are defined as follows:
•
1- 6 Rating — Pass: Risk-rating grades “1” through “6” comprise those loans ranging from ‘Substantially Risk Free’ which indicates borrowers are of unquestioned credit standing and the pinnacle of credit quality, well established companies with a very strong financial condition, and loans fully secured by cash collateral, through ‘Acceptable Risk’, which indicates borrowers may exhibit declining earnings, strained cash flow, increasing or above average leverage and/or weakening market fundamentals that indicate below average asset quality, margins and market share. Collateral coverage is protective.
•
7 Rating — Potential Weakness: Borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Company’s asset and position. While potentially weak, currently these borrowers are marginally acceptable; no loss of principal or interest is envisioned.
•
8 Rating — Definite Weakness Loss Unlikely: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. Loan may be inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. However, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation.

17
Table of Contents

•
9 Rating — Partial Loss Probable: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt with the added provision that the weaknesses make collection of the debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely.
•
10 Rating — Definite Loss: Borrowers deemed incapable of repayment. Loans to such borrowers are considered uncollectible and of such little value that continuation as active assets of the Company is not warranted.
The credit quality of the commercial loan portfolio is actively monitored and any changes in credit quality are reflected in risk-rating changes. Risk-ratings are assigned or reviewed for all new loans, when advancing significant additions to existing relationships (over $50,000), at least quarterly for all actively managed loans, and any time a significant event occurs, including at renewal of the loan.
The Company utilizes a comprehensive strategy for monitoring commercial credit quality. Actively managed commercial borrowers are required to provide updated financial information at least annually which is carefully evaluated for any changes in credit quality. Larger loan relationships are subject to a full annual credit review by an experienced credit analysis group, while continuous portfolio monitoring techniques are employed to evaluate changes in credit quality for smaller loan relationships. Additionally, the Company retains an independent loan review firm to evaluate the credit quality of the commercial loan portfolio. The independent loan review process achieves significant penetration into the commercial loan portfolio and reports the results of these reviews to the Audit Committee of the Board of Directors on a quarterly basis.
The following tables detail the amount of outstanding principal balances relative to each of the risk-rating categories for the Company’s commercial portfolio:
 
 
 
March 31, 2018
Category
Risk
Rating
 
Commercial  and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small Business
 
Total
 
 
 
(Dollars in thousands)
Pass
1 - 6
 
$
829,401

 
$
2,992,497

 
$
399,568

 
$
131,237

 
$
4,352,703

Potential weakness
7
 
15,910

 
70,879

 
947

 
1,404

 
89,140

Definite weakness-loss unlikely
8
 
51,782

 
38,431

 
419

 
1,022

 
91,654

Partial loss probable
9
 
6,121

 
464

 
—

 
3

 
6,588

Definite loss
10
 
—

 
—

 
—

 
—

 
—

Total
 
 
$
903,214

 
$
3,102,271

 
$
400,934

 
$
133,666

 
$
4,540,085


 
 
 
December 31, 2017
Category
Risk
Rating
 
Commercial  and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small Business
 
Total
 
 
 
(Dollars in thousands)
Pass
1 - 6
 
$
806,331

 
$
3,007,672

 
$
400,964

 
$
130,265

 
$
4,345,232

Potential weakness
7
 
16,563

 
69,788

 
—

 
1,471

 
87,822

Definite weakness-loss unlikely
8
 
59,415

 
38,637

 
833

 
631

 
99,516

Partial loss probable
9
 
6,219

 
464

 
—

 
3

 
6,686

Definite loss
10
 
—

 
—

 
—

 
—

 
—