INDB 9.30.2014 10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________________ 
FORM 10-Q
___________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
Commission File Number: 1-9047
___________________________________________________
Independent Bank Corp.
(Exact name of registrant as specified in its charter)
 ___________________________________________________
Massachusetts
04-2870273
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Office Address: 2036 Washington Street, Hanover Massachusetts 02339
Mailing Address: 288 Union Street, Rockland, Massachusetts 02370
(Address of principal executive offices, including zip code)
(781) 878-6100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer
x
Accelerated Filer
o
 
 
 
 
Non-accelerated Filer
o
Smaller Reporting Company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of November 1, 2014, there were 23,958,212 shares of the issuer’s common stock outstanding, par value $0.01 per share.
 



Table of Contents


 
Table of Contents
 
PAGE
 
 
Consolidated Balance Sheets - September 30, 2014 and December 31, 2013
Consolidated Statements of Income - Three and nine months ended September 30, 2014 and 2013
Consolidated Statements of Comprehensive Income -Three and nine months ended September 30, 2014 and 2013
Consolidated Statements of Stockholders’ Equity - Nine months ended September 30, 2014 and 2013
Consolidated Statements of Cash Flows - Nine months ended September 30, 2014 and 2013
 
 
 
 
 
 
 

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Table of Contents
 
 
 
 
Exhibit 31.1 – Certification 302
 
Exhibit 31.2 – Certification 302
 
Exhibit 32.1 – Certification 906
 
Exhibit 32.2 – Certification 906
 

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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT BANK CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited—Dollars in thousands, except share data)
 
 
September 30,
2014
 
December 31,
2013
Assets
Cash and due from banks
$
98,810

 
$
168,106

Interest-earning deposits with banks
126,522

 
48,219

Securities

 

Securities available for sale
361,455

 
356,862

Securities held to maturity (fair value $373,465 and $346,455)
372,418

 
350,652

Total securities
733,873

 
707,514

Loans held for sale (at fair value)
12,580

 
8,882

Loans
 
 
 
Commercial and industrial
842,833

 
784,202

Commercial real estate
2,338,641

 
2,249,260

Commercial construction
276,593

 
223,859

Small business
81,435

 
77,240

Residential real estate
536,822

 
541,443

Home equity - 1st position
509,903

 
497,075

Home equity - subordinate positions
344,743

 
325,066

Other consumer
16,885

 
20,162

Total loans
4,947,855

 
4,718,307

Less: allowance for loan losses
(55,005
)
 
(53,239
)
Net loans
4,892,850

 
4,665,068

Federal Home Loan Bank stock
33,233

 
39,926

Bank premises and equipment, net
64,186

 
64,950

Goodwill
170,421

 
170,421

Identifiable intangible assets
10,450

 
12,221

Cash surrender value of life insurance policies
108,895

 
100,406

Other real estate owned and other foreclosed assets
9,632

 
7,633

Other assets
122,976

 
105,888

Total assets
$
6,384,428

 
$
6,099,234

Liabilities and Stockholders' Equity
Deposits
 
 
 
Demand deposits
$
1,493,116

 
$
1,369,432

Savings and interest checking accounts
2,070,617

 
1,940,153

Money market
1,066,237

 
933,205

Time certificates of deposit of $100,000 and over
268,965

 
297,984

Other time certificates of deposits
403,499

 
445,644

Total deposits
5,302,434

 
4,986,418

Borrowings
 
 
 
Federal Home Loan Bank borrowings
60,127

 
140,294

Customer repurchase agreements and other short-term borrowings
153,192

 
154,288

Wholesale repurchase agreements
50,000

 
50,000


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Junior subordinated debentures
73,741

 
73,906

Subordinated debentures
30,000

 
30,000

Total borrowings
367,060

 
448,488

Other liabilities
87,752

 
72,788

Total liabilities
5,757,246

 
5,507,694

Commitments and contingencies

 

Stockholders' equity
 
 
 
Preferred stock, $.01 par value. authorized: 1,000,000 shares, outstanding: none

 

Common stock, $.01 par value. authorized: 75,000,000 shares, issued and outstanding: 23,911,678 shares at September 30, 2014 and 23,805,984 shares at December 31, 2013 (includes 254,030 and 268,290 shares of unvested participating restricted stock awards, respectively)
237

 
235

Shares held in rabbi trust at cost: 175,219 shares at September 30, 2014 and 178,765 shares at December 31, 2013
(3,591
)
 
(3,404
)
Deferred compensation obligation
3,591

 
3,404

Additional paid in capital
308,723

 
305,179

Retained earnings
320,226

 
293,560

Accumulated other comprehensive loss, net of tax
(2,004
)
 
(7,434
)
Total stockholders’ equity
627,182

 
591,540

Total liabilities and stockholders' equity
$
6,384,428

 
$
6,099,234

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


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INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited—Dollars in thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2014
 
2013
 
2014
 
2013
Interest income
 
 
 
 
 
 
 
Interest on loans
$
49,514

 
$
47,019

 
$
147,111

 
$
141,717

Taxable interest and dividends on securities
4,563

 
3,763

 
13,903

 
10,798

Nontaxable interest and dividends on securities
36

 
10

 
110

 
32

Interest on loans held for sale
159

 
156

 
306

 
661

Interest on federal funds sold and short-term investments
96

 
79

 
203

 
134

Total interest and dividend income
54,368

 
51,027

 
161,633

 
153,342

Interest expense
 
 
 
 
 
 
 
Interest on deposits
2,735

 
2,649

 
8,314

 
7,857

Interest on borrowings
2,070

 
3,182

 
7,095

 
9,812

Total interest expense
4,805

 
5,831

 
15,409

 
17,669

Net interest income
49,563

 
45,196

 
146,224

 
135,673

Provision for loan losses
1,901

 
2,650

 
8,653

 
7,050

Net interest income after provision for loan losses
47,662

 
42,546

 
137,571

 
128,623

Noninterest income
 
 
 
 
 
 
 
Deposit account fees
4,656

 
4,604

 
13,478

 
13,164

Interchange and ATM fees
3,375

 
2,845

 
9,672

 
7,934

Investment management
5,016

 
4,175

 
14,755

 
12,417

Mortgage banking income
1,015

 
1,843

 
2,379

 
5,794

Loan level derivative income
381

 
1,331

 
1,452

 
2,679

Increase in cash surrender value of life insurance policies
774

 
793

 
2,217

 
2,325

Gain on extinguishment of debt

 
763

 

 
763

Gain on life insurance benefits

 

 
1,964

 

Gain (loss) on sale of equity securities, net
67

 

 
138

 
(4
)
Other noninterest income
1,814

 
1,776

 
5,414

 
5,473

Total noninterest income
17,098

 
18,130

 
51,469

 
50,545

Noninterest expenses
 
 
 
 
 
 
 
Salaries and employee benefits
23,651

 
22,654

 
69,574

 
66,963

Occupancy and equipment expenses
5,027

 
4,573

 
16,474

 
14,742

Data processing and facilities management
1,178

 
1,179

 
3,609

 
3,564

FDIC assessment
957

 
898

 
2,828

 
2,653

Advertising expense
1,179

 
759

 
3,252

 
3,410

Consulting expense
737

 
914

 
2,105

 
2,291

Debit card expense
552

 
766

 
1,694

 
2,209

Loss on termination of derivatives

 

 
1,122

 

Merger and acquisition expense
677

 
366

 
754

 
2,465

Software maintenance
579

 
599

 
1,850

 
1,878

Other noninterest expenses
8,070

 
8,014

 
24,212

 
25,630

Total noninterest expenses
42,607

 
40,722

 
127,474

 
125,805

Income before income taxes
22,153

 
19,954

 
61,566

 
53,363

Provision for income taxes
6,415

 
5,299

 
17,699

 
13,698

Net income
$
15,738

 
$
14,655

 
$
43,867

 
$
39,665

Basic earnings per share
$
0.66

 
$
0.64

 
$
1.84

 
$
1.73

Diluted earnings per share
$
0.66

 
$
0.64

 
$
1.83

 
$
1.73

Weighted average common shares (basic)
23,911,678

 
22,946,308

 
23,876,391

 
22,886,521

Common shares equivalents
90,685

 
100,806

 
95,320

 
72,799

Weighted average common shares (diluted)
24,002,363

 
23,047,114

 
23,971,711

 
22,959,320

Cash dividends declared per common share
$
0.24

 
$
0.22

 
$
0.72

 
$
0.66

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
 
Nine Months Ended
 
September 30
 
September 30
 
2014
 
2013
 
2014
 
2013
Net income
$
15,738

 
$
14,655

 
$
43,867

 
$
39,665

Other comprehensive income, net of tax
 
 
 
 
 
 
 
Unrealized gains (losses) on securities
 
 
 
 
 
 
 
Change in fair value of securities available for sale
(810
)
 
(148
)
 
3,544

 
(5,517
)
Less: net security gains (losses) reclassified into earnings
40

 

 
82

 
(3
)
Net change in fair value of securities available for sale
(850
)
 
(148
)
 
3,462

 
(5,514
)
Unrealized gains (losses) on cash flow hedges
 
 
 
 
 
 
 
Change in fair value of cash flow hedges
149

 
(411
)
 
(315
)
 
350

Less: net cash flow hedge losses reclassified into earnings
(429
)
 
(866
)
 
(2,400
)
 
(2,557
)
Net change in fair value of cash flow hedges
578

 
455

 
2,085

 
2,907

Net gain (loss) during the period and amortization of certain costs included in net periodic retirement costs
(39
)
 
30

 
(117
)
 
73

Total other comprehensive income (loss)
(311
)
 
337

 
5,430

 
(2,534
)
Total comprehensive income
$
15,427

 
$
14,992

 
$
49,297

 
$
37,131

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


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INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited—Dollars in thousands, except per share data)


Common Stock Outstanding
 
Common Stock
 
Value of Shares Held in Rabbi Trust at Cost
 
Deferred Compensation Obligation
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other
Comprehensive Loss
 
Total
Balance at December 31, 2013
23,805,984

 
$
235

 
$
(3,404
)
 
$
3,404

 
$
305,179

 
$
293,560

 
$
(7,434
)
 
$
591,540

Net income

 

 

 

 

 
43,867

 

 
43,867

Other comprehensive income

 

 

 

 

 

 
5,430

 
5,430

Common dividend declared ($0.72 per share)

 

 

 

 

 
(17,201
)
 

 
(17,201
)
Proceeds from exercise of stock options
24,609

 
1

 

 

 
582

 

 

 
583

Tax benefit related to equity award activity

 

 

 

 
438

 

 

 
438

Equity based compensation

 

 

 

 
2,075

 

 

 
2,075

Restricted stock awards issued, net of awards surrendered
55,675

 
1

 

 

 
(644
)
 

 

 
(643
)
Shares issued under direct stock purchase plan
25,410

 

 

 

 
959

 

 

 
959

Deferred compensation obligation

 

 
(187
)
 
187

 

 

 

 

Tax benefit related to deferred compensation distributions

 

 

 

 
134

 

 

 
134

Balance at September 30, 2014
23,911,678

 
$
237

 
$
(3,591
)
 
$
3,591

 
$
308,723

 
$
320,226

 
$
(2,004
)
 
$
627,182

Balance at December 31, 2012
22,774,009

 
$
225

 
$
(3,179
)
 
$
3,179

 
$
269,950

 
$
263,671

 
$
(4,526
)
 
$
529,320

Net income

 

 

 

 

 
39,665

 

 
39,665

Other comprehensive income

 

 

 

 

 

 
(2,534
)
 
(2,534
)
Common dividend declared ($0.66 per share)

 

 

 

 

 
(15,128
)
 

 
(15,128
)
Proceeds from exercise of stock options
76,253

 
1

 

 

 
1,993

 

 

 
1,994

Tax benefit related to equity award activity

 

 

 

 
412

 

 

 
412

Equity based compensation

 

 

 

 
1,923

 

 

 
1,923

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

 
1

 

 

 
(670
)
 

 

 
(669
)
Shares issued under direct stock purchase plan
19,594

 

 

 

 
656

 

 

 
656

Deferred compensation obligation

 

 
(165
)
 
165

 

 

 

 

Tax benefit related to deferred compensation distributions

 

 

 

 
105

 

 

 
105

Balance September 30, 2013
22,959,287

 
$
227

 
$
(3,344
)
 
$
3,344

 
$
274,369

 
$
288,208

 
$
(7,060
)
 
$
555,744

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)
 
 
Nine Months Ended
 
September 30
 
2014
 
2013
Cash flow from operating activities
 
 
 
Net income
$
43,867

 
$
39,665

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
8,451

 
6,268

Provision for loan losses
8,653

 
7,050

Deferred income tax expense
459

 
5

Net (gain) loss on sale of equity securities
(138
)
 
4

Net loss on fixed assets
505

 
27

Gain on extinguishment of debt

 
(763
)
Loss on termination of derivatives
1,122

 

Net loss on sale of other real estate owned and foreclosed assets
361

 
47

Realized gain on sale leaseback transaction
(775
)
 
(775
)
Stock based compensation
2,075

 
1,923

Excess tax benefit related to equity award activity
(438
)
 
(412
)
Increase in cash surrender value of life insurance policies
(2,213
)
 
(2,325
)
Gain on life insurance benefits
(1,964
)
 

Change in fair value on loans held for sale
(1
)
 
(274
)
Net change in:
 
 
 
Loans held for sale
(3,697
)
 
37,794

Other assets
6,321

 
43,094

Other liabilities
(3,320
)
 
(14,264
)
Total adjustments
15,401

 
77,399

Net cash provided by operating activities
59,268

 
117,064

Cash flows used in investing activities
 
 
 
Proceeds from sales of securities available for sale
945

 
169

Proceeds from maturities and principal repayments of securities available for sale
35,936

 
69,732

Purchase of securities available for sale
(36,577
)
 
(34,864
)
Proceeds from maturities and principal repayments of securities held to maturity
32,864

 
39,713

Purchase of securities held to maturity
(54,681
)
 
(179,226
)
Redemption of Federal Home Loan Bank stock
6,693

 
3,093

Investment in Low Income Housing Projects
(5,566
)
 

Purchase of life insurance policies
(10,116
)
 
(219
)
Proceeds from life insurance policies
6,309

 

Net increase in loans
(242,207
)
 
(44,975
)
Purchase of bank premises and equipment
(5,987
)
 
(6,121
)
Proceeds from the sale of bank premises and equipment
1,064

 
19

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

Proceeds from the sale of other real estate owned and foreclosed assets
4,269

 
7,119

Net capital improvements to other real estate owned
(1,772
)
 
(2,035
)
Net cash used in investing activities
(269,948
)
 
(147,595
)

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Cash flows provided by financing activities
 
 
 
Net decrease in time deposits
(71,164
)
 
(61,509
)
Net increase in other deposits
387,180

 
272,141

Net repayments of short-term Federal Home Loan Bank borrowings
(75,000
)
 
(6,507
)
Repayments of long-term Federal Home Loan Bank borrowings
(5,000
)
 
(73,134
)
Net increase in customer repurchase agreements
3,904

 
10,821

Net decrease in other borrowings
(5,000
)
 
(12,000
)
Proceeds from exercise of stock options, net of cash paid
583

 
1,994

Restricted stock awards issued, net of awards surrendered
(643
)
 
(669
)
Excess tax benefit from stock based compensation
438

 
412

Tax benefit from deferred compensation distribution
134

 
105

Proceeds from shares issued under direct stock purchase plan
959

 
656

Common dividends paid
(16,704
)
 
(10,070
)
Net cash provided by financing activities
219,687

 
122,240

Net increase in cash and cash equivalents
9,007

 
91,709

Cash and cash equivalents at beginning of year
216,325

 
215,474

Cash and cash equivalents at end of period
$
225,332

 
$
307,183

Supplemental schedule of noncash investing and financing activities
 
 
 
Transfer of loans to other real estate owned & foreclosed assets
$
5,039

 
$
2,346

Capital commitment relating to Low Income Housing Project investments
$
22,273

 
$

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

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION
Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company, incorporated in 1985. The Company is the sole stockholder of Rockland Trust Company (“Rockland Trust” or the “Bank”), a Massachusetts trust company chartered in 1907.
All material intercompany balances and transactions have been eliminated in consolidation. Certain previously reported amounts may have been reclassified to conform to the current year’s presentation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Operating results for the quarter ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or any other interim period.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission.

NOTE 2 - RECENT ACCOUNTING STANDARDS UPDATES

FASB ASC Subtopic 205-40 "Presentation of Financial Statements - Going Concern" Updated No. 2014-15. Update No. 2014-15 was issued in August 2014 to provide guidance in U.S. Generally accepted accounting principles ("GAAP") about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

FASB ASC Subtopic 310-40 "Receivables - Troubled Debt Restructurings by Creditors" Update No. 2014-14. Update No. 2014-14 was issued in August 2014 to address the diversity in practice related to how creditors classify government-guaranteed mortgage loans, including Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA) guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The objective of this update is to reduce that diversity by addressing the classification of certain foreclosed mortgage loans held by creditors that are either fully or partially guaranteed under government programs. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

FASB ASC Topic 718 "Compensation - Stock Compensation" Update No. 2014 -12. Update No. 2014-12 was issued in June 2014 to resolve the diverse accounting treatment of share-based payment awards that require, as a condition to vesting, achievement of a specific performance target after the requisite service period. Many reporting entities account for these performance targets as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance target in the estimate of the grant-date fair value of the award, while other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award. This amendment requires that these performance targets that affect vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 "Compensation - Stock Compensation" as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

FASB ASC Topic 860 "Transfers and Servicing" Update No. 2014-11. Update No. 2014-11 was issued in June 2014 to respond to stakeholders' concerns about current accounting and disclosures for repurchase agreements and similar transactions.  The amendments in this Update require two accounting changes.  First, the amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting.  Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement.  The amendments

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in this Update require disclosures for certain transactions comprising (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. For those transactions outstanding at the reporting date, the transferor is required to disclose certain information by type of transaction.  The amendments in this Update also require certain disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. The accounting changes in this Update are effective for public business entities for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application for a public business entity is prohibited. For public business entities, the disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date.  The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2014-09. Update No. 2014-09 was issued in May 2014 to address the previous revenue recognition requirements in GAAP that differ from those in International Financial Reporting Standards (IFRS).  Accordingly, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, the standard is effective for annual and interim periods beginning after December 15, 2016, and calendar year-end public entities will apply it in the quarter that ends March 31, 2017.  Early adoption is not permitted.  We are currently assessing the potential impact of this amendment on our consolidated financial position.
    
FASB ASC Subtopic 310-40 "Receivables - Troubled Debt Restructurings by Creditors" Update No. 2014-04. Update No. 2014-04 was issued in January 2014 to reduce diversity by clarifying when an in substance repossession of foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in the update should be applied prospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.


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NOTE 3 - SECURITIES
The following table presents a summary of the amortized cost, gross unrealized holding gains and losses, other-than-temporary impairment recorded in other comprehensive income and fair value of securities available for sale and securities held to maturity for the periods below:
 
September 30, 2014
 
December 31, 2013
 
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
$
41,357

 
$
23

 
$
(93
)
 
$
41,287

 
$
41,331

 
$
3

 
$
(885
)
 
$
40,449

Agency mortgage-backed securities
224,336

 
6,397

 
(1,529
)
 
229,204

 
232,742

 
6,405

 
(4,556
)
 
234,591

Agency collateralized mortgage obligations
66,244

 
285

 
(943
)
 
65,586

 
58,765

 
490

 
(1,102
)
 
58,153

State, county, and municipal securities
5,125

 
128

 

 
5,253

 
5,439

 
1

 
(28
)
 
5,412

Single issuer trust preferred securities issued by banks
2,925

 
14

 
(16
)
 
2,923

 
2,960

 
14

 
(22
)
 
2,952

Pooled trust preferred securities issued by banks and insurers (1)
7,961

 
32

 
(2,607
)
 
5,386

 
8,083

 

 
(4,242
)
 
3,841

Equity securities
11,173

 
851

 
(208
)
 
11,816

 
10,997

 
762

 
(295
)
 
11,464

Total available for sale securities
$
359,121

 
$
7,730

 
$
(5,396
)
 
$
361,455

 
$
360,317

 
$
7,675

 
$
(11,130
)
 
$
356,862

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

 
$
50

 
$

 
$
1,060

 
$
1,011

 
$
31

 
$

 
$
1,042

Agency mortgage-backed securities
164,531

 
3,511

 
(42
)
 
168,000

 
155,067

 
1,917

 
(1,033
)
 
155,951

Agency collateralized mortgage obligations
199,950

 
1,821

 
(4,494
)
 
197,277

 
187,388

 
824

 
(6,176
)
 
182,036

State, county, and municipal securities
424

 
9

 

 
433

 
678

 
7

 

 
685

Single issuer trust preferred securities issued by banks
1,500

 
30

 

 
1,530

 
1,503

 
23

 

 
1,526

Corporate debt securities
5,003

 
162

 

 
5,165

 
5,005

 
210

 

 
5,215

Total held to maturity securities
$
372,418

 
$
5,583

 
$
(4,536
)
 
$
373,465

 
$
350,652

 
$
3,012

 
$
(7,209
)
 
$
346,455

Total
$
731,539

 
$
13,313

 
$
(9,932
)
 
$
734,920

 
$
710,969

 
$
10,687

 
$
(18,339
)
 
$
703,317

(1)    Gross unrealized gains and gross unrealized losses include $1.1 million and $2.3 million of net non-credit related OTTI at September 30, 2014 and December 31, 2013, respectively.
When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The Company realized net gains of $67,000 and $138,000 on equity securities classified as available for sale during the three and nine month periods ending September 30, 2014, respectively. The Company had no realized gains or losses during the three month period ending September 30, 2013 and realized a net loss of $4,000 during the nine month period ending September 30, 2013 on equity securities classified as available for sale. There were no gains or losses realized on sale of nonequity securities for the periods ending September 30, 2014 and 2013.
 
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 September 30, 2014 is presented below:


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Table of Contents

 
Available for Sale
 
Held to Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(Dollars in thousands)
Due in one year or less
$
118

 
$
124

 
$
199

 
$
204

Due after one year to five years
37,513

 
38,373

 
5,492

 
5,674

Due after five years to ten years
92,385

 
91,581

 
32,731

 
33,115

Due after ten years
217,932

 
219,561

 
333,996

 
334,472

Total debt securities
$
347,948

 
$
349,639

 
$
372,418

 
$
373,465

Equity securities
$
11,173

 
$
11,816

 
$

 
$

Total
$
359,121

 
$
361,455

 
$
372,418

 
$
373,465

Inclusive in the table above is $34.1 million of callable securities in the Company’s investment portfolio at September 30, 2014.
The carrying value of securities pledged to secure public funds, repurchase agreements and for other purposes, as required or permitted by law, was $352.3 million and $360.1 million at September 30, 2014 and December 31, 2013, respectively.
At September 30, 2014 and December 31, 2013, the Company had no investments in obligations of individual states, counties, or municipalities which exceeded 10% of stockholders’ equity.
Other-Than-Temporary Impairment ("OTTI")
The Company continually reviews investment securities for the existence of OTTI, taking into consideration current market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, the credit worthiness of the obligor of the security, volatility of earnings, current analysts’ evaluations, the Company’s intent to sell the security, or whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery, as well as other qualitative factors. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.
The following tables show the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position, which the Company has not deemed to be OTTI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
 
September 30, 2014
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
# of holdings
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(Dollars in thousands)
U.S. Government agency securities
25

 
$
33,836

 
$
(93
)
 
$

 
$

 
$
33,836

 
$
(93
)
Agency mortgage-backed securities
54

 
44,458

 
(60
)
 
45,437

 
(1,511
)
 
89,895

 
(1,571
)
Agency collateralized mortgage obligations
15

 
34,062

 
(345
)
 
104,095

 
(5,092
)
 
138,157

 
(5,437
)
Single issuer trust preferred securities issued by banks and insurers
1

 
1,083

 
(16
)
 

 

 
1,083

 
(16
)
Pooled trust preferred securities issued by banks and insurers
2

 

 

 
2,580

 
(1,512
)
 
2,580

 
(1,512
)
Equity securities
17

 
935

 
(26
)
 
4,052

 
(182
)
 
4,987

 
(208
)
Total temporarily impaired securities
114

 
$
114,374

 
$
(540
)
 
$
156,164

 
$
(8,297
)
 
$
270,538

 
$
(8,837
)


14

Table of Contents

 
December 31, 2013
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
 
# of holdings
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(Dollars in thousands)
U.S. government agency securities
39

 
$
39,950

 
$
(885
)
 
$

 
$

 
$
39,950

 
$
(885
)
Agency mortgage-backed securities
124

 
202,004

 
(5,217
)
 
5,108

 
(372
)
 
207,112

 
(5,589
)
Agency collateralized mortgage obligations
19

 
183,721

 
(7,278
)
 

 

 
183,721

 
(7,278
)
State, county, and municipal securities
13

 
3,838

 
(28
)
 

 

 
3,838

 
(28
)
Single issuer trust preferred securities issued by banks and insurers
2

 
1,341

 
(22
)
 

 

 
1,341

 
(22
)
Pooled trust preferred securities issued by banks and insurers
2

 

 

 
2,300

 
(1,913
)
 
2,300

 
(1,913
)
Equity securities
22

 
2,376

 
(90
)
 
3,520

 
(205
)
 
5,896

 
(295
)
Total temporarily impaired securities
221

 
$
433,230

 
$
(13,520
)
 
$
10,928

 
$
(2,490
)
 
$
444,158

 
$
(16,010
)
The Company does not intend to sell these investments and has determined based upon available evidence that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost basis. As a result, the Company does not consider these investments to be OTTI. The Company made this determination by reviewing various qualitative and quantitative factors regarding each investment category, such as current market conditions, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, and current analysts’ evaluations.
As a result of the Company’s review of these qualitative and quantitative factors, the causes of the impairments listed in the table above by category are as follows at September 30, 2014:
U.S. Government Agency Securities, Agency Mortgage-Backed Securities and Collateralized Mortgage Obligations: This portfolio has contractual terms that generally do not permit the issuer to settle the securities at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. Government or one of its agencies.
Single Issuer Trust Preferred Securities: This portfolio consists of one security which is below investment grade. The unrealized loss on this security is attributable to the illiquid nature of the trust preferred market in the current economic environment. Management evaluates various financial metrics for the issuer, including regulatory capital ratios of the issuer.
Pooled Trust Preferred Securities: This portfolio consists of two below investment grade securities both of which are performing. The unrealized loss on these securities is attributable to the illiquid nature of the trust preferred market and the significant risk premiums required in the current economic environment. Management evaluates collateral credit and instrument structure, including current and expected deferral and default rates and timing. In addition, discount rates are determined by evaluating comparable spreads observed currently in the market for similar instruments.
Equity Securities: This portfolio consists of mutual funds and other equity investments. During some periods, the mutual funds in the Company’s investment portfolio may have unrealized losses resulting from market fluctuations as well as the risk premium associated with that particular asset class. For example, emerging market equities tend to trade at a higher risk premium than U.S. government bonds and thus, will fluctuate to a greater degree on both the upside and the downside. In the context of a well-diversified portfolio, however, the correlation amongst the various asset classes represented by the funds serves to minimize downside risk. The Company evaluates each mutual fund in the portfolio regularly and measures performance on both an absolute and relative basis. A reasonable recovery period for positions with an unrealized loss is based on management’s assessment of general economic data, trends within a particular asset class, valuations, earnings forecasts and bond durations.

15

Table of Contents

The following table shows the total OTTI that the Company recorded for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Gross change in OTTI recorded on certain investments
$
235

 
$
303

 
$
1,264

 
$
674

Portion of OTTI recognized in OCI
(235
)
 
(303
)
 
(1,264
)
 
(674
)
Total credit related OTTI losses recognized in earnings
$

 
$

 
$

 
$

The following table shows the cumulative credit related component of OTTI for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Balance at beginning of period
$
(9,997
)
 
$
(10,847
)
 
$
(9,997
)
 
$
(10,847
)
Add
 
 
 
 
 
 
 
Incurred on securities not previously impaired

 

 

 

Incurred on securities previously impaired

 

 

 

Less
 
 
 
 
 
 
 
Securities sold during the period

 

 

 

Reclassification due to changes in Company’s intent

 

 

 

Increases in cash flow expected to be collected

 

 

 

Balance at end of period
$
(9,997
)
 
$
(10,847
)
 
$
(9,997
)
 
$
(10,847
)


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Table of Contents




NOTE 4 - LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY
The following tables bifurcate the amount of allowance allocated to each loan category based on the type of impairment analysis as of the periods indicated:
 
September 30, 2014
 
 
(Dollars in thousands)
 
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 
Other Consumer
 
Total
 
Financing receivables ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans by group
$
842,833

 
$
2,338,641

 
$
276,593

 
$
81,435

 
$
536,822

 
$
854,646

 
$
16,885


$
4,947,855

(1
)
Individually evaluated for impairment
$
7,592

 
$
33,765

 
$
311

 
$
1,244

 
$
15,503

 
$
5,492

 
$
974

 
$
64,881

  
Purchase credit impaired loans
$

 
$
15,071

 
$
184

 
$

 
$
9,784

 
$
241

 
$
5

 
$
25,285

 
Collectively evaluated for impairment
$
835,241

 
$
2,289,805

 
$
276,098

 
$
80,191

 
$
511,535

 
$
848,913

 
$
15,906

 
$
4,857,689

  
 
December 31, 2013
 
 
(Dollars in thousands)
 
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 
Other Consumer
 
Total
 
Financing receivables ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans by group
$
784,202

 
$
2,249,260

 
$
223,859

 
$
77,240

 
$
541,443

 
$
822,141

 
$
20,162

 
$
4,718,307

(1
)
Individually evaluated for impairment
$
9,148

 
$
39,516

 
$
100

 
$
1,903

 
$
15,200

 
$
4,890

 
$
1,298

 
$
72,055

  
Purchase credit impaired loans
$
1

 
$
18,612

 
$
197

 
$

 
$
10,389

 
$
326

 
$
19

 
$
29,544

 
Collectively evaluated for impairment
$
775,053

 
$
2,191,132

 
$
223,562

 
$
75,337

 
$
515,854

 
$
816,925

 
$
18,845

 
$
4,616,708

  
 
(1)
The amount of net deferred fees included in the ending balance was $2.7 million and $2.3 million at September 30, 2014 and December 31, 2013.
The following tables summarize changes in allowance for loan losses by loan category for the periods indicated:
 
Three Months Ended September 30, 2014
 
(Dollars in thousands)
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 
Other Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
15,929

 
$
25,095

 
$
3,757

 
$
1,154

 
$
2,879

 
$
4,969

 
$
755

 
$
54,538

Charge-offs
(504
)
 
(691
)
 

 
(73
)
 
(199
)
 
(160
)
 
(279
)
 
(1,906
)
Recoveries
6

 
57

 

 
29

 
178

 
67

 
135

 
472

Provision
91

 
1,248

 
356

 
45

 
(36
)
 
71

 
126

 
1,901

Ending balance
$
15,522

 
$
25,709

 
$
4,113

 
$
1,155

 
$
2,822

 
$
4,947

 
$
737

 
$
55,005



17

Table of Contents

 
Three Months Ended September 30, 2013
 
(Dollars in thousands)
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 
Other Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
14,325

 
$
23,029

 
$
3,422

 
$
1,295

 
$
2,959

 
$
7,267

 
$
679

 
$
52,976

Charge-offs
(866
)
 
(209
)
 
(308
)
 
(84
)
 
(210
)
 
(420
)
 
(273
)
 
(2,370
)
Recoveries
24

 
89

 

 
47

 
5

 
22

 
119

 
306

Provision
1,531

 
2,069

 
387

 
(43
)
 
141

 
(1,555
)
 
120

 
2,650

Ending balance
$
15,014

 
$
24,978

 
$
3,501

 
$
1,215

 
$
2,895

 
$
5,314

 
$
645

 
$
53,562


 
Nine Months Ended September 30, 2014
 
(Dollars in thousands)
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 
Other Consumer
 
Total
Allowance for loan losses
 
Beginning balance
$
15,622

 
$
24,541

 
$
3,371

 
$
1,215

 
$
2,760

 
$
5,036

 
$
694

 
$
53,239

Charge-offs
(1,757
)
 
(4,273
)
 

 
(469
)
 
(653
)
 
(562
)
 
(908
)
 
(8,622
)
Recoveries
213

 
322

 

 
168

 
368

 
215

 
449

 
1,735

Provision
1,444

 
5,119

 
742

 
241

 
347

 
258

 
502

 
8,653

Ending balance
$