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EX-32.2 - 906 CERTIFICATION CFO - INDEPENDENT BANK CORPindb930201610-qexx322.htm
EX-32.1 - 906 CERTIFICATION CEO - INDEPENDENT BANK CORPindb930201610-qexx321.htm
EX-31.2 - 302 CERTIFICATION CFO - INDEPENDENT BANK CORPindb930201610-qexx312.htm
EX-31.1 - 302 CERTIFICATION CEO - INDEPENDENT BANK CORPindb930201610-qexx311.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 September 30, 2016
Commission File Number: 1-9047
___________________________________________________
Independent Bank Corp.
(Exact name of registrant as specified in its charter)
 ___________________________________________________
Massachusetts
04-2870273
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Office Address: 2036 Washington Street, Hanover Massachusetts 02339
Mailing Address: 288 Union Street, Rockland, Massachusetts 02370
(Address of principal executive offices, including zip code)
(781) 878-6100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer
x
Accelerated Filer
o
 
 
 
 
Non-accelerated Filer
o
Smaller Reporting Company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of November 1, 2016, there were 26,329,185 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)
 
 
September 30,
2016
 
December 31
2015
Assets
Cash and due from banks
$
92,185

 
$
84,813

Interest-earning deposits with banks
265,618

 
190,952

Securities
 
 
 
Securities - trading
809

 
356

Securities - available for sale
387,008

 
367,249

Securities - held to maturity (fair value $441,834 and $478,749)
430,763

 
477,507

Total securities
818,580

 
845,112

Loans held for sale (at fair value)
13,334

 
5,990

Loans
 
 
 
Commercial and industrial
857,713

 
843,276

Commercial real estate
2,787,660

 
2,653,434

Commercial construction
376,245

 
373,368

Small business
115,054

 
96,246

Residential real estate
632,685

 
638,606

Home equity - first position
559,867

 
543,092

Home equity - subordinate positions
405,245

 
384,711

Other consumer
11,664

 
14,988

   Total loans
5,746,133

 
5,547,721

Less: allowance for loan losses
(58,205
)
 
(55,825
)
Net loans
5,687,928

 
5,491,896

Federal Home Loan Bank stock
11,304

 
14,431

Bank premises and equipment, net
76,429

 
75,663

Goodwill
201,083

 
201,083

Other intangible assets
9,751

 
11,826

Cash surrender value of life insurance policies
137,723

 
134,627

Other real estate owned and other foreclosed assets
1,798

 
2,159

Other assets
186,276

 
150,917

Total assets
$
7,502,009

 
$
7,209,469

Liabilities and Stockholders' Equity
Deposits
 
 
 
Demand deposits
2,024,235

 
1,846,593

Savings and interest checking accounts
2,417,195

 
2,370,141

Money market
1,198,959

 
1,089,139

Time certificates of deposit of $100,000 and over
257,638

 
274,701

Other time certificates of deposits
371,433

 
410,129

Total deposits
6,269,460

 
5,990,703

Borrowings
 
 
 
Federal Home Loan Bank borrowings
50,826

 
102,080

Customer repurchase agreements and other short-term borrowings
140,914

 
133,958


4


Junior subordinated debentures (less unamortized debt issuance costs of $141 and $158)
73,157

 
73,306

Subordinated debentures (less unamortized debt issuance costs of $376 and $411)
34,624

 
34,589

Total borrowings
299,521

 
343,933

Other liabilities
114,786

 
103,370

Total liabilities
6,683,767

 
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: 26,320,467 shares at September 30, 2016 and 26,236,352 shares at December 31, 2015 (includes 212,673 and 230,900 shares of unvested participating restricted stock awards, respectively)
261

 
260

Shares held in rabbi trust at cost: 169,075 shares at September 30, 2016 and 173,378 shares at December 31, 2015
(4,199
)
 
(3,958
)
Deferred compensation and other retirement benefit obligations
4,199

 
3,958

Additional paid in capital
409,731

 
405,486

Retained earnings
404,750

 
368,169

Accumulated other comprehensive income (loss), net of tax
3,500

 
(2,452
)
Total stockholders’ equity
818,242

 
771,463

Total liabilities and stockholders' equity
$
7,502,009

 
$
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
 
Nine Months Ended
 
September 30
 
September 30
 
2016
 
2015
 
2016
 
2015
Interest income
 
 
 
 
 
 
 
Interest and fees on loans
$
56,778

 
$
54,557

 
$
166,683

 
$
160,261

Taxable interest and dividends on securities
5,034

 
5,455

 
15,500

 
14,934

Nontaxable interest and dividends on securities
28

 
31

 
89

 
95

Interest on loans held for sale
81

 
64

 
170

 
173

Interest on federal funds sold and short-term investments
387

 
121

 
767

 
212

Total interest and dividend income
62,308

 
60,228

 
183,209

 
175,675

Interest expense
 
 
 
 
 
 
 
Interest on deposits
2,733

 
2,951

 
8,339

 
8,636

Interest on borrowings
1,907

 
2,232

 
5,778

 
6,997

Total interest expense
4,640

 
5,183

 
14,117

 
15,633

Net interest income
57,668

 
55,045

 
169,092

 
160,042

Provision for loan losses
950

 
800

 
2,075

 
1,000

Net interest income after provision for loan losses
56,718

 
54,245

 
167,017

 
159,042

Noninterest income
 
 
 
 
 
 
 
Deposit account fees
4,622

 
4,754

 
13,563

 
13,385

Interchange and ATM fees
4,190

 
3,949

 
12,050

 
10,817

Investment management
5,446

 
4,981

 
16,183

 
15,616

Mortgage banking income
1,963

 
1,480

 
4,458

 
3,832

Gain on sale of equity securities

 

 
5

 
19

Gain on sale of fixed income securities

 

 

 
798

Increase in cash surrender value of life insurance policies
984

 
958

 
2,980

 
2,685

Loan level derivative income
810

 
968

 
4,627

 
2,816

Other noninterest income
2,401

 
2,157

 
6,800

 
6,096

Total noninterest income
20,416

 
19,247

 
60,666

 
56,064

Noninterest expenses
 
 
 
 
 
 
 
Salaries and employee benefits
27,395

 
26,685

 
81,561

 
78,291

Occupancy and equipment expenses
5,433

 
5,443

 
16,927

 
17,509

Data processing and facilities management
1,400

 
1,112

 
3,831

 
3,462

FDIC assessment
725

 
1,020

 
2,655

 
2,993

Advertising expense
1,654

 
1,414

 
4,134

 
4,101

Consulting expense
770

 
867

 
2,235

 
2,451

Legal fees
321

 
746

 
1,132

 
1,462

Loss on extinguishment of debt

 

 
437

 
122

Loss on sale of equity securities

 

 
32

 
8

Loss on sale of fixed income securities

 

 

 
1,124

Merger and acquisition expense
151

 

 
691

 
10,501

Other noninterest expenses
9,008

 
9,744

 
26,850

 
28,628

Total noninterest expenses
46,857

 
47,031

 
140,485

 
150,652

Income before income taxes
30,277

 
26,461

 
87,198

 
64,454

Provision for income taxes
9,793

 
7,867

 
27,729

 
18,949

Net income
$
20,484

 
$
18,594

 
$
59,469

 
$
45,505

Basic earnings per share
$
0.78

 
$
0.71

 
$
2.26

 
$
1.77

Diluted earnings per share
$
0.78

 
$
0.71

 
$
2.26

 
$
1.76

Weighted average common shares (basic)
26,324,316

 
26,200,621

 
26,301,340

 
25,774,571

Common shares equivalents
53,072

 
63,493

 
48,354

 
72,921

Weighted average common shares (diluted)
26,377,388

 
26,264,114

 
26,349,694

 
25,847,492

Cash dividends declared per common share
$
0.29

 
$
0.26

 
$
0.87

 
$
0.78

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
 
Nine Months Ended
 
September 30
 
September 30
 
2016
 
2015
 
2016
 
2015
Net income
$
20,484

 
$
18,594

 
$
59,469

 
$
45,505

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Net change in fair value of securities available for sale
(816
)
 
1,211

 
5,119

 
544

Net change in fair value of cash flow hedges
674

 
132

 
653

 
596

Net change in other comprehensive income for defined benefit postretirement plans
59

 
110

 
180

 
309

Total other comprehensive income (loss)
(83
)
 
1,453

 
5,952

 
1,449

Total comprehensive income
$
20,401

 
$
20,047

 
$
65,421

 
$
46,954

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

 

 

 

 

 
59,469

 

 
59,469

Other comprehensive income

 

 

 

 

 

 
5,952

 
5,952

Common dividend declared ($0.87 per share)

 

 

 

 

 
(22,888
)
 

 
(22,888
)
Proceeds from exercise of stock options, net of cash paid
9,022

 

 

 

 
160

 

 

 
160

Tax benefit related to equity award activity

 

 

 

 
354

 

 

 
354

Stock based compensation

 

 

 

 
2,308

 

 

 
2,308

Restricted stock awards issued, net of awards surrendered
32,567

 
1

 

 

 
(674
)
 

 

 
(673
)
Shares issued under direct stock purchase plan
42,526

 

 

 

 
1,918

 

 

 
1,918

Deferred compensation and other retirement benefit obligations

 

 
(241
)
 
241

 


 

 

 

Tax benefit related to deferred compensation distributions

 

 

 

 
179

 

 

 
179

Balance September 30, 2016
26,320,467

 
$
261

 
$
(4,199
)
 
$
4,199

 
$
409,731

 
$
404,750

 
$
3,500

 
$
818,242

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2014
23,998,738

 
$
237

 
$
(3,666
)
 
$
3,666

 
$
311,978

 
$
330,444

 
$
(2,132
)
 
$
640,527

Net income

 

 

 

 

 
45,505

 

 
45,505

Other comprehensive income

 

 

 

 

 

 
1,449

 
1,449

Common dividend declared ($0.78 per share)

 

 

 

 

 
(20,412
)
 

 
(20,412
)
Common stock issued for acquisition
2,052,137

 
21

 

 

 
86,394

 

 

 
86,415

Proceeds from exercise of stock options, net of cash paid
78,240

 
1

 

 

 
1,364

 

 

 
1,365

Tax benefit related to equity award activity

 

 

 

 
776

 

 

 
776

Stock based compensation

 

 

 

 
2,028

 

 

 
2,028

Restricted stock awards issued, net of awards surrendered
36,901

 
1

 

 

 
(646
)
 

 

 
(645
)
Shares issued under direct stock purchase plan
46,222

 

 

 

 
2,023

 

 

 
2,023

Deferred compensation and other retirement benefit obligations

 

 
(217
)
 
217

 

 

 

 

Tax benefit related to deferred compensation distributions

 

 

 

 
172

 

 

 
172

Balance September 30, 2015
26,212,238

 
$
260

 
$
(3,883
)
 
$
3,883

 
$
404,089

 
$
355,537

 
$
(683
)
 
$
759,203

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)
 
 
Nine Months Ended
 
September 30
 
2016
 
2015
Cash flow from operating activities
 
 
 
Net income
$
59,469

 
$
45,505

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
10,729

 
9,327

Provision for loan losses
2,075

 
1,000

Deferred income tax expense
314

 
5,372

Net loss on sale of securities
27

 
315

Net loss on fixed assets
10

 
213

Loss on extinguishment of debt
437

 
122

Net loss on other real estate owned and foreclosed assets
41

 
1,070

Realized gain on sale leaseback transaction
(775
)
 
(775
)
Stock based compensation
2,308

 
2,028

Excess tax benefit related to equity award activity
(354
)
 
(776
)
Increase in cash surrender value of life insurance policies
(2,980
)
 
(2,685
)
Change in fair value on loans held for sale
(60
)
 
(3
)
Net change in:
 
 
 
Trading assets
(453
)
 
(454
)
Loans held for sale
(7,284
)
 
(4,585
)
Other assets
(42,044
)
 
4,366

Other liabilities
18,314

 
2,035

Total adjustments
(19,695
)
 
16,570

Net cash provided by operating activities
39,774

 
62,075

Cash flows used in investing activities
 
 
 
Proceeds from sales of securities available for sale
285

 
14,344

Proceeds from maturities and principal repayments of securities available for sale
48,421

 
60,507

Purchases of securities available for sale
(60,888
)
 
(49,086
)
Proceeds from maturities and principal repayments of securities held to maturity
62,005

 
44,706

Purchases of securities held to maturity
(14,998
)
 
(117,286
)
Redemption of Federal Home Loan Bank stock
3,127

 

Investments in low income housing projects
(5,473
)
 
(14,817
)
Purchases of life insurance policies
(116
)
 
(115
)
Net increase in loans
(198,731
)
 
(65,650
)
Cash used in business combinations, net of cash acquired

 
(13,448
)
Purchases of bank premises and equipment
(6,022
)
 
(6,846
)
Proceeds from the sale of bank premises and equipment
26

 
1,233

Proceeds from the sale of other real estate owned and foreclosed assets
842

 
7,378

Net payments relating to other real estate owned and foreclosed assets
(145
)
 
(961
)
Net cash used in investing activities
(171,667
)
 
(140,041
)
Cash flows provided by financing activities
 
 
 
Net decrease in time deposits
(55,759
)
 
(54,293
)

9


Net increase in other deposits
334,516

 
326,440

Net repayments of short-term Federal Home Loan Bank borrowings

 
(10,000
)
Repayments of long-term Federal Home Loan Bank borrowings
(51,641
)
 
(7,000
)
Net increase (decrease) in customer repurchase agreements
6,956

 
(9,441
)
Repayments of wholesale repurchase agreements

 
(50,000
)
Repayments of subordinated debentures

 
(30,000
)
Net proceeds from exercise of stock options
160

 
1,365

Restricted stock awards issued, net of awards surrendered
(673
)
 
(645
)
Excess tax benefit from stock based compensation
354

 
776

Tax benefit from deferred compensation distribution
179

 
172

Proceeds from shares issued under direct stock purchase plan
1,918

 
2,023

Common dividends paid
(22,079
)
 
(19,357
)
Net cash provided by financing activities
213,931

 
150,040

Net increase in cash and cash equivalents
82,038

 
72,074

Cash and cash equivalents at beginning of year
275,765

 
178,254

Cash and cash equivalents at end of period
357,803

 
250,328

Supplemental schedule of noncash investing and financing activities
 
 
 
Transfer of loans to other real estate owned & foreclosed assets
$
377

 
$
2,134

Other net transfers to other real estate owned
$

 
$
142

Net increase in capital commitments relating to low income housing project investments
$
163

 
$
2,085

In conjunction with the Peoples Federal Bancshares, Inc. acquisition, assets were acquired and liabilities were assumed as follows
 
 
 
Common stock issued for acquisition
$

 
$
86,415

Fair value of assets acquired, net of cash acquired
$

 
$
598,376

Fair value of liabilities assumed
$

 
$
498,513

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

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 September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or any other interim period.
For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission.

NOTE 2 - RECENT ACCOUNTING STANDARDS UPDATES

Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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 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 largely converged revenue recognition standards will supersede virtually all revenue recognition guidance in 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. Since the issuance of Update 2014-09, the FASB has finalized various amendments to the standard as summarized below:
FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2016-12
FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2016-10
FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2016-08.
FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2015-14.

Through Updates 2016-12, 2016-10 and 2016-08, the FASB amended its new revenue guidance on licenses of intellectual property, identification of performance obligations, collectability, noncash consideration and the presentation of sales and other similar taxes. The FASB also clarified the definition of a completed contract at transition and added a practical expedient to ease transition for contracts that were modified prior to adoption. The FASB also amended the new revenue recognition guidance on determining whether an entity is a principal or an agent in an arrangement which affects whether revenue should be reported gross or net.
Following the issuance of Update 2015-14, Update 2014-09, as amended, is effective for the Company for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. A full or modified retrospective transition method is required. The Company's revenue is comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new guidance, and noninterest income. The Company plans to adopt the revenue recognition guidance in the first quarter of 2018 and is currently evaluating the potential impact on noninterest income on the Company's consolidated financial position, other presentation and disclosure issues, as well as evaluating its selection of transition method.
FASB ASC Topic 230 "Statement of Cash Flows" Update No. 2016-15. Update No. 2016-15 was issued in August 2016 to reduce diversity of practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update provide guidance on the following eight specific cash flow issues; (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after

11


a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the Predominance Principle. The amendments in this topic will provide guidance for these eight issues, thereby reducing the current and potential future diversity in practice. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 31, 2017. Earlier adoption is permitted, including interim reporting periods within that reporting period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

FASB ASC Topic 326 "Financial Instruments - Credit Losses" Update No. 2016-13. Update No. 2016-13 was issued in June 2016 to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with earlier adoption permitted as of fiscal years beginning after December 15, 2018, including interim periods with those fiscal years. The Company is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position.
 
FASB ASC Topic 605 "Revenue Recognition" and Topic 815 "Derivatives and Hedging" Update No. 2016-11. Update No. 2016-11 was issued in May 2016 and is a rescission of SEC guidance because of ASU Updates 2014-09 and 2014-16 pursuant to staff announcements at the March 3, 2016 Emerging Issues Task Force meeting. The amendments in this update are effective upon adoption of Topic 606 "Revenue from Contracts with Customers." The Company is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position.

FASB ASC Topic 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 323 "Investments -Equity Method and Joint Ventures" Update No. 2016-07. Update No. 2016-07 was issued in March 2016 and eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

FASB ASC Topic 815 "Derivative and Hedging - Contingent Put and Call Options in Debt Instruments" Update No. 2016-6. Update No. 2016-6 was issued in March 2016 to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. An entity has an option to apply

12


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 update retains many current requirements, it significantly revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The update also amends certain disclosure requirements associated with the fair value of financial instruments and various other aspects of recognition, measurement, presentation and disclosure of financial instruments. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for only certain guidance. The Company is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position.
FASB ASC Subtopic 835-30 "Interest - Imputation of Interest" Update No. 2015-03. Update No. 2015-03 was issued in April 2015 to simplify presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuances costs are not affected by the amendments in this update. The amendments in this update 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.




13


NOTE 3 - SECURITIES
Trading Securities

The Company had trading securities of $809,000 and $356,000 as of September 30, 2016 and December 31, 2015, respectively. These securities are held in a rabbi trust and will be used for future payments associated with the Company’s non-qualified 401(k) Restoration Plan and Non-Qualified Deferred Compensation Plan.

Available for Sale and Held to Maturity Securities
The following table presents a summary of the amortized cost and gross unrealized holding gains and losses recorded in other comprehensive income and fair value of securities available for sale and securities held to maturity for the periods below:
 
September 30, 2016
 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
(Dollars in thousands)
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency securities
$
24,502

 
$
804

 
$

 
$
25,306

 
$
29,958

 
$
261

 
$
(4
)
 
$
30,215

Agency mortgage-backed securities
178,095

 
7,481

 
(3
)
 
185,573

 
207,693

 
4,227

 
(983
)
 
210,937

Agency collateralized mortgage obligations
107,466

 
1,286

 
(156
)
 
108,596

 
64,157

 
179

 
(752
)
 
63,584

State, county, and municipal securities
4,255

 
105

 

 
4,360

 
4,543

 
116

 

 
4,659

Single issuer trust preferred securities issued by banks
2,324

 
4

 
(31
)
 
2,297

 
2,865

 
8

 
(81
)
 
2,792

Pooled trust preferred securities issued by banks and insurers
2,200

 

 
(662
)
 
1,538

 
2,217

 

 
(645
)
 
1,572

Small business administration pooled securities

38,678

 
1,202

 

 
39,880

 
40,472

 
87

 
(110
)
 
40,449

Equity securities
19,000

 
701

 
(243
)
 
19,458

 
13,235

 
374

 
(568
)
 
13,041

Total available for sale securities
$
376,520

 
$
11,583

 
$
(1,095
)
 
$
387,008

 
$
365,140

 
$
5,252

 
$
(3,143
)
 
$
367,249

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

 
$
81

 
$

 
$
1,089

 
$
1,009

 
$
55

 
$

 
$
1,064

Agency mortgage-backed securities
148,822

 
6,309

 

 
155,131

 
167,134

 
3,460

 
(219
)
 
170,375

Agency collateralized mortgage obligations
246,744

 
4,072

 
(556
)
 
250,260

 
267,348

 
1,195

 
(3,652
)
 
264,891

State, county, and municipal securities

 

 

 

 
225

 
2

 

 
227

Single issuer trust preferred securities issued by banks
1,500

 
47

 

 
1,547

 
1,500

 
22

 

 
1,522

Small business administration pooled securities

32,689

 
1,118

 

 
33,807

 
35,291

 
437

 
(64
)
 
35,664

Corporate debt securities

 

 

 

 
5,000

 
6

 

 
5,006

Total held to maturity securities
$
430,763

 
$
11,627

 
$
(556
)
 
$
441,834

 
$
477,507

 
$
5,177

 
$
(3,935
)
 
$
478,749

Total
$
807,283

 
$
23,210

 
$
(1,651
)
 
$
828,842

 
$
842,647

 
$
10,429

 
$
(7,078
)
 
$
845,998

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale.
 
The actual maturities of certain securities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. A schedule of the contractual maturities of securities available for sale and securities held to maturity as of September 30, 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
$
999

 
$
1,003

 
$
11

 
$
11

Due after one year to five years
30,422

 
31,258

 
16,099

 
16,739

Due after five to ten years
86,511

 
89,455

 
24,594

 
25,602

Due after ten years
239,588

 
245,834

 
390,059

 
399,482

Total debt securities
$
357,520

 
$
367,550

 
$
430,763

 
$
441,834

Equity securities
$
19,000

 
$
19,458

 
$

 
$

Total
$
376,520

 
$
387,008

 
$
430,763

 
$
441,834

Inclusive in the table above is $11.9 million of callable securities in the Company’s investment portfolio at September 30, 2016.
The carrying value of securities pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law, was $451.7 million and $444.8 million at September 30, 2016 and December 31, 2015, respectively.
At September 30, 2016 and December 31, 2015, the Company had no investments in obligations of individual states, counties, or municipalities which exceeded 10% of stockholders’ equity.
Other-Than-Temporary Impairment ("OTTI")
The Company continually reviews investment securities for the existence of OTTI, taking into consideration current market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, the credit worthiness of the obligor of the security, volatility of earnings, current analysts’ evaluations, the Company’s intent to sell the security, or whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery, as well as other qualitative factors. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.
The following tables show the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position, which the Company has not deemed to be OTTI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
 
September 30, 2016
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
# of holdings
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(Dollars in thousands)
Agency mortgage-backed securities
2

 
$
1,016

 
$
(3
)
 
$

 
$

 
$
1,016

 
$
(3
)
Agency collateralized mortgage obligations
9

 
14,530

 
(30
)
 
51,578

 
(682
)
 
66,108

 
(712
)
Single issuer trust preferred securities issued by banks and insurers
2

 

 

 
2,048

 
(31
)
 
2,048

 
(31
)
Pooled trust preferred securities issued by banks and insurers
1

 

 

 
1,537

 
(662
)
 
1,537

 
(662
)
Equity securities
21

 
515

 
(16
)
 
6,903

 
(227
)
 
7,418

 
(243
)
Total temporarily impaired securities
35

 
$
16,061

 
$
(49
)
 
$
62,066

 
$
(1,602
)
 
$
78,127

 
$
(1,651
)


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 September 30, 2016:
Agency Mortgage-Backed Securities and Agency Collateralized Mortgage Obligations: These portfolios have contractual terms that generally do not permit the issuer to settle the securities at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are either implicitly or explicitly guaranteed by the U.S. Government or one of its agencies.
Single Issuer Trust Preferred Securities: This portfolio consists of two securities, one of which is below investment grade. The unrealized loss on these securities is attributable to the illiquid nature of the trust preferred market in the current economic environment. Management evaluates various financial metrics for the issuers, including regulatory capital ratios of the issuers.
Pooled Trust Preferred Securities: This portfolio consists of one below investment grade security which is performing. The unrealized loss on this security is attributable to the illiquid nature of the trust preferred market in the current economic and regulatory environment. Management evaluates collateral credit and instrument structure, including current and expected deferral and default rates and timing. In addition, discount rates are determined by evaluating comparable spreads observed currently in the market for similar instruments.
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
 
Nine Months Ended
 
September 30
 
September 30
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Gross change in OTTI recorded on certain investments
$

 
$

 
$

 
$
84

Portion of OTTI recognized in OCI

 

 

 
(84
)
Total credit related OTTI recognized in earnings
$

 
$

 
$

 
$

The following table shows the cumulative credit related component of OTTI for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2016
 
2015
 
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

 

 

 
9,997

Reclassification due to changes in Company's intent

 

 

 

Increases in cash flow expected to be collected

 

 

 

Balance at end of period
$

 
$

 
$

 
$



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:
 
September 30, 2016
 
 
(Dollars in thousands)
 
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 
Other Consumer
 
Total
 
Financing receivables ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
853,245

 
$
2,759,158

 
$
376,245

 
$
114,085

 
$
609,854

 
$
958,999

 
$
11,244

 
$
5,682,830

  
Individually evaluated for impairment
$
4,468

 
$
18,077

 
$

 
$
969

 
$
14,193

 
$
5,904

 
$
418

 
$
44,029

  
Purchased credit impaired loans
$

 
$
10,425

 
$

 
$

 
$
8,638

 
$
209

 
$
2

 
$
19,274

 
Total loans by group
$
857,713

 
$
2,787,660

 
$
376,245

 
$
115,054

 
$
632,685

 
$
965,112

 
$
11,664

 
$
5,746,133

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

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

 
$
2,619,294

 
$
373,064

 
$
95,225

 
$
614,014

 
$
921,563

 
$
14,427

 
$
5,475,716

 
Individually evaluated for impairment
$
5,147

 
$
22,986

 
$
304

 
$
1,021

 
$
15,405

 
$
5,989

 
$
558

 
$
51,410

  
Purchased credit impaired loans
$

 
$
11,154

 
$

 
$

 
$
9,187

 
$
251

 
$
3

 
$
20,595

 
Total loans by group
$
843,276

 
$
2,653,434

 
$
373,368

 
$
96,246

 
$
638,606

 
$
927,803

 
$
14,988

 
$
5,547,721

(1
)
 
(1)
The amount of net deferred fees on loans and net unamortized discounts on acquired loans not deemed to be purchased credit impaired ("PCI") included in the ending balance was $10.9 million at both September 30, 2016 and December 31, 2015 respectively.
The following tables summarize changes in allowance for loan losses by loan category for the periods indicated:
 
Three Months Ended September 30, 2016
 
(Dollars in thousands)
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 
Other Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
14,027

 
$
29,011

 
$
5,216

 
$
1,441

 
$
2,578

 
$
4,986

 
$
468

 
$
57,727

Charge-offs
(27
)
 
(341
)
 

 
(98
)
 

 
(154
)
 
(523
)
 
(1,143
)
Recoveries
63

 
124

 

 
28

 
130

 
24

 
302

 
671

Provision (benefit)
(189
)
 
609

 
117

 
113

 
(44
)
 
196

 
148

 
950

Ending balance
$
13,874

 
$
29,403

 
$
5,333

 
$
1,484

 
$
2,664

 
$
5,052

 
$
395

 
$
58,205



18


 
Three Months Ended September 30, 2015
 
(Dollars in thousands)
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 
Other Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
15,279

 
$
26,359

 
$
4,071

 
$
1,248

 
$
2,551

 
$
4,871

 
$
616

 
$
54,995

Charge-offs
(497
)