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EX-32.1 - 906 CERTIFICATION CEO - INDEPENDENT BANK CORPindb331201610-qexx321.htm
EX-32.2 - 906 CERTIFICATION CFO - INDEPENDENT BANK CORPindb331201610-qexx322.htm
EX-31.1 - 302 CERTIFICATION CEO - INDEPENDENT BANK CORPindb331201610-qexx311.htm
EX-31.2 - 302 CERTIFICATION CFO - INDEPENDENT BANK CORPindb331201610-qexx312.htm

 
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, 2016
Commission File Number: 1-9047
___________________________________________________
Independent Bank Corp.
(Exact name of registrant as specified in its charter)
 ___________________________________________________
Massachusetts
04-2870273
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Office Address: 2036 Washington Street, Hanover Massachusetts 02339
Mailing Address: 288 Union Street, Rockland, Massachusetts 02370
(Address of principal executive offices, including zip code)
(781) 878-6100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer
x
Accelerated Filer
o
 
 
 
 
Non-accelerated Filer
o
Smaller Reporting Company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of May 2, 2016, there were 26,302,440 shares of the issuer’s common stock outstanding, par value $0.01 per share.
 






 
Table of Contents
 
PAGE
 
 
 
 
 
 
 
 
 




3


PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT BANK CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited—Dollars in thousands, except share data)
 
 
March 31,
2016
 
December 31, 2015
Assets
Cash and due from banks
$
83,345

 
$
84,813

Interest-earning deposits with banks
113,387

 
190,952

Securities
 
 
 
Securities - trading
763

 
356

Securities - available for sale
378,227

 
367,249

Securities - held to maturity (fair value $467,764 and $478,749)
457,641

 
477,507

Total securities
836,631

 
845,112

Loans held for sale (at fair value)
7,588

 
5,990

Loans
 
 
 
Commercial and industrial
835,336

 
843,276

Commercial real estate
2,711,857

 
2,653,434

Commercial construction
357,867

 
373,368

Small business
103,323

 
96,246

Residential real estate
631,888

 
638,606

Home equity - first position
547,056

 
543,092

Home equity - subordinate positions
388,255

 
384,711

Other consumer
13,649

 
14,988

   Total loans
5,589,231

 
5,547,721

Less: allowance for loan losses
(56,432
)
 
(55,825
)
Net loans
5,532,799

 
5,491,896

Federal Home Loan Bank stock
11,807

 
14,431

Bank premises and equipment, net
76,692

 
75,663

Goodwill
201,083

 
201,083

Other intangible assets
11,135

 
11,826

Cash surrender value of life insurance policies
135,734

 
134,627

Other real estate owned and other foreclosed assets
1,720

 
2,159

Other assets
177,347

 
150,917

Total assets
$
7,189,268

 
$
7,209,469

Liabilities and Stockholders' Equity
Deposits
 
 
 
Demand deposits
1,840,186

 
1,846,593

Savings and interest checking accounts
2,374,264

 
2,370,141

Money market
1,123,600

 
1,089,139

Time certificates of deposit of $100,000 and over
267,936

 
274,701

Other time certificates of deposits
389,261

 
410,129

Total deposits
5,995,247

 
5,990,703

Borrowings
 
 
 
Federal Home Loan Bank borrowings
50,840

 
102,080

Customer repurchase agreements and other short-term borrowings
134,568

 
133,958


4


Junior subordinated debentures (less unamortized debt issuance costs of $152 and $158)
73,257

 
73,306

Subordinated debentures (less unamortized debt issuance costs of $400 and $411)
34,600

 
34,589

Total borrowings
293,265

 
343,933

Other liabilities
112,609

 
103,370

Total liabilities
6,401,121

 
6,438,006

Commitments and contingencies

 

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

 

Common stock, $.01 par value. authorized: 75,000,000 shares,
issued and outstanding: 26,293,565 shares at March 31, 2016 and 26,236,352 shares at December 31, 2015 (includes 223,753 and 230,900 shares of unvested participating restricted stock awards, respectively)
261

 
260

Shares held in rabbi trust at cost: 164,571 shares at March 31, 2016 and 173,378 shares at December 31, 2015
(4,031
)
 
(3,958
)
Deferred compensation and other retirement benefit obligations
4,031

 
3,958

Additional paid in capital
406,921

 
405,486

Retained earnings
379,153

 
368,169

Accumulated other comprehensive income (loss), net of tax
1,812

 
(2,452
)
Total stockholders’ equity
788,147

 
771,463

Total liabilities and stockholders' equity
$
7,189,268

 
$
7,209,469

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


5


INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited—Dollars in thousands, except share and per share data)
 
Three Months Ended
 
March 31
 
2016
 
2015
Interest income
 
 
 
Interest and fees on loans
$
54,269

 
$
51,687

Taxable interest and dividends on securities
5,197

 
4,627

Nontaxable interest and dividends on securities
32

 
34

Interest on loans held for sale
32

 
51

Interest on federal funds sold and short-term investments
211

 
30

Total interest and dividend income
59,741

 
56,429

Interest expense
 
 
 
Interest on deposits
2,868

 
2,763

Interest on borrowings
1,982

 
2,417

Total interest expense
4,850

 
5,180

Net interest income
54,891

 
51,249

Provision (benefit) for loan losses
525

 
(500
)
Net interest income after provision (benefit) for loan losses
54,366

 
51,749

Noninterest income
 
 
 
Deposit account fees
4,470

 
4,166

Interchange and ATM fees
3,724

 
3,100

Investment management
5,003

 
5,107

Mortgage banking income
1,132

 
1,126

Increase in cash surrender value of life insurance policies
1,014

 
778

Loan level derivative income
1,722

 
418

Other noninterest income
2,090

 
1,862

Total noninterest income
19,155

 
16,557

Noninterest expenses
 
 
 
Salaries and employee benefits
27,189

 
25,288

Occupancy and equipment expenses
5,827

 
6,394

Data processing and facilities management
1,206

 
1,122

FDIC assessment
1,010

 
956

Advertising expense
1,257

 
834

Consulting expense
601

 
755

Loss on extinguishment of debt
437

 
122

Loss on sale of equity securities
29

 

Merger and acquisition expense
334

 
10,230

Software maintenance
754

 
625

Other noninterest expenses
7,838

 
8,651

Total noninterest expenses
46,482

 
54,977

Income before income taxes
27,039

 
13,329

Provision for income taxes
8,428

 
3,869

Net income
$
18,611

 
$
9,460

Basic earnings per share
$
0.71

 
$
0.38

Diluted earnings per share
$
0.71

 
$
0.38

Weighted average common shares (basic)
26,275,323

 
24,959,865

Common shares equivalents
43,409

 
80,215

Weighted average common shares (diluted)
26,318,732

 
25,040,080

Cash dividends declared per common share
$
0.29

 
$
0.26

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


6


INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited—Dollars in thousands)
 
 
Three Months Ended
 
March 31
 
2016
 
2015
Net income
$
18,611

 
$
9,460

Other comprehensive income, net of tax
 
 
 
Net change in fair value of securities available for sale
4,081

 
1,561

Net change in fair value of cash flow hedges
123

 
82

Net change in other comprehensive income for defined benefit postretirement plans
60

 
76

Total other comprehensive income
4,264

 
1,719

Total comprehensive income
$
22,875

 
$
11,179

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


7


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

 
Common Stock Outstanding
 
Common Stock
 
Value of Shares Held in Rabbi Trust at Cost
 
Deferred Compensation and Other Retirement Benefit Obligations
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other
Comprehensive Income (Loss)
 
Total
Balance December 31, 2015
26,236,352

 
$
260

 
$
(3,958
)
 
$
3,958

 
$
405,486

 
$
368,169

 
$
(2,452
)
 
$
771,463

Net income

 

 

 

 

 
18,611

 

 
18,611

Other comprehensive income

 

 

 

 

 

 
4,264

 
4,264

Common dividend declared ($0.29 per share)

 

 

 

 

 
(7,627
)
 

 
(7,627
)
Proceeds from exercise of stock options
5,000

 

 

 

 
149

 

 

 
149

Tax benefit related to equity award activity

 

 

 

 
235

 

 

 
235

Stock based compensation

 

 

 

 
865

 

 

 
865

Restricted stock awards issued, net of awards surrendered
36,887

 
1

 

 

 
(672
)
 

 

 
(671
)
Shares issued under direct stock purchase plan
15,326

 

 

 

 
679

 

 

 
679

Deferred compensation and other retirement benefit obligations

 

 
(73
)
 
73

 


 

 

 

Tax benefit related to deferred compensation distributions

 

 

 

 
179

 

 

 
179

Balance March 31, 2016
26,293,565

 
$
261

 
$
(4,031
)
 
$
4,031

 
$
406,921

 
$
379,153

 
$
1,812

 
$
788,147

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2014
23,998,738

 
$
237

 
$
(3,666
)
 
$
3,666

 
$
311,978

 
$
330,444

 
$
(2,132
)
 
$
640,527

Net income

 

 

 

 

 
9,460

 

 
9,460

Other comprehensive income

 

 

 

 

 

 
1,719

 
1,719

Common dividend declared ($0.26 per share)

 

 

 

 

 
(6,800
)
 

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

 
21

 

 

 
86,394

 

 

 
86,415

Proceeds from exercise of stock options
23,436

 

 

 

 
321

 

 

 
321

Tax benefit related to equity award activity

 

 

 

 
337

 

 

 
337

Stock based compensation

 

 

 

 
739

 

 

 
739

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

 
1

 

 

 
(636
)
 

 

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

 

 

 

 
638

 

 

 
638

Deferred compensation and other retirement benefit obligations

 

 
(34
)
 
34

 

 

 

 

Tax benefit related to deferred compensation distributions

 

 

 

 
165

 

 

 
165

Balance March 31, 2015
26,123,576

 
$
259

 
$
(3,700
)
 
$
3,700

 
$
399,936

 
$
333,104

 
$
(413
)
 
$
732,886

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

8


INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited—Dollars in thousands)
 
 
Three Months Ended
 
March 31
 
2016
 
2015
Cash flow from operating activities
 
 
 
Net income
$
18,611

 
$
9,460

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
2,905

 
3,145

Provision (benefit) for loan losses
525

 
(500
)
Deferred income tax expense
462

 
639

Net loss on sale of securities
29

 

Net gain on fixed assets

 
(2
)
Loss on extinguishment of debt
437

 
122

Net (gain) loss on other real estate owned and foreclosed assets
(86
)
 
666

Realized gain on sale leaseback transaction
(258
)
 
(258
)
Stock based compensation
865

 
739

Excess tax benefit related to equity award activity
(235
)
 
(337
)
Increase in cash surrender value of life insurance policies
(1,014
)
 
(778
)
Change in fair value on loans held for sale
(54
)
 
(27
)
Net change in:
 
 
 
Trading assets
(407
)
 
(494
)
Loans held for sale
(1,544
)
 
(2,592
)
Other assets
(30,455
)
 
2,934

Other liabilities
11,762

 
(5,292
)
Total adjustments
(17,068
)
 
(2,035
)
Net cash provided by operating activities
1,543

 
7,425

Cash flows provided by (used in) investing activities
 
 
 
Proceeds from sales of securities available for sale
266

 

Proceeds from maturities and principal repayments of securities available for sale
11,575

 
13,108

Purchases of securities available for sale
(16,469
)
 
(5,846
)
Proceeds from maturities and principal repayments of securities held to maturity
19,942

 
12,616

Purchases of securities held to maturity

 
(31,890
)
Redemption of Federal Home Loan Bank stock
2,624

 

Investments in low income housing projects
(2,648
)
 
(5,002
)
Purchases of life insurance policies
(93
)
 
(92
)
Net (increase) decrease in loans
(40,895
)
 
41,330

Cash used in business combinations, net of cash acquired

 
(13,448
)
Purchases of bank premises and equipment
(2,750
)
 
(1,481
)
Proceeds from the sale of bank premises and equipment

 
14

Proceeds from the sale of other real estate owned and foreclosed assets
724

 
1,641

Net capital improvements to other real estate owned
(113
)
 
(665
)
Net cash provided by (used in) investing activities
(27,837
)
 
10,285

Cash flows used in financing activities
 
 
 
Net decrease in time deposits
(27,633
)
 
(19,023
)

9


Net increase in other deposits
32,177

 
47,019

Net repayments of short-term Federal Home Loan Bank borrowings

 
(10,000
)
Repayments of long-term Federal Home Loan Bank borrowings
(51,641
)
 
(3,000
)
Net increase (decrease) in customer repurchase agreements
610

 
(29,752
)
Net increase in other short term borrowings

 
10,000

Repayments of subordinated debentures

 
(30,000
)
Net proceeds from exercise of stock options
149

 
321

Restricted stock awards issued, net of awards surrendered
(671
)
 
(635
)
Excess tax benefit from stock based compensation
235

 
337

Tax benefit from deferred compensation distribution
179

 
165

Proceeds from shares issued under direct stock purchase plan
679

 
638

Common dividends paid
(6,823
)
 
(5,760
)
Net cash used in financing activities
(52,739
)
 
(39,690
)
Net decrease in cash and cash equivalents
(79,033
)
 
(21,980
)
Cash and cash equivalents at beginning of year
275,765

 
178,254

Cash and cash equivalents at end of period
196,732

 
156,274

Supplemental schedule of noncash investing and financing activities
 
 
 
Transfer of loans to other real estate owned & foreclosed assets
$
86

 
$
354

Net increase in capital commitments relating to low income housing project investments
$
37

 
$

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

 
$
86,415

Fair value of assets acquired, net of cash acquired
$

 
$
598,376

Fair value of liabilities assumed
$

 
$
498,513

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

10


CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION
Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company, incorporated in 1985. The Company is the sole stockholder of Rockland Trust Company (“Rockland Trust” or the “Bank”), a Massachusetts trust company chartered in 1907.
All material intercompany balances and transactions have been eliminated in consolidation. Certain previously reported amounts may have been reclassified to conform to the current year’s presentation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Operating results for the quarter ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or any other interim period.
For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission.

NOTE 2 - RECENT ACCOUNTING STANDARDS UPDATES

Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 835-30 "Interest - Imputation of Interest" Update No. 2015-03. Update No. 2015-03 was issued in April 2015 to simplify presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuances costs are not affected by the amendments in this update. The amendments in this update were adopted by the Company effective January 1, 2016, with applicable prior period presentation updated as well. The adoption of this standard did not have a material impact on the Company's consolidated financial position.

FASB ASC Topic 810 "Consolidation" Update No. 2015-02. Update No. 2015-02 was issued in February 2015 to respond to stakeholders' concerns about the current accounting for consolidation of certain legal entities. The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this update were adopted by the Company effective January 1, 2016. The adoption of this standard did not have a material impact on the Company's consolidated financial position.

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

FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2016-08. Update No. 2016-08 was issued in March 2016 and affects entities that enter into contracts with customers to transfer goods or services (that are an output of the entity's ordinary activities) in exchange for consideration. The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The amendments in this update do not change

11


the core principle of the guidance. The effective date and transition requirements for the amendments are the same as the effective date and transitions requirements of Update No. 2014-09, which were originally finalized for public companies effective for fiscal years beginning after December 15, 2016. However, this effective date was subsequently deferred for another year. The    Company is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position.    
FASB ASC Topic 323 "Investments -Equity Method and Joint Ventures" Update No. 2016-07. Update No. 2016-07 was issued in March 2016 and eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.
FASB ASC Topic 815 "Derivative and Hedging - Contingent Put and Call Options in Debt Instruments" Updated No. 2016-6. Update No. 2016-6 was issued in March 2016 to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. An entity has an option to apply the amendments in this update on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.
FASB ASC Topic 815 "Derivative and Hedging - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships" Update No. 2016-05. Update No. 2016-05 was issued in March 2016 and applies to all reporting entities for which there is a change in the counterpart to a derivative instrument that has been designated as a hedging instrument under Topic 815. The amendments in this update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria (including those in paragraphs 815-20-35-14 through 35-18) continue to be met. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. An entity has an option to apply the amendments in this update on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.
FASB ASC Topic 842 "Leases" Update No. 2016-02. Update No. 2016-02 was issued in February 2016 and affects any entity that enters into a lease (as that term is defined in this update), with some specified scope exemptions. The core principle of this update is that a lessee should recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The recognition, measurement, and presentation of expenses and cash flows arising from a lease have not significantly changed from previous GAAP. In addition, the accounting applied by a lessor is largely unchanged from that applied under previous GAAP. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position.    
FASB ASC Topic 825-10 "Financial Instruments - Overall Recognition and Measurement of Financial Assets and Financial Liabilities" Update No. 2016-01. Update No. 2016-01 was issued in January 2016 to amend the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU 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 ASU also amends certain disclosure requirements associated with the fair value of financial instruments and various other aspects of recognition,

12


measurement, presentation and disclosure of financial instruments. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for only certain guidance. The Company is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position.





13


NOTE 3 - SECURITIES
Trading Securities

The Company had trading securities of $763,000 and $356,000 as of March 31, 2016 and December 31, 2015, respectively. These securities are held in a rabbi trust and will be used for future payments associated with the Company’s non-qualified 401(k) Restoration Plan and Non-Qualified Deferred Compensation Plan.
Available for Sale and Held to Maturity Securities
The following table presents a summary of the amortized cost, gross unrealized holding gains and losses, other-than-temporary impairment recorded in other comprehensive income and fair value of securities available for sale and securities held to maturity for the periods below:
 
March 31, 2016
 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
(Dollars in thousands)
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency securities
$
29,466

 
$
856

 
$

 
$
30,322

 
$
29,958

 
$
261

 
$
(4
)
 
$
30,215

Agency mortgage-backed securities
200,081

 
6,950

 
(20
)
 
207,011

 
207,693

 
4,227

 
(983
)
 
210,937

Agency collateralized mortgage obligations
76,481

 
1,001

 
(325
)
 
77,157

 
64,157

 
179

 
(752
)
 
63,584

State, county, and municipal securities
4,529

 
127

 

 
4,656

 
4,543

 
116

 

 
4,659

Single issuer trust preferred securities issued by banks
2,350

 
8

 
(125
)
 
2,233

 
2,865

 
8

 
(81
)
 
2,792

Pooled trust preferred securities issued by banks and insurers
2,216

 

 
(716
)
 
1,500

 
2,217

 

 
(645
)
 
1,572

Small business administration pooled securities

39,942

 
849

 

 
40,791

 
40,472

 
87

 
(110
)
 
40,449

Equity securities
14,373

 
423

 
(239
)
 
14,557

 
13,235

 
374

 
(568
)
 
13,041

Total available for sale securities
$
369,438

 
$
10,214

 
$
(1,425
)
 
$
378,227

 
$
365,140

 
$
5,252

 
$
(3,143
)
 
$
367,249

Held to maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
1,008

 
$
84

 
$

 
$
1,092

 
$
1,009

 
$
55

 
$

 
$
1,064

Agency mortgage-backed securities
161,452

 
6,123

 

 
167,575

 
167,134

 
3,460

 
(219
)
 
170,375

Agency collateralized mortgage obligations
258,620

 
3,866

 
(1,007
)
 
261,479

 
267,348

 
1,195

 
(3,652
)
 
264,891

State, county, and municipal securities
225

 

 

 
225

 
225

 
2

 

 
227

Single issuer trust preferred securities issued by banks
1,500

 
17

 

 
1,517

 
1,500

 
22

 

 
1,522

Small business administration pooled securities

34,836

 
1,040

 

 
35,876

 
35,291

 
437

 
(64
)
 
35,664

Corporate debt securities

 

 

 

 
5,000

 
6

 

 
5,006

Total held to maturity securities
$
457,641

 
$
11,130

 
$
(1,007
)
 
$
467,764

 
$
477,507

 
$
5,177

 
$
(3,935
)
 
$
478,749

Total
$
827,079

 
$
21,344

 
$
(2,432
)
 
$
845,991

 
$
842,647

 
$
10,429

 
$
(7,078
)
 
$
845,998

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The Company had a $29,000 realized loss during the three months ended March 31, 2016 and no realized gains or losses during the three months ended March 31, 2015 on equity securities available for sale. There were no gains or losses on the Company's fixed income securities during the periods ending March 31, 2016 and 2015.
 
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, 2016 is presented below:


14


 
Available for Sale
 
Held to Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(Dollars in thousands)
Due in one year or less
$
500

 
$
500

 
$
276

 
$
277

Due after one year to five years
33,068

 
33,743

 
15,263

 
15,875

Due after five to ten years
96,153

 
98,802

 
29,468

 
30,705

Due after ten years
225,344

 
230,625

 
412,634

 
420,907

Total debt securities
$
355,065

 
$
363,670

 
$
457,641

 
$
467,764

Equity securities
$
14,373

 
$
14,557

 
$

 
$

Total
$
369,438

 
$
378,227

 
$
457,641

 
$
467,764

Inclusive in the table above is $17.1 million of callable securities in the Company’s investment portfolio at March 31, 2016.
The carrying value of securities pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law, was $292.7 million and $314.1 million at March 31, 2016 and December 31, 2015, respectively.
At March 31, 2016 and December 31, 2015, the Company had no investments in obligations of individual states, counties, or municipalities which exceeded 10% of stockholders’ equity.
Other-Than-Temporary Impairment ("OTTI")
The Company continually reviews investment securities for the existence of OTTI, taking into consideration current market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, the credit worthiness of the obligor of the security, volatility of earnings, current analysts’ evaluations, the Company’s intent to sell the security, or whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery, as well as other qualitative factors. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.
The following tables show the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position, which the Company has not deemed to be OTTI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 
March 31, 2016
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
# of holdings
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(Dollars in thousands)
Agency mortgage-backed securities
3

 
$
694

 
$
(2
)
 
$
3,501

 
$
(18
)
 
$
4,195

 
$
(20
)
Agency collateralized mortgage obligations
9

 

 

 
72,566

 
(1,332
)
 
72,566

 
(1,332
)
Single issuer trust preferred securities issued by banks and insurers
2

 
979

 
(66
)
 
1,000

 
(59
)
 
1,979

 
(125
)
Pooled trust preferred securities issued by banks and insurers
1

 

 

 
1,500

 
(716
)
 
1,500

 
(716
)
Equity securities
29

 
2,545

 
(118
)
 
2,249

 
(121
)
 
4,794

 
(239
)
Total temporarily impaired securities
44

 
$
4,218

 
$
(186
)
 
$
80,816

 
$
(2,246
)
 
$
85,034

 
$
(2,432
)


15


 
December 31, 2015
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
# of holdings
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(Dollars in thousands)
U.S.government agency securities
3

 
$
1,990

 
$
(4
)
 
$

 
$

 
$
1,990

 
$
(4
)
Agency mortgage-backed securities
57

 
112,648

 
(1,062
)
 
4,297

 
(140
)
 
116,945

 
(1,202
)
Agency collateralized mortgage obligations
23

 
147,707

 
(1,420
)
 
80,927

 
(2,984
)
 
228,634

 
(4,404
)
Single issuer trust preferred securities issued by banks and insurers
2

 
1,018

 
(33
)
 
1,018

 
(48
)
 
2,036

 
(81
)
Pooled trust preferred securities issued by banks and insurers
1

 

 

 
1,572

 
(645
)
 
1,572

 
(645
)
Small business administration pooled securities
3

 
37,986

 
(174
)
 

 

 
37,986

 
(174
)
Equity securities
34

 
3,481

 
(189
)
 
4,971

 
(379
)
 
8,452

 
(568
)
Total temporarily impaired securities
123

 
$
304,830

 
$
(2,882
)
 
$
92,785

 
$
(4,196
)
 
$
397,615

 
$
(7,078
)
The Company does not intend to sell these investments and has determined based upon available evidence that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost basis. As a result, the Company does not consider these investments to be OTTI. The Company made this determination by reviewing various qualitative and quantitative factors regarding each investment category, such as current market conditions, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, and current analysts’ evaluations.
As a result of the Company’s review of these qualitative and quantitative factors, the causes of the impairments listed in the table above by category are as follows at March 31, 2016:

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 either implicitly or explicitly guaranteed by the U.S. Government or one of its agencies.
Single Issuer Trust Preferred Securities: This portfolio consists of two securities, one of which is below investment grade. The unrealized loss on these securities is attributable to the illiquid nature of the trust preferred market in the current economic environment. Management evaluates various financial metrics for the issuers, including regulatory capital ratios of the issuers.
Pooled Trust Preferred Securities: This portfolio consists of one below investment grade security which is performing. The unrealized loss on this security is attributable to the illiquid nature of the trust preferred market and the significant risk premiums required in the current economic environment. Management evaluates collateral credit and instrument structure, including current and expected deferral and default rates and timing. In addition, discount rates are determined by evaluating comparable spreads observed currently in the market for similar instruments.
Equity Securities: This portfolio consists of mutual funds and other equity investments. During some periods, the mutual funds in the Company’s investment portfolio may have unrealized losses resulting from market fluctuations as well as the risk premium associated with that particular asset class. For example, emerging market equities tend to trade at a higher risk premium than U.S. government bonds and thus, will fluctuate to a greater degree on both the upside and the downside. In the context of a well-diversified portfolio, however, the correlation amongst the various asset classes represented by the funds serves to minimize downside risk. The Company evaluates each mutual fund in the portfolio regularly and measures performance on both an absolute and relative basis. A reasonable recovery period for positions with an unrealized loss is based on management’s assessment of general economic data, trends within a particular asset class, valuations, earnings forecasts and bond durations. The Company has the ability and intent to hold these equity securities until a recovery of fair value.

16


The following table shows the total OTTI that the Company recorded for the periods indicated:
 
Three Months Ended
 
March 31
 
2016
 
2015
 
(Dollars in thousands)
Gross change in OTTI recorded on certain investments
$

 
$
84

Portion of OTTI recognized in OCI

 
(84
)
Total credit related OTTI recognized in earnings
$

 
$

The following table shows the cumulative credit related component of OTTI for the periods indicated:
 
Three Months Ended
 
March 31
 
2016
 
2015
 
(Dollars in thousands)
Balance at beginning of period
$

 
$
(9,997
)
Add
 
 
 
Incurred on securities not previously impaired

 

Incurred on securities previously impaired

 

Less
 
 
 
Securities sold during the period

 

Reclassification due to changes in Company's intent

 

Increases in cash flow expected to be collected

 

Balance at end of period
$

 
$
(9,997
)


17





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, 2016
 
 
(Dollars in thousands)
 
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 
Other Consumer
 
Total
 
Financing receivables ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
830,477

 
$
2,678,161

 
$
357,867

 
$
102,384

 
$
609,153

 
$
929,050

 
$
13,113

 
$
5,520,205

  
Individually evaluated for impairment
$
4,859

 
$
22,808

 
$

 
$
939

 
$
13,673

 
$
6,006

 
$
534

 
$
48,819

  
Purchased credit impaired loans
$

 
$
10,888

 
$

 
$

 
$
9,062

 
$
255

 
$
2

 
$
20,207

 
Total loans by group
$
835,336

 
$
2,711,857

 
$
357,867

 
$
103,323

 
$
631,888

 
$
935,311

 
$
13,649

 
$
5,589,231

(1
)
 
December 31, 2015
 
 
(Dollars in thousands)
 
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 
Other Consumer
 
Total
 
Financing receivables ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
838,129

 
$
2,619,294

 
$
373,064

 
$
95,225

 
$
614,014

 
$
921,563

 
$
14,427

 
$
5,475,716

 
Individually evaluated for impairment
$
5,147

 
$
22,986

 
$
304

 
$
1,021

 
$
15,405

 
$
5,989

 
$
558

 
$
51,410

  
Purchased credit impaired loans
$

 
$
11,154

 
$

 
$

 
$
9,187

 
$
251

 
$
3

 
$
20,595

 
Total loans by group
$
843,276

 
$
2,653,434

 
$
373,368

 
$
96,246

 
$
638,606

 
$
927,803

 
$
14,988

 
$
5,547,721

(1
)
 
(1)
The amount of net deferred fees on loans and net unamortized discounts on acquired loans not deemed to be PCI included in the ending balance was $11.0 million and $10.9 million at March 31, 2016 and December 31, 2015, respectively.
The following tables summarize changes in allowance for loan losses by loan category for the periods indicated:


18


 
Three Months Ended March 31, 2016
 
(Dollars in thousands)
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 
Other Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
13,802

 
$
27,327

 
$
5,366

 
$
1,264

 
$
2,590

 
$
4,889

 
$
587

 
$
55,825

Charge-offs
(2
)
 

 

 
(63
)
 
(19
)
 
(147
)
 
(306
)
 
(537
)
Recoveries
138

 
189

 

 
21

 

 
27

 
244

 
619

Provision (benefit)
(453
)
 
1,079

 
(266
)
 
119

 
(4
)
 
146

 
(96
)
 
525

Ending balance
$
13,485

 
$
28,595

 
$
5,100

 
$
1,341

 
$
2,567

 
$
4,915

 
$
429

 
$
56,432

Ending balance: individually evaluated for impairment
$
222

 
$
802

 
$

 
$
3

 
$
1,223

 
$
231

 
$
26

 
$
2,507

Ending balance: collectively evaluated for impairment
$
13,263

 
$
27,793

 
$
5,100

 
$
1,338

 
$
1,344

 
$
4,684

 
$
403

 
$
53,925

 
Three Months Ended March 31, 2015
 
(Dollars in thousands)
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 
Other Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
15,573

 
$
25,873

 
$
3,945

 
$
1,171

 
$
2,834

 
$
4,956

 
$
748

 
$
55,100

Charge-offs
(561
)
 
(141
)
 

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

 
685

 

 
67

 
45

 
72

 
192

 
1,440

Provision (benefit)
(834
)
 
(132
)
 
197

 
134

 
32

 
39

 
64

 
(500
)
Ending balance
$
14,557

 
$
26,285

 
$
4,142

 
$
1,222

 
$
2,726

 
$
4,906

 
$
677

 
$
54,515

Ending balance: individually evaluated for impairment
$
308

 
$
265

 
$

 
$
5

 
$
1,453

 
$
253

 
$
34

 
$
2,318

Ending balance: collectively evaluated for impairment
$
14,249

 
$
26,020

 
$
4,142

 
$
1,217

 
$
1,273

 
$
4,653

 
$
643

 
$
52,197

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.

19


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.  The Company does not originate or purchase sub-prime loans.
Home Equity: Home equity loans and 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. The home equity loan has a fixed rate and is billed in equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed in interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Additionally, the Company has the option of renewing the line of credit for additional draw periods.  Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan to value ratios within established policy guidelines.
Other Consumer: Other consumer loan products include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, debt consolidation, personal expenses or overdraft protection.  Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines.  These loans may be secured or unsecured.
Credit Quality
The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as delinquent, impaired, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. If a restructured loan meets certain criteria, it may be categorized as a troubled debt restructuring (“TDR”).
The Company reviews numerous credit quality indicators when assessing the risk in its loan portfolio. For the commercial portfolio, the Company utilizes a 10-point commercial risk-rating system, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated with a commercial loan transaction. Factors considered include industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral, and other considerations. The risk-ratings categories are defined as follows:
1- 6 Rating — Pass: Risk-rating grades “1” through “6” comprise those loans ranging from ‘Substantially Risk Free’ which indicates borrowers are of unquestioned credit standing and the pinnacle of credit quality, well established companies with a very strong financial condition, and loans fully secured by cash collateral, through ‘Acceptable Risk’, which indicates borrowers may exhibit declining earnings, strained cash flow, increasing 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.
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,

20


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. Borrowers are required to provide updated financial information at least annually which is carefully evaluated for any changes in credit quality. Larger loan relationships are subject to a full annual credit review by an experienced credit analysis group. Additionally, the Company retains an independent loan review firm to evaluate the credit quality of the commercial loan portfolio. The independent loan review process achieves significant penetration into the commercial loan portfolio and reports the results of these reviews to the Audit Committee of the Board of Directors on a quarterly basis.
The following table details the amount of outstanding principal balances relative to each of the risk-rating categories for the Company’s commercial portfolio:
 
 
 
March 31, 2016
Category
Risk
Rating
 
Commercial  and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small Business
 
Total
 
 
 
(Dollars in thousands)
Pass
1 - 6
 
$
768,317

 
$
2,558,324

 
$
351,483

 
$
100,090

 
$
3,778,214

Potential weakness
7
 
44,762

 
95,580

 
5,000

 
2,392

 
147,734

Definite weakness-loss unlikely
8
 
22,183

 
56,894

 
1,384

 
741

 
81,202

Partial loss probable
9
 
74

 
1,059

 

 
100

 
1,233

Definite loss
10
 

 

 

 

 

Total
 
 
$
835,336

 
$
2,711,857

 
$
357,867

 
$
103,323

 
$
4,008,383


 
 
 
December 31, 2015
Category
Risk
Rating
 
Commercial  and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small Business
 
Total
 
 
 
(Dollars in thousands)
Pass
1 - 6
 
$
765,753

 
$
2,484,025

 
$