INDEPENDENT BANK CORP
10-Ks and 10-Qs
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Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
| For the fiscal year ended December 31, 2010 | ||
|
or
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
| For the transition period from to | ||
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 Mailing Address: 288 Union Street, Rockland, Massachusetts (Address of principal executive offices) |
02339
02370 (Zip Code) |
Registrant’s telephone number, including area code:
(781) 878-6100
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of Each Class
|
Name of Each Exchange on Which Registered
|
|
|
Common Stock, $.01 par value per share
|
NASDAQ Global Select Market | |
|
Preferred Stock Purchase Rights
|
NASDAQ Global Select Market |
Securities
registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
o
No
þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required 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
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, 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
o
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
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. (Check one):
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
The aggregate market value of the voting common stock held by
non-affiliates of the registrant, computed by reference to the
closing price of such stock on June 30, 2010, was
approximately $481,623,191.
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the latest
practicable date. January 31,
2011 21,255,620
DOCUMENTS
INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by
reference and the Part of the
Form 10-K
(e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders;
(2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under
the Securities Act of 1933. The listed documents should be
clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended
December 24, 1980).
Portions of the Registrant’s definitive proxy statement for
its 2010 Annual Meeting of Stockholders are incorporated into
Part III,
Items 10-13
of this
Form 10-K.
Table of Contents
INDEPENDENT
BANK CORP.
2010
ANNUAL REPORT ON
FORM 10-K
TABLE OF
CONTENTS
1
Table of Contents
2
Table of Contents
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
A number of the presentations and disclosures in this
Form 10-K,
including, without limitation, statements regarding the level of
allowance for loan losses, the rate of delinquencies and amounts
of charge-offs, and the rates of loan growth, and any statements
preceded by, followed by, or which include the words
“may,” “could,” “should,”
“will,” “would,” “hope,”
“might,” “believe,” “expect,”
“anticipate,” “estimate,”
“intend,” “plan,” “assume” or
similar expressions constitute forward-looking statements within
the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements, implicitly and explicitly,
include the assumptions underlying the statements and other
information with respect to the beliefs, plans, objectives,
goals, expectations, anticipations, estimates, intentions,
financial condition, results of operations, future performance
and business, of the Company including the Company’s
expectations and estimates with respect to the Company’s
revenues, expenses, earnings, return on average equity, return
on average assets, efficiency ratio, asset quality and other
financial data and capital and performance ratios.
Although the Company believes that the expectations reflected in
the Company’s forward-looking statements are reasonable,
these statements involve risks and uncertainties that are
subject to change based on various important factors (some of
which are beyond the Company’s control). The following
factors, among others, could cause the Company’s financial
performance to differ materially from the Company’s goals,
plans, objectives, intentions, expectations and other
forward-looking statements:
| • | a weakening in the United States economy in general and the regional and local economies within the New England region and Massachusetts, which could result in a deterioration of credit quality, a change in the allowance for loan losses, or a reduced demand for the Company’s credit or fee-based products and services; | |
| • | adverse changes in the local real estate market could result in a deterioration of credit quality and an increase in the allowance for loan loss, as most of the Company’s loans are concentrated in eastern Massachusetts and Cape Cod, and to a lesser extent, Rhode Island, and a substantial portion of these loans have real estate as collateral; | |
| • | the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, could affect the Company’s business environment or affect the Company’s operations; | |
| • | the effects of, any changes in, and any failure by the Company to comply with tax laws generally and requirements of the federal New Markets Tax Credit program in particular could adversely affect the Company’s tax provision and its financial results; | |
| • | inflation, interest rate, market and monetary fluctuations could reduce net interest income and could increase credit losses; | |
| • | adverse changes in asset quality could result in increasing credit risk-related losses and expenses; | |
| • | changes in the deferred tax asset valuation allowance in future periods may adversely affect financial results; | |
| • | competitive pressures could intensify and affect the Company’s profitability, including continued industry consolidation, the increased financial services provided by non-banks and banking reform; | |
| • | a deterioration in the conditions of the securities markets could adversely affect the value or credit quality of the Company’s assets, the availability and terms of funding necessary to meet the Company’s liquidity needs, and the Company’s ability to originate loans and could lead to impairment in the value of securities in the Company’s investment portfolios, having an adverse effect on the Company’s earnings; | |
| • | the potential need to adapt to changes in information technology could adversely impact the Company’s operations and require increased capital spending; | |
| • | changes in consumer spending and savings habits could negatively impact the Company’s financial results; |
3
Table of Contents
| • | acquisitions may not produce results at levels or within time frames originally anticipated and may result in unforeseen integration issues or impairment of goodwill and/or other intangibles; | |
| • | new laws and regulations regarding the financial services industry including but not limited to, the Dodd-Frank Wall Street Reform & Consumer Protection Act, may have significant effects on the financial services industry in general, and/or the Company in particular, the exact nature and extent of which is uncertain; | |
| • | changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) generally applicable to the Company’s business could adversely affect the Company’s operations; and | |
| • | changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters, could negatively impact the Company’s financial results. |
If one or more of the factors affecting the Company’s
forward-looking information and statements proves incorrect,
then the Company’s actual results, performance or
achievements could differ materially from those expressed in, or
implied by, forward-looking information and statements contained
in this
Form 10-K.
Therefore, the Company cautions you not to place undue reliance
on the Company’s forward-looking information and statements.
The Company does not intend to update the Company’s
forward-looking information and statements, whether written or
oral, to reflect change. All forward-looking statements
attributable to the Company are expressly qualified by these
cautionary statements.
4
Table of Contents
| Item 1. | Business |
General
Independent Bank Corp. (the “Company”) is a state
chartered, federally registered bank holding company
headquartered in Rockland, Massachusetts that was incorporated
under Massachusetts law in 1985. The Company is the sole
stockholder of Rockland Trust Company (“Rockland”
or the “Bank”), a Massachusetts trust company
chartered in 1907. Rockland is a community-oriented commercial
bank. The community banking business is the Company’s only
reportable operating segment. The community banking business is
managed as a single strategic unit and derives its revenues from
a wide range of banking services, including lending activities,
acceptance of demand, savings, and time deposits, and wealth
management. At December 31, 2010, the Company had total
assets of $4.7 billion, total deposits of
$3.6 billion, stockholders’ equity of
$436.5 million, and 919 full-time equivalent employees.
The Company is currently the sponsor of Independent Capital
Trust V (“Trust V”), a Delaware statutory
trust, and Slade’s Ferry Statutory Trust I
(“Slade’s Ferry Trust I”), a Connecticut
statutory trust, each of which was formed to issue trust
preferred securities. Trust V and Slade’s Ferry
Trust I are not included in the Company’s consolidated
financial statements in accordance with the requirements of the
consolidation topic of the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”).
Periodically, the Bank acts as Qualified Intermediary
(“QI”)
and/or
Exchange Accommodation Titleholder (“EAT”) in
connection with customers’ like-kind exchanges under
Section 1031 of the Internal Revenue Code through its
subsidiary Compass Exchange Advisors, LLC. The Internal Revenue
Service established a “safe harbor” procedure, Revenue
Procedure
2000-37,
that allows an EAT to hold title to property for up to
180 days. This Revenue Procedure also allows the customer
to: lend the EAT all of the funds needed to acquire the property
on a non-recourse basis, manage the property, and receive all of
the economic benefit of the property while title is held by the
EAT. Compass Exchange Advisors LLC may form various entities to
act as EATs and take title to customer’s property in
connection with the customer’s 1031 exchange. In each
transaction in which an entity owned by the Bank acts as EAT,
any funds borrowed are non-recourse to the EAT and Bank, no
economic investment is made in the property and the EAT derives
no profit or loss from the ownership or operation of the
property (other than its fees for services). Accordingly, any
property owned by an entity as EAT is not consolidated by the
Bank.
As of December 31, 2010, the Bank had the following
corporate subsidiaries, all of which were wholly-owned by the
Bank and included in the Company’s consolidated financial
statements:
| • | Three Massachusetts security corporations, namely Rockland Borrowing Collateral Securities Corp., Rockland Deposit Collateral Securities Corp., and Taunton Avenue Securities Corp., which hold securities, industrial development bonds, and other qualifying assets; | |
| • | Rockland Trust Community Development Corporation, which has two wholly-owned subsidiaries named Rockland Trust Community Development LLC and Rockland Trust Community Development Corporation II, and which also serves as the manager of two Limited Liability Company subsidiaries wholly-owned by the Bank named Rockland Trust Community Development III LLC and Rockland Trust Community Development IV LLC, all of which were all formed to qualify as community development entities under federal New Markets Tax Credit Program criteria; | |
| • | Rockland Trust Phoenix LLC, which was established to hold other real estate owned acquired during loan workouts; | |
| • | Compass Exchange Advisors LLC which provides like-kind exchange services pursuant to section 1031 of the Internal Revenue Code; and | |
| • | Bright Rock Capital Management LLC, which was established to act as a registered investment advisor under the Investment Advisors Act of 1940. |
5
Table of Contents
Market
Area and Competition
The Bank contends with considerable competition both in
generating loans and attracting deposits. The Bank’s
competition for generating loans is primarily from other
commercial banks, savings banks, credit unions, mortgage banking
companies, insurance companies, finance companies, and other
institutional lenders. Competitive factors considered for loan
generation include interest rates, terms offered, loan fees
charged, loan products offered, service provided, and geographic
locations.
In attracting deposits, the Bank’s primary competitors are
savings banks, commercial and co-operative banks, credit unions,
internet banks, as well as other non-bank institutions that
offer financial alternatives such as brokerage firms and
insurance companies. Competitive factors considered in
attracting and retaining deposits include deposit and investment
products and their respective rates of return, liquidity, and
risk, among other factors, such as convenient branch locations
and hours of operation, personalized customer service, online
access to accounts, and automated teller machines.
The Bank’s market area is attractive and entry into the
market by financial institutions previously not competing in the
market area may continue to occur which could impact the
Bank’s growth or profitability.
Lending
Activities
The Bank’s gross loan portfolio (loans before allowance for
loan losses) amounted to $3.6 billion on December 31,
2010, or 75.7% of total assets. The Bank classifies loans as
commercial, consumer real estate, or other consumer. Commercial
loans consist of commercial and industrial loans, commercial
real estate, commercial construction, and small business loans.
Commercial and industrial loans consist of loans with credit
needs in excess of $250,000 and revenue in excess of
$2.5 million, for working capital and other
business-related purposes and floor plan financing. Commercial
real estate loans are comprised of commercial mortgages that are
secured by non-residential properties, as well as mortgages for
construction loans on non-residential properties. Small business
loans, including real estate loans, consist primarily of loans
to businesses with commercial credit needs of less than or equal
to $250,000 and revenues of less than $2.5 million.
Consumer real estate consists of residential mortgages and home
equity loans and lines that are secured primarily by
owner-occupied residences and mortgages for the construction of
residential properties. Other consumer loans are mainly personal
loans and automobile loans.
The Bank’s borrowers consist of
small-to-medium
sized businesses and retail customers. The Bank’s market
area is generally comprised of eastern Massachusetts, including
Cape Cod, and to a lesser extent, Rhode Island. Substantially
all of the Bank’s commercial, consumer real estate, and
other consumer loan portfolios consist of loans made to
residents of and businesses located in the Bank’s market
area. The majority of the real estate loans in the Bank’s
loan portfolio are secured by properties located within this
market area.
Interest rates charged on loans may be fixed or variable and
vary with the degree of risk, loan term, underwriting and
servicing costs, loan amount, and the extent of other banking
relationships maintained with customers. Rates are further
subject to competitive pressures, the current interest rate
environment, availability of funds, and government regulations.
The Bank’s principal earning assets are its loans. Although
the Bank judges its borrowers to be creditworthy, the risk of
deterioration in borrowers’ abilities to repay their loans
in accordance with their existing loan agreements is inherent in
any lending function. Participating as a lender in the credit
market requires a strict underwriting and monitoring process to
minimize credit risk. This process requires substantial analysis
of the loan application, an evaluation of the customer’s
capacity to repay according to the loan’s contractual
terms, and an objective determination of the value of the
collateral. The Bank also utilizes the services of an
independent third-party to provide loan review services, which
consist of a variety of monitoring techniques performed after a
loan becomes part of the Bank’s portfolio.
The Bank’s Controlled Asset and Consumer Collections
departments are responsible for the management and resolution of
nonperforming loans. Nonperforming loans consist of nonaccrual
loans and loans that are more than 90 days past due but
still accruing interest. In the course of resolving
nonperforming loans, the Bank may choose to restructure the
contractual terms of certain loans. Terms may be modified to fit
the ability of the borrower to repay in
6
Table of Contents
line with its current financial status. It is the Bank’s
policy to have any restructured loans which are on nonaccrual
status prior to being modified remain on nonaccrual status for
approximately six months before management considers its return
to accrual status. If the restructured loan is on accrual status
prior to being modified, it is reviewed to determine if the
modified loan should remain on accrual status.
Other Real Estate Owned (“OREO”) includes properties
controlled by the Bank. In order to facilitate the disposition
of OREO, the Bank may finance the purchase of such properties at
market rates if the borrower qualifies under the Bank’s
standard underwriting guidelines. The Bank had sixteen
properties held as OREO at December 31, 2010, with a net
realizable value totaling $7.3 million.
Origination of Loans
Commercial and
industrial, commercial real estate, and construction loan
applications are obtained through existing customers,
solicitation by Bank personnel, referrals from current or past
customers, or walk-in customers. Small business loan
applications are typically originated by the Bank’s retail
staff, through a dedicated team of business officers, by
referrals from other areas of the Bank, referrals from current
or past customers, or through walk-in customers. Customers for
consumer real estate loans are referred to Mortgage Loan
Officers who will meet with the borrowers at the borrowers’
convenience. Residential real estate loan applications primarily
result from referrals by real estate brokers, homebuilders, and
existing or walk-in customers. Mortgage Loan Officers are
compensated on a commission basis and provide convenient
origination services during banking and non-banking hours. Other
consumer loan applications are directly obtained through
existing or walk-in customers who have been made aware of the
Bank’s consumer loan services through advertising, direct
mail, and other media.
Loans are approved based upon a hierarchy of authority,
predicated upon the size of the loan. Levels within the
hierarchy of lending authorities range from individual lenders
to Executive Committee of the Board of Directors. In accordance
with governing banking statutes, Rockland is permitted, with
certain exceptions, to make loans and commitments to any one
borrower, including related entities, in the aggregate amount of
not more than 20% of the Bank’s stockholders’ equity,
which is the Bank’s legal lending limit, or
$97.0 million at December 31, 2010. Notwithstanding
the foregoing, the Bank has established a more restrictive limit
of not more than 75% of the Bank’s legal lending limit, or
$72.8 million at December 31, 2010, which may only be
exceeded with the approval of the Board of Directors. There were
no borrowers whose total indebtedness in aggregate exceeded the
Bank’s self-imposed restrictive limit. The Banks largest
relationship as of December 31, 2010 consisted of
thirty-three loans which aggregates to $41.9 million in
exposure.
Sale of Loans
The Bank’s residential
mortgage loans are generally originated in compliance with
terms, conditions and documentation which permit the sale of
such loans to investors, such as the Federal Home Loan Mortgage
Corporation (“FHLMC”), Federal National Mortgage
Association (“Fannie Mae”), the Government National
Mortgage Association (“GNMA”), and other investors in
the secondary market. Loan sales in the secondary market provide
funds for additional lending and other banking activities. The
Bank sells the servicing on a majority of the sold loans for a
servicing released premium, simultaneous with the sale of the
loan. For the remainder of the sold loans for which the Company
retains the servicing, a mortgage servicing asset is recognized.
As part of its asset/liability management strategy, the Bank may
retain a portion of the adjustable rate and fixed rate
residential real estate loan originations for its portfolio.
During 2010, the Bank originated $418.7 million in
residential real estate loans of which $63.7 million were
retained in its portfolio, and comprised primarily of fifteen or
twenty year terms.
7
Table of Contents
Below is a discussion of the loan categories in the
Company’s portfolio. The following table shows the balance
of the loans, the percentage of the gross loan portfolio, and
the percentage of total interest income that loans generated, by
category, for the fiscal years indicated:
|
% of Total Interest Income Generated
|
||||||||||||||||||||
|
As of
|
% of Total
|
For the Year Ended December 31, | ||||||||||||||||||
| December 31, 2010 | Loans | 2010 | 2009 | 2008 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Commercial
|
$ | 2,429,517 | 68.3 | % | 61.8 | % | 57.3 | % | 55.1 | % | ||||||||||
|
Consumer Real Estate
|
1,057,389 | 29.8 | % | 22.2 | % | 22.5 | % | 23.3 | % | |||||||||||
|
Other Consumer
|
68,773 | 1.9 | % | 3.4 | % | 5.1 | % | 7.5 | % | |||||||||||
|
Total
|
$ | 3,555,679 | 100.0 | % | ||||||||||||||||
Commercial Loans
Commercial loans consist of
commercial and industrial loans, commercial real estate loans,
commercial construction loans and small business loans. The Bank
offers secured and unsecured commercial loans for business
purposes, including issuing letters of credit.
Commercial loans may be structured as term loans or as revolving
lines of credit including overdraft protection, credit cards,
automatic clearinghouse (“ACH”) exposure, owner and
non-owner occupied commercial mortgages and standby letters of
credit.
Commercial term loans generally have a repayment schedule of
five years or less and, although the Bank occasionally
originates some commercial term loans with interest rates which
float in accordance with a designated index rate, the majority
of commercial term loans have fixed rates of interest and are
collateralized by equipment, machinery or other corporate
assets. In addition, the Bank generally obtains personal
guarantees from the principals of the borrower for virtually all
of its commercial loans. At December 31, 2010, there were
$246.8 million of term loans in the commercial loan
portfolio.
The following pie chart shows the diversification of the
commercial and industrial portfolio as of December 31, 2010:
C&I
Loan Portfolio Composition as of
12/31/10
8
Table of Contents
Collateral for commercial revolving lines of credit may consist
of accounts receivable, inventory or both, as well as other
business assets. Commercial revolving lines of credit generally
are reviewed on an annual basis and usually require substantial
repayment of principal during the course of a year. The vast
majority of these revolving lines of credit have variable rates
of interest. At December 31, 2010, there were
$256.1 million of revolving lines of credit in the
commercial loan portfolio.
The Bank’s standby letters of credit generally are secured,
have terms of not more than one year, and are reviewed for
renewal on an annualized basis. At December 31, 2010, the
Bank had $21.5 million of commercial and standby letters of
credit.
The Bank also provides automobile and, to a lesser extent, boat
and other vehicle floor plan financing. Floor plan loans are
secured by the automobiles, boats, or other vehicles, which
constitute the dealer’s inventory. Upon the sale of a floor
plan unit, the proceeds of the sale are applied to reduce the
loan balance. In the event a unit financed under a floor plan
line of credit remains in the dealer’s inventory for an
extended period, the Bank requires the dealer to pay-down the
outstanding balance associated with such unit. Contractors hired
by the Bank make unannounced periodic inspections of each dealer
to review the value and condition of the underlying collateral.
At December 31, 2010, there were $35.9 million in
floor plan loans, all of which have variable rates of interest.
Small business lending caters to all of the banking needs of
businesses with commercial credit requirements and revenues
typically less than or equal to $250,000 and $2.5 million,
respectively, and uses partially automated loan underwriting
capabilities. The small business team makes use of the
Bank’s authority as a preferred lender with the
U.S. Small Business Administration (“SBA”). At
December 31, 2010, there were $5.2 million of SBA
guaranteed loans in the small business loan portfolio.
The Bank’s commercial real estate portfolio, inclusive of
commercial construction, is the Bank’s largest loan type
concentration. This portfolio is well-diversified with loans
secured by a variety of property types, such as owner-occupied
and non-owner-occupied commercial, retail, office, industrial,
warehouse, industrial development bonds, and other special
purpose properties, such as hotels, motels, nursing homes,
restaurants, churches, recreational facilities, marinas, and
golf courses. Commercial real estate also includes loans secured
by certain residential-related property types including
multi-family apartment buildings, residential development tracts
and condominiums. The following pie chart shows the
diversification of the commercial real estate portfolio as of
December 31, 2010:
Commercial
Real Estate Portfolio by Property Type
as of 12/31/10
as of 12/31/10
9
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Although terms vary, commercial real estate loans may have
maturities of five years or less, or rate resets every five
years for longer duration loans. These loan may have
amortization periods of 20 to 25 years, with interest rates
that float in accordance with a designated index or that are
fixed during the origination process. It is the Bank’s
policy to obtain personal guarantees from the principals of the
borrower on commercial real estate loans and to obtain financial
statements at least annually from all actively managed
commercial and multi-family borrowers.
Commercial real estate lending entails additional risks as
compared to residential real estate lending. Commercial real
estate loans typically involve larger loan balances to single
borrowers or groups of related borrowers. Development of
commercial real estate projects also may be subject to numerous
land use and environmental issues. The payment experience on
such loans is typically dependent on the successful operation of
the real estate project, which can be significantly impacted by
supply and demand conditions within the markets for commercial,
retail, office, industrial/warehouse and multi-family tenancy.
Additionally, classified in the commercial real estate portfolio
are industrial developmental bonds. The Bank owns certain bonds
issued by various state agencies, municipalities and non-profit
organizations that it classifies as loans and not securities on
the basis that another entity (i.e. the Bank’s customer),
not the issuing agency is responsible for the payment to the
Bank of the principal and interest on the debt, credit
underwriting is based solely on the credit of the customer (and
guarantors, if any), the banking relationship is with the
customer and not the agency, there is no secondary market for
the bonds, and the bonds are not available for sale, but are
intended to be held by the bank until maturity. Therefore, the
Bank believes that such bonds are more appropriately
characterized as loans, rather than securities.
Construction loans are intended to finance the construction of
residential and commercial properties, including loans for the
acquisition and development of land or rehabilitation of
existing properties. Non-permanent construction loans generally
have terms of at least six months, but not more than two years.
They usually do not provide for amortization of the loan balance
during the construction term. The majority of the Bank’s
commercial construction loans have floating rates of interest
based upon the Rockland base rate or the Prime or London
interbank offered rate (“LIBOR”) which are published
daily in the Wall Street Journal.
Construction loans are generally considered to present a higher
degree of risk than permanent real estate loans and may be
affected by a variety of factors, such as adverse changes in
interest rates and the borrower’s ability to control costs
and adhere to time schedules. Other construction-related risks
may include market risk, that is, the risk that
“for-sale” or “for-lease” units may or may
not be absorbed by the market within a developer’s
anticipated time-frame or at a developer’s anticipated
price. When the Company enters into a loan agreement with a
borrower on a construction loan, an interest reserve may be
included in the amount of the loan commitment to the borrower
and it allows the lender to periodically advance loan funds to
pay interest charges on the outstanding balance of the loan. The
interest is capitalized and added to the loan balance.
Management actively tracks and monitors these accounts. At
December 31, 2010 the amount of interest reserves relating
to construction loans was approximately $1.6 million.
Consumer
Real Estate Loans
The Bank’s consumer real estate loans consist of loans
secured by
one-to-four
family residential properties, construction loans and home
equity loans and lines.
Rockland originates both fixed-rate and adjustable-rate
residential real estate loans. The Bank will lend up to 97% of
the lesser of the appraised value of the residential property
securing the loan or the purchase price, and generally requires
borrowers to obtain private mortgage insurance when the amount
of the loan exceeds 80% of the value of the property. The rates
of these loans are typically competitive with market rates. The
Bank’s residential real estate loans are generally
originated only under terms, conditions and documentation which
permit sale in the secondary market. The Bank generally requires
title insurance protecting the priority of its mortgage lien, as
well as fire, extended coverage casualty and flood insurance,
when necessary, in order to protect the properties securing its
residential and other real estate loans. Independent appraisers
appraise properties securing all of the Bank’s first
mortgage real estate loans, as required by regulatory standards.
10
Table of Contents
The Bank’s residential construction lending is related to
residential development within the Bank’s market area and
the portfolio amounted to $4.2 million at December 31,
2010. The Bank typically has focused its construction lending on
relatively small projects and has developed and maintains
relationships with developers and operative homebuilders in the
Plymouth, Norfolk, Barnstable, Bristol, Middlesex, and Worcester
Counties of Massachusetts, and, to a lesser extent, in the state
of Rhode Island.
Home equity loans and lines may be made as a fixed rate term
loan or under a variable rate revolving line of credit secured
by a first or second mortgage on the borrower’s residence
or second home. At December 31, 2010, 45% of the home
equity loans were in first position and 55% of the loans were in
second position. At December 31, 2010, $183.4 million,
or 31.7%, of the home equity portfolio were term loans and
$395.9 million, or 68.3%, of the home equity portfolio was
comprised of revolving lines of credit. The Bank will originate
home equity loans and lines in an amount up to 80.0%, and at the
Banks discretion it may loan up to 89.9%, of the appraised value
or on-line valuation, reduced for any loans outstanding which
are secured by such collateral. Home equity loans and lines are
underwritten in accordance with the Bank’s loan policy,
which includes a combination of credit score,
loan-to-value
(“LTV”) ratio, employment history and
debt-to-income
ratio.
The Bank does supplement performance data with current Fair
Isaac Corporation (“FICO”) and LTV estimates. Current
FICO data is purchased and appended to all consumer loans on a
quarterly basis. In addition, automated valuation services and
broker opinions of value are used to supplement original value
data for the residential and home equity portfolios. Use of
re-score and re-value data enables the Bank to better understand
the current credit risk associated with these loans, but is not
the only factor relied upon in determining a borrower’s
credit worthiness. The following table shows the weighted
average FICO scores and the weighted average combined
loan-to-value
ratio for the periods indicated below:
| As of December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Residential Portfolio
|
||||||||
|
FICO Score (re-scored)
|
738 | 740 | ||||||
|
Combined Loan-to-Value (re-valued)
|
64.0 | % | 67.0 | % | ||||
|
Home Equity Portfolio
|
||||||||
|
FICO Score (re-scored)
|
760 | 760 | ||||||
|
Combined Loan- to-Value (re-valued)
|
55.0 | % | 61.0 | % | ||||
The average FICO scores above for 2010 are based upon re-scores
available from November 2010 and actual score data for loans
booked between December 1 and December 31, the LTV ratios
are based on updated automated valuations as of
November 30. The 2009 LTV ratios are based upon re-score
data available as of January 2010.
Other Consumer Loans
The Bank makes loans for
a wide variety of personal needs. Consumer loans primarily
consist of installment loans and overdraft protection.
The Bank’s consumer loans also include auto, unsecured
loans, loans secured by deposit accounts, loans to purchase
motorcycles, recreational vehicles, or boats. The lending policy
allows lending up to 80% of the purchase price of vehicles other
than automobiles, with terms of up to three years for
motorcycles and up to fifteen years for recreational vehicles.
The Bank’s installment loans consist primarily of auto
loans, which totaled $41.9 million, at December 31,
2010, or 1.2% of loans, a decrease from 2.3% of loans at
year-end 2009. Effective August 1, 2009 the Company chose
to exit the indirect automobile business and consequently no
longer originates auto loans on an indirect basis. Prior to
August 2009, a portion of the Bank’s automobile loans were
originated indirectly by a network of new and used automobile
dealers located within the Bank’s market area.
Investment
Activities
The Bank’s securities portfolio consists of
U.S. Treasury securities, agency mortgage-backed
securities, agency collateralized mortgage obligations, private
mortgage-backed securities, state, county, and municipal
securities, single issuer trust preferred securities issued by
banks, pooled trust preferred securities issued by banks
11
Table of Contents
and insurers, equity securities held for the purpose of funding
supplemental executive retirement plan obligations, and equity
securities comprised of an investment in a community development
affordable housing mutual fund. The majority of these securities
are investment grade debt obligations with average lives of five
years or less. U.S. Treasury securities entail a lesser
degree of risk than loans made by the Bank by virtue of the
guarantees that back them, require less capital under risk-based
capital rules than non-insured or non-guaranteed mortgage loans,
are more liquid than individual mortgage loans, and may be used
to collateralize borrowings or other obligations of the Bank.
The Bank views its securities portfolio as a source of income
and liquidity. Interest and principal payments generated from
securities provide a source of liquidity to fund loans and meet
short-term cash needs. The Bank’s securities portfolio is
managed in accordance with the Rockland Trust Company
Investment Policy adopted by the Board of Directors. The Chief
Executive Officer or the Chief Financial Officer may make
investments with the approval of one additional member of the
Asset/Liability Management Committee, subject to limits on the
type, size and quality of all investments, which are specified
in the Investment Policy. The Bank’s Asset/Liability
Management Committee, or its appointee, is required to evaluate
any proposed purchase from the standpoint of overall
diversification of the portfolio. The Company reviews its
security portfolio to ensure collection of interest. If any
securities are deferring interest payments, the Company would
place securities on nonaccrual status and reverse accrued but
uncollected interest. At December 31, 2010, securities
totaled $587.8 million. Total securities generated interest
and dividends of 12.2%, 14.6%, and 14.2% of total interest
income for the fiscal years ended 2010, 2009 and 2008,
respectively.
Sources
of Funds
Deposits
At December 31, 2010 total
deposits were $3.6 billion. Deposits obtained through
Rockland’s branch banking network have traditionally been
the principal source of the Bank’s funds for use in lending
and for other general business purposes. The Bank has built a
stable base of in-market core deposits from consumers,
businesses, and municipalities located in eastern Massachusetts,
including Cape Cod. Rockland offers a range of demand deposits,
interest checking, money market accounts, savings accounts, and
time certificates of deposit. Interest rates on deposits are
based on factors that include loan demand, deposit maturities,
alternative costs of funds, and interest rates offered by
competing financial institutions in the Bank’s market area.
The Bank believes it has been able to attract and maintain
satisfactory levels of deposits based on the level of service it
provides to its customers, the convenience of its banking
locations, and its interest rates, that are generally
competitive with those of competing financial institutions.
Rockland Trust also participates in the Certificate of Deposit
Registry Service (“CDARS”) program, allowing the Bank
to provide easy access to multi-million dollar Federal Deposit
Insurance Corporation (“FDIC”) insurance protection on
Certificate of Deposit investments for consumers, businesses and
public entities. As of December 31, 2010, CDARS deposits
totaled $13.6 million. Rockland has a municipal banking
department that focuses on providing core depository services to
local municipalities. As of December 31, 2010, municipal
deposits totaled $481.8 million.
The Federal Government’s Emergency Economic Stabilization
Act of 2008 (the “EESA”) introduced the Temporary
Liquidity Guarantee Program (“TLGP”) effective
November 2008. One of the TLGP’s main components resulted
in an increase, of deposit insurance coverage from $100,000 to
$250,000, per depositor. The
Dodd-Frank
Act made the increase in the deposit insurance to $250,000
permanent. At December 31, 2010 there were
$1.3 billion in deposits with balances over $250,000.
Additionally, during 2010, amendments to the Federal Deposit
Insurance Act were enacted, providing unlimited insurance
coverage for noninterest-bearing transaction accounts beginning
December 31, 2010, through December 31, 2012. These
deposits amounted to $141.6 million at December 31,
2010. This coverage applies to all insured depository
institutions and there are no separate assessments applicable on
these covered accounts.
Rockland Trust’s seventy branch locations are supplemented
by the Bank’s internet banking services as well as
automated teller machine (“ATM”) cards and debit cards
which may be used to conduct various banking transactions at
ATMs maintained at each of the Bank’s full-service offices
and five additional remote ATM locations. The ATM cards and
debit cards also allow customers access to a variety of national
and international ATM networks. The Bank recently added mobile
banking services giving customers the ability to use a variety
of mobile devices to check balances, track account activity,
search transactions, and set up alerts for text or
e-mail
messages for changes in their account. They can also transfer
funds between Rockland Trust accounts and identify
12
Table of Contents
the nearest branch or ATM directly from their phone. A new
feature to the mobile banking suite is a capability called
mDeposit, which allows the Bank’s customers to deposit a
check into their account directly from their mobile device.
The chart below shows the categories of deposits at
December 31, 2010:
Borrowings
As of December 31, 2010, total
borrowings were $565.4 million. Borrowings consist of
short-term and long-term obligations. Short-term borrowings may
consist of Federal Home Loan Bank of Boston (“FHLBB”)
advances, federal funds purchased, treasury tax and loan notes
and assets sold under repurchase agreements. The chart below
shows the categories of borrowings at December 31, 2010:
In 1994, Rockland became a member of the FHLBB. The primary
reason for FHLBB membership is to gain access to a reliable
source of wholesale funding, particularly term funding as a tool
to manage interest rate risk. At December 31, 2010, the
Bank had $302.4 million outstanding in FHLB borrowings with
initial maturities ranging from 3 months to 20 years.
In addition, the Bank had $370.4 million of borrowing
capacity remaining with the FHLB at December 31, 2010.
As a member of the FHLBB, the Bank is required to purchase stock
in the FHLBB. That stock amounted to $35.9 million at
December 31, 2010. During 2010 the FHLBB continued the
moratorium on excess stock repurchases that was put into effect
during 2008, as the FHLBB’s board of directors have
continued to focus on building retained earnings while
delivering core solutions of liquidity and longer-term funding
to their members. As a result of these efforts the FHLBB was
able to restore a modest dividend as announced on
February 22, 2011.
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Table of Contents
In addition to borrowing from the FHLBB, the Company also has
access to other forms of borrowing, such as securities
repurchase agreements. In a security repurchase agreement
transaction, the Bank will generally sell a security, agreeing
to repurchase either the same or a substantially identical
security on a specified later date, at a price greater than the
original sales price. The difference in the sale price and
purchase price is the cost of the proceeds recorded as interest
expense. The securities underlying the agreements are delivered
to counterparties as security for the repurchase obligation.
Since the securities are treated as collateral and the agreement
stipulates that the borrower has an obligation to pay back the
cash in short order, the transaction does not meet the criteria
to be classified as a sale and is therefore considered a secured
borrowing transaction for accounting purposes. Payments on such
borrowings are interest only until the scheduled repurchase
date. Repurchase agreements represent a non-deposit funding
source for the Bank and the Bank is subject to the risk that the
purchaser may default at maturity and not return the securities
underlying the agreements. In order to minimize this potential
risk, the Bank either deals with established firms when entering
into these transactions or with customers whose agreements
stipulate that the securities underlying the agreement are not
delivered to the customer, instead they are held in segregated
safekeeping accounts by the Company’s safekeeping agents.
At December 31, 2010, the Bank had $50.0 million and
$118.1 million of repurchase agreements with investment
brokerage firms and customers, respectively.
Also included in borrowings at December 31, 2010 were
$61.8 million of junior subordinated debentures, and
$30.0 million of subordinated debt. These instruments
provide long-term fixed rate funding as well as regulatory
capital benefits. The Bank has a line of credit with the FHLB
and FRB giving the Bank access to additional funds if necessary.
See Note 8, “Borrowings” within Notes to the
Consolidated Financial Statements included in Item 8 hereof
for more information regarding borrowings.
Wealth
Management
Investment Management
The Rockland
Trust Investment Management Group provides investment
management and trust services to individuals, institutions,
small businesses, and charitable institutions throughout eastern
Massachusetts, including Cape Cod, and Rhode Island.
Accounts maintained by the Rockland Trust Investment
Management Group consist of “managed” and
“non-managed” accounts. “Managed” accounts
are those for which the Bank is responsible for administration
and investment management
and/or
investment advice. “Non-managed” accounts are those
for which the Bank acts solely as a custodian or directed
trustee. The Bank receives fees dependent upon the level and
type of service(s) provided. For the year ended
December 31, 2010, the Investment Management Group
generated gross fee revenues of $10.3 million. Total assets
under administration as of December 31, 2010, were
$1.6 billion, an increase of $295.8 million, or 23.2%,
from December 31, 2009. This increase is largely due to
strong sales results and general market appreciation.
The administration of trust and fiduciary accounts is monitored
by the Trust Committee of the Bank’s Board of
Directors. The Trust Committee has delegated administrative
responsibilities to three committees, one for investments, one
for administration, and one for operations, all of which are
comprised of Investment Management Group officers who meet not
less than monthly.
Additionally, during 2010, the Company established Bright Rock
Capital Management, LLC, (“Bright Rock”) a
wholly-owned subsidiary of Rockland Trust, to provide
institutional quality investment management services to the
institutional/intermediary marketplace. Bright Rock is a
registered investment advisor with the SEC and employs a
fundamentally based investment philosophy and a highly
disciplined investment management process. At December 31,
2010 Bright Rock had $103.6 million of assets under
administration.
Retail Wealth Management
The Bank has an
agreement with LPL Financial (“LPL”) and its
affiliates and their insurance subsidiary LPL Insurance
Associates, Inc. to offer the sale of mutual fund shares, unit
investment trust shares, general securities, fixed and variable
annuities and life insurance. Registered representatives who are
both employed by the Bank and licensed and contracted with LPL
are onsite to offer these products to the Bank’s customer
base. The Bank also has an agreement with Savings Bank Life
Insurance of Massachusetts (“SBLI”) to enable
appropriately licensed Bank employees to offer SBLI’s fixed
annuities and life insurance to the Bank’s customer base.
For the year ended December 31, 2010, the retail
investments and insurance group generated gross fee revenues of
$1.4 million.
14
Table of Contents
Regulation
The following discussion sets forth certain of the material
elements of the regulatory framework applicable to bank holding
companies and their subsidiaries and provides certain specific
information relevant to the Company. To the extent that the
following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. A change in
applicable statutes, regulations or regulatory policy, may have
a material effect on the Company’s business. The laws and
regulations governing the Company and the Bank generally have
been promulgated to protect depositors and not for the purpose
of protecting stockholders.
General
The Company is registered as a bank
holding company under the Bank Holding Company Act of 1956
(“BHCA”), as amended, and as such is subject to
regulation by the Board of Governors of the Federal Reserve
System (“Federal Reserve”). Rockland is subject to
regulation and examination by the Commissioner of Banks of The
Commonwealth of Massachusetts (the “Commissioner”) and
the FDIC.
The Bank Holding Company Act
BHCA prohibits
the Company from acquiring direct or indirect ownership or
control of more than 5% of any class of voting shares of any
bank, or increasing such ownership or control of any bank,
without prior approval of the Federal Reserve. The BHCA also
prohibits the Company from, with certain exceptions, acquiring
more than 5% of any class of voting shares of any company that
is not a bank and from engaging in any business other than
banking or managing or controlling banks.
Under the BHCA, the Federal Reserve is authorized to approve the
ownership by the Company of shares in any company, the
activities of which the Federal Reserve has determined to be so
closely related to banking or to managing or controlling banks
as to be a proper incident thereto. The Federal Reserve has, by
regulation, determined that some activities are closely related
to banking within the meaning of the BHCA. These activities
include, but are not limited to, operating a mortgage company,
finance company, credit card company, factoring company, trust
company or savings association; performing data processing
operations; providing some securities brokerage services; acting
as an investment or financial adviser; acting as an insurance
agent for types of credit-related insurance; engaging in
insurance underwriting under limited circumstances; leasing
personal property on a full-payout, non-operating basis;
providing tax planning and preparation services; operating a
collection agency and a credit bureau; providing consumer
financial counseling and courier services. The Federal Reserve
also has determined that other activities, including real estate
brokerage and syndication, land development, property management
and, except under limited circumstances, underwriting of life
insurance not related to credit transactions, are not closely
related to banking and are not a proper incident thereto.
Financial Services Modernization
Legislation
In November 1999, the
Gramm-Leach-Bliley Act (“GLB”) was enacted. The GLB
repeals provisions of the Glass-Steagall Act which restricted
the affiliation of Federal Reserve member banks with firms
“engaged principally” in specified securities
activities, and which restricted officer, director, or employee
interlocks between a member bank and any company or person
“primarily engaged” in specified securities activities.
In addition, the GLB also contains provisions that expressly
preempt any state law restricting the establishment of financial
affiliations, primarily related to insurance. The general effect
of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies,
securities firms and other financial service providers, by
revising and expanding the BHCA framework to permit a holding
company to engage in a full range of financial activities
through a new entity known as a “financial holding
company.” “Financial activities” is broadly
defined to include not only banking, insurance and securities
activities, but also merchant banking and additional activities
that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines to be financial in nature,
incidental to such financial activities or complementary
activities that do not pose a substantial risk to the safety and
soundness of depository institutions or the financial system
generally.
The GLB also permits national banks to engage in expanded
activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity
authorized for national banks directly or any financial
activity, except for insurance underwriting, insurance
investments, real estate investment or development, or merchant
banking, which may only be conducted through a subsidiary of a
financial holding company. Financial activities include all
activities permitted under new sections of the BHCA or permitted
by regulation.
15
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To the extent that the GLB permits banks, securities firms and
insurance companies to affiliate, the financial services
industry may experience further consolidation. The GLB is
intended to grant to community banks certain powers as a matter
of right that larger institutions have accumulated on an ad hoc
basis and which unitary savings and loan holding companies
already possess. Nevertheless, the GLB may have the result of
increasing the amount of competition that the Company faces from
larger institutions and other types of companies offering
financial products, many of which may have substantially more
financial resources than the Company.
Interstate Banking
Pursuant to the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the
“Interstate Banking Act”), bank holding companies may
acquire banks in states other than their home state without
regard to the permissibility of such acquisitions under state
law, but subject to any state requirement that the bank has been
organized and operating for a minimum period of time, not to
exceed five years, and the requirement that the bank holding
company, after the proposed acquisition, controls no more than
10 percent of the total amount of deposits of insured
depository institutions in the United States and no more than
30 percent or such lesser or greater amount set by state
law of such deposits in that state.
Pursuant to Massachusetts law, no approval to acquire a banking
institution, acquire additional shares in a banking institution,
acquire substantially all the assets of a banking institution,
or merge or consolidate with another bank holding company, may
be given if the bank being acquired has been in existence for a
period less than three years or, as a result, the bank holding
company would control, in excess of 30%, of the total deposits
of all state and federally chartered banks in Massachusetts,
unless waived by the Commissioner. With the prior written
approval of the Commissioner, Massachusetts also permits the
establishment of de novo branches in Massachusetts to the full
extent permitted by the Interstate Banking Act, provided the
laws of the home state of such
out-of-state
bank expressly authorize, under conditions no more restrictive
than those of Massachusetts, Massachusetts’ banks to
establish and operate de novo branches in such state.
Capital Requirements
The Federal Reserve has
adopted capital adequacy guidelines pursuant to which it
assesses the adequacy of capital in examining and supervising a
bank holding company and in analyzing applications to it under
the BHCA. The Federal Reserve’s capital adequacy guidelines
which generally require bank holding companies to maintain total
capital equal to 8% of total risk-weighted assets, with at least
one-half of that amount consisting of Tier 1, or core
capital, and up to one-half of that amount consisting of
Tier 2, or supplementary capital. Tier 1 capital for
bank holding companies generally consists of the sum of common
stockholders’ equity and perpetual preferred stock (subject
in the latter case to limitations on the kind and amount of such
stocks which may be included as Tier 1 capital), less net
unrealized gains and losses on available for sale securities and
on cash flow hedges, post retirement adjustments recorded in
accumulated other comprehensive income (“AOCI”), and
goodwill and other intangible assets required to be deducted
from capital. Tier 2 capital generally consists of
perpetual preferred stock which is not eligible to be included
as Tier 1 capital; hybrid capital instruments such as
perpetual debt and mandatory convertible debt securities, and
term subordinated debt and intermediate-term preferred stock;
and, subject to limitations, the allowance for loan losses.
Assets are adjusted under the risk-based guidelines to take into
account different risk characteristics, with the categories
ranging from 0% (requiring no additional capital), for assets
such as cash, up to 1250%, which is a
dollar-for-dollar
capital charge on certain assets such as securities that are not
eligible for the ratings based approach. The majority of assets
held by a bank holding company are risk-weighted at 100%,
including certain commercial real estate loans, commercial loans
and consumer loans. Single family residential first mortgage
loans which are not 90 days or more past due or
nonperforming and which have been made in accordance with
prudent underwriting standards are assigned a 50% level in the
risk-weighting system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of
such loans and certain multi-family housing loans. Off-balance
sheet items also are adjusted to take into account certain risk
characteristics.
In addition to the risk-based capital requirements, the Federal
Reserve requires bank holding companies to maintain a minimum
leverage capital ratio of Tier 1 capital to total assets of
3.0%. Total assets for this purpose do not include goodwill and
any other intangible assets or investments that the Federal
Reserve determines should be deducted from Tier 1 capital.
The Federal Reserve has announced that the 3.0% Tier 1
leverage capital ratio requirement is the minimum for the
top-rated bank holding companies without any supervisory,
financial or operational weaknesses or deficiencies or those
which are not experiencing or anticipating significant growth.
Other
16
Table of Contents
bank holding companies (including the Company) are expected to
maintain Tier 1 leverage capital ratios of at least 4.0% to
5.0% or more, depending on their overall condition.
The Company currently is in compliance with the above-described
regulatory capital requirements. At December 31, 2010, the
Company had Tier 1 capital and total capital equal to
10.28% and 12.37% of total risk-weighted adjusted assets,
respectively, and Tier 1 leverage capital equal to 8.19% of
total average assets. As of such date, the Bank complied with
the applicable bank federal regulatory risked based capital
requirements, with Tier 1 capital and total capital equal
to 9.84% and 11.92% of total risk-weighted assets, respectively,
and Tier 1 leverage capital equal to 7.83% of total average
assets.
The FDIC has promulgated regulations and adopted a statement of
policy regarding the capital adequacy of state-chartered banks,
which, like the Bank, are not members of the Federal Reserve
System. These requirements are substantially similar to those
adopted by the Federal Reserve regarding bank holding companies,
as described above. The FDIC’s capital regulations
establish a minimum 3.0% Tier 1 leverage capital to total
assets requirement for the most highly-rated state-chartered,
non-member banks, with an additional cushion of at least 100 to
200 basis points for all other state-chartered, non-member
banks, which effectively will increase the minimum Tier 1
leverage capital ratio for such banks to 4.0% or 5.0% or more.
Beginning in 2011, the Federal Reserve will limit the inclusion
of restricted core capital elements, which include trust
preferred securities, in tier 1 capital of bank holding
companies. The inclusion of these elements will be limited to an
amount equal to one-third of the sum of unrestricted core
capital less goodwill net of deferred tax liabilities. Based on
these limits, the Company does not anticipate excluding its
trust preferred securities when calculating tier 1 capital.
Each federal banking agency has broad powers to implement a
system of prompt corrective action to resolve problems of
financial institutions that it regulates which are not
adequately capitalized. The minimum levels are defined as
follows:
| Bank | Holding Company | |||||||||||||||||||||||
|
Tier 1
|
Tier 1
|
|||||||||||||||||||||||
|
Total
|
Tier 1
|
Leverage
|
Total
|
Tier 1
|
Leverage
|
|||||||||||||||||||
|
Risk-Based
|
Risk-Based
|
Capital
|
Risk-Based
|
Risk-Based
|
Capital
|
|||||||||||||||||||
|
Category
|
Ratio | Ratio | Ratio | Ratio | Ratio | Ratio | ||||||||||||||||||
|
Well Capitalized
|
³ 10% and | ³ 6% and | ³ 5% | n/a | n/a | n/a | ||||||||||||||||||
|
Adequately Capitalized
|
³ 8% and | ³ 4% and | ³ 4% | * | ³ 8 | % and | ³ 4 | % and | ³ 4 | % | ||||||||||||||
|
Undercapitalized
|
< 8% or | < 4% or | < 4% | * | < 8 | % or | < 4 | % or | < 4 | % | ||||||||||||||
|
Significantly Undercapitalized
|
< 6% or | < 3% or | < 3% | n/a | n/a | n/a | ||||||||||||||||||
| * | 3% for institutions with a rating of one under the regulatory CAMELS or related rating system that are not anticipating or experiencing significant growth and have well-diversified risk. |
A bank is considered critically undercapitalized if it has a
ratio of tangible equity to total assets that is equal to or
less than 2.0%. At December 31, 2010 the Company’s
tangible equity ratio was 6.47%. The Company’s tangible
equity ratio proforma to include the tax deductibility of
goodwill was 6.89%. As of December 31, 2010, the Bank was
deemed a “well-capitalized institution” as defined by
federal banking agencies.
Commitments to Affiliated Institutions
Under
Federal Reserve policy, the Company is expected to act as a
source of financial strength to the Bank and to commit resources
to support the Bank. This support may be required at times when
the Company may not be able to provide such support. Similarly,
under the cross-guarantee provisions of the Federal Deposit
Insurance Act, in the event of a loss suffered or anticipated by
the FDIC — either as a result of default of a banking
or thrift subsidiary of a bank/financial holding company such as
the Company or related to FDIC assistance provided to a
subsidiary in danger of default — the other banking
subsidiaries of such bank/financial holding company may be
assessed for the FDIC’s loss, subject to certain exceptions.
Limitations on Acquisitions of Common
Stock
The federal Change in Bank Control Act
(“CBCA”) prohibits a person or group of persons from
acquiring control of a bank holding company or bank unless the
appropriate federal bank regulator has been given 60 days
prior written notice of such proposed acquisition and within
that time period such regulator has not issued a notice
disapproving the proposed acquisition or extending for up to
another
17
Table of Contents
30 days the period during which such a disapproval may be
issued. The acquisition of 25% or more of any class of voting
securities constitutes the acquisition of control under the
CBCA. In addition, under a rebuttal presumption established
under the CBCA regulations, the acquisition of 10% or more of a
class of voting stock of a bank holding company or a FDIC
insured bank, with a class of securities registered under or
subject to the requirements of Section 12 of the Securities
Exchange Act of 1934 would, under the circumstances set forth in
the presumption, constitute the acquisition of control.
Any company would be required to obtain the approval of the
Federal Reserve under the BHCA before acquiring 25% (5% in the
case of an acquirer that is a bank holding company) or more of
the outstanding common stock of, or such lesser number of shares
as constitute control over the company. Such approval would be
contingent upon, among other things, the acquirer registering as
a bank holding company, divesting all impermissible holdings and
ceasing any activities not permissible for a bank holding
company. The Company does not own more than 5% voting stock in
any banking institution other than Rockland.
FDIC Deposit Insurance
The majority of
Rockland’s deposit accounts are insured to the maximum
extent permitted by law by the Deposit Insurance Fund
(“DIF”) which is administered by the FDIC. The FDIC
offers insurance coverage on deposits up to the federally
insured limit of $250,000. Additionally, during 2010, amendments
to the Federal Deposit Insurance Act were enacted, providing
unlimited insurance coverage for noninterest-bearing transaction
accounts beginning December 31, 2010, for a two year
period. This coverage applies to all insured depository
institutions and there is no separate assessments applicable on
these covered accounts.
The Bank currently pays deposit insurance premiums to the FDIC
based upon a combination of financial ratios and supervisory
factors. There are four established risk categories under the
new assessment rules and accordingly the Bank has initial base
assessment rates ranging from 12 to 16 basis points of the
deposit assessment base, as defined by the FDIC. Effective April
2011, the assessment base will be defined as average
consolidated total assets minus average tangible equity.
Additionally, as a result of these changes, the FDIC has
proposed a change to the initial base assessment rates which
will potentially range from 5 to 9 basis points of the
newly defined assessment base.
During 2009, the FDIC voted to amend its assessment regulations
to require all institutions to prepay the estimated risk-based
assessments for the fourth quarter of 2009 (which would have
been due in March 2010) and for all of 2010, 2011, and 2012. As
a result, the Bank was required to pay $20.4 million on
December 30, 2009, of which approximately
$13.1 million and $17.9 million reflected prepaid
balances as of December 31, 2010 and 2009, respectively.
Community Reinvestment Act
(“CRA”)
Pursuant to the CRA and similar
provisions of Massachusetts law, regulatory authorities review
the performance of the Company and the Bank in meeting the
credit needs of the communities served by the Bank. The
applicable regulatory authorities consider compliance with this
law in connection with applications for, among other things,
approval of new branches, branch relocations, engaging in
certain new financial activities under the Gramm-Leach-Bliley
Act of 1999 (“GLB”), and acquisitions of banks and
bank holding companies. The FDIC and the Massachusetts Division
of Banks has assigned the Bank a CRA rating of outstanding as of
the latest examination.
Bank Secrecy Act
The Bank Secrecy Act requires
financial institutions to keep records and file reports that are
determined to have a high degree of usefulness in criminal, tax
and regulatory matters, and to implement counter-money
laundering programs and compliance procedures.
USA Patriot Act of 2001
The Patriot Act
strengthens U.S. law enforcement’s and the
intelligence communities’ abilities to work cohesively to
combat terrorism on a variety of fronts. The impact of the
Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping
anti-money laundering and financial transparency laws and
imposes various regulations, including standards for verifying
client identification at account opening, and rules to promote
cooperation among financial institutions, regulators and law
enforcement entities in identifying parties that may be involved
in terrorism or money laundering.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley
Act (“SOX”) of 2002 includes very specific disclosure
requirements and corporate governance rules, and the Securities
and Exchange Commission (“SEC”) and securities
exchanges have adopted extensive disclosure, corporate
governance and other related rules, due to SOX. The
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Company has incurred additional expenses in complying with the
provisions of SOX and the resulting regulations. As the SEC
provides any new requirements under SOX, management will review
those rules, comply as required and may incur more expenses.
However, management does not expect that such compliance will
have a material impact on the results of operation or financial
condition.
Regulation W
Transactions between a bank
and its “affiliates” are quantitatively and
qualitatively restricted under the Federal Reserve Act. The
Federal Deposit Insurance Act applies Sections 23A and 23B
to insured nonmember banks in the same manner and to the same
extent as if they were members of the Federal Reserve System.
The Federal Reserve Board has also issued Regulation W,
which codifies prior regulations under Sections 23A and 23B
of the Federal Reserve Act and interpretative guidance with
respect to affiliate transactions. Regulation W
incorporates the exemption from the affiliate transaction rules,
but expands the exemption to cover the purchase of any type of
loan or extension of credit from an affiliate. Affiliates of a
bank include, among other entities, the bank’s holding
company and companies that are under common control with the
bank. The Company is considered to be an affiliate of the Bank.
In general, subject to certain specified exemptions, a bank and
its subsidiaries are limited in their ability to engage in
“covered transactions” with affiliates:
| • | to an amount equal to 10% of the bank’s capital and surplus, in the case of covered transactions with any one affiliate; and | |
| • | to an amount equal to 20% of the bank’s capital and surplus, in the case of covered transactions with all affiliates. |
In addition, a bank and its subsidiaries may engage in covered
transactions and other specified transactions only on terms and
under circumstances that are substantially the same, or at least
as favorable to the bank or its subsidiary, as those prevailing
at the time for comparable transactions with nonaffiliated
companies. A “covered transaction” includes:
| • | a loan or extension of credit to an affiliate; | |
| • | a purchase of, or an investment in, securities issued by an affiliate; | |
| • | a purchase of assets from an affiliate, with some exceptions; | |
| • | the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; and | |
| • | the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. |
In addition, under Regulation W:
| • | a bank and its subsidiaries may not purchase a low-quality asset from an affiliate; | |
| • | covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and | |
| • | with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by collateral with a market value ranging from 100% to 130%, depending on the type of collateral, or the amount of the loan or extension of credit. |
Regulation W generally excludes all non-bank and
non-savings association subsidiaries of banks from treatment as
affiliates, except to the extent that the Federal Reserve Board
decides to treat these subsidiaries as affiliates.
Emergency Economic Stabilization Act of
2008
In response to the financial crisis
affecting the banking and financial markets, in October 2008,
the “EESA” was signed into law. Pursuant to the EESA,
the U.S. Treasury (the “Treasury”) has the
authority to, among other things, purchase up to
$700 billion of mortgages, mortgage-backed securities and
certain other financial instruments from financial institutions
for the purpose of stabilizing and providing liquidity to the
U.S. financial markets.
The Treasury was authorized to purchase equity stakes in
U.S. financial institutions. Under this program, known as
the Capital Purchase Program (“CPP”), from the
$700 billion authorized by the EESA, the Treasury made
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$250 billion of capital available to U.S. financial
institutions through the purchase of preferred stock or
subordinated debentures by the Treasury. In conjunction with the
purchase of preferred stock from publicly-held financial
institutions, the Treasury also received warrants to purchase
common stock with an aggregate market price equal to 15% of the
total amount of the preferred investment. Participating
financial institutions are required to adopt the Treasury’s
standards for executive compensation and corporate governance
for the period during which the Treasury holds equity issued
under the CPP and are restricted from increasing dividends to
common shareholders or repurchasing common stock for three years
without the consent of the Treasury.
The Company had initially elected to participate in the CPP in
January of 2009 and subsequently returned the funds in April of
2009. For further details, see
Note 11 “Capital
Purchase Program”
within Notes to the Consolidated
Financial Statements included in Item 8 hereof.
New Markets Tax Credit Program
The New Markets
Tax Credit Program was created in December 2000 under federal
law to provide federal tax incentives to induce private-sector,
market-driven investment in businesses and real estate
development projects located in low-income urban and rural
communities across the nation. The New Markets Tax Credit
Program is part of the United States Department of the Treasury
Community Development Financial Institutions Fund. The New
Markets Tax Credit Program enables investors to acquire federal
tax credits by making equity investments for a period of at
least seven years in qualified community development entities
which have been awarded tax credit allocation authority by, and
entered into an Allocation Agreement with, the United States
Treasury. Community development entities must use equity
investments to make loans to, or other investments in, qualified
businesses and individuals in low-income communities in
accordance with New Markets Tax Credit Program criteria.
Investors receive an overall tax credit equal to 39% of their
total equity investment, credited at a rate of 5% in each of the
first 3 years and 6% in each of the final 4 years.
More information on the New Markets Tax Credit Program may be
obtained at
www.cdfifund.gov.
The United States Treasury has honored the Bank’s qualified
community development entity subsidiaries on multiple occasions
with awards of tax credit allocation authority pursuant to the
New Markets Tax Credit Program. For further details about the
Bank’s New Markets Tax Credit Program, see the paragraph
entitled “Income Taxes” included in Item 7 below.
Dodd-Frank Wall Street Reform and Consumer Protection
Act
During 2010, Congress enacted the
Dodd-Frank
Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”). This new law will significantly
change the current bank regulatory structure and affect the
lending, deposit, investment, trading and operating activities
of financial institutions and their holding companies. The
Dodd-Frank Act requires various federal agencies to adopt a
broad range of new implementing rules and regulations, and to
prepare numerous studies and reports for Congress. The federal
agencies are given significant discretion in drafting the
implementing rules and regulations, and consequently, many of
the details and much of the impact of the Dodd-Frank Act may not
be known for many months or years.
Effective July 1, 2011, the Dodd-Frank Act eliminates the
federal prohibitions on paying interest on demand deposits, thus
allowing businesses to have interest bearing checking accounts.
Depending on competitive responses, this significant change to
existing law could have an adverse impact on the Company’s
interest expense.
The Dodd-Frank Act also broadens the base for Federal Deposit
Insurance Corporation insurance assessments. Assessments will
now be based on the average consolidated total assets less
tangible equity capital of a financial institution. The
Dodd-Frank Act also permanently increases the maximum amount of
deposit insurance for banks, savings institutions and credit
unions to $250,000 per depositor, retroactive to January 1,
2009, and non-interest bearing transaction accounts have
unlimited deposit insurance through December 31, 2012.
The Dodd-Frank Act requires publicly traded companies to give
stockholders a non-binding vote on executive compensation and
so-called “golden parachute” payments, and authorizes
the Securities and Exchange Commission to promulgate rules that
would allow stockholders to nominate their own candidates using
a company’s proxy materials. The legislation also directs
the Federal Reserve Board to promulgate rules prohibiting
excessive compensation paid to bank holding company executives,
regardless of whether the company is publicly traded or not.
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The Dodd-Frank Act creates a new Consumer Financial Protection
Bureau with broad powers to supervise and enforce consumer
protection laws. The Consumer Financial Protection Bureau has
broad rule-making authority for a wide range of consumer
protection laws that apply to all banks and savings
institutions, including the authority to prohibit “unfair,
deceptive or abusive” acts and practices. Banks and savings
institutions with $10 billion or less in assets will
continue to be examined for compliance with consumer laws by
their primary bank regulators.
The Company is actively reviewing the provisions of the
Dodd-Frank Act and assessing its probable impact on its
business, financial condition, and results of operations.
However, the ultimate effect of the Dodd-Frank Act on the
financial services industry in general, and on the Company in
particular, is uncertain at this time.
Regulation E
Federal Reserve Board
Regulation E governs electronic fund transfers and provides
a basic framework that establishes the rights, liabilities, and
responsibilities of participants in electronic fund transfer
systems such as automated teller machine transfers, telephone
bill-payment services,
point-of-sale
terminal transfers in stores, and preauthorized transfers from
or to a consumer’s account (such as direct deposit and
social security payments). The term “electronic fund
transfer” generally refers to a transaction initiated
through an electronic terminal, telephone, computer, or magnetic
tape that instructs a financial institution either to credit or
to debit a consumer’s asset account. Regulation E
describes the disclosures which financial institutions are
required to make to consumers who engage in electronic fund
transfers and generally limits a consumer’s liability for
unauthorized electronic fund transfers, such as those arising
from loss or theft of an access device, to $50 for consumers who
notify their bank in a timely manner.
Employees
As of December 31, 2010, the
Bank had 919 full time equivalent employees. None of the
Company’s employees are represented by a labor union and
management considers relations with its employees to be good.
Miscellaneous
The Bank is subject to certain
restrictions on loans to the Company, investments in the stock
or securities thereof, the taking of such stock or securities as
collateral for loans to any borrower, and the issuance of a
guarantee or letter of credit on behalf of the Company. The Bank
also is subject to certain restrictions on most types of
transactions with the Company, requiring that the terms of such
transactions be substantially equivalent to terms of similar
transactions with non-affiliated firms. In addition, under state
law, there are certain conditions for and restrictions on the
distribution of dividends to the Company by the Bank.
The regulatory information referenced briefly summarizes certain
material statutes and regulations affecting the Company and the
Bank and is qualified in its entirety by reference to the
particular statutory and regulatory provisions.
Statistical
Disclosure by Bank Holding Companies
For information regarding borrowings, see
Note 8,
“Borrowings”
within Notes to the Consolidated
Financial Statements included in Item 8 hereof, which
includes information regarding short-term borrowings.
For information regarding the Company’s business and
operations, see
Selected Financial Data
in Item 6
hereof,
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
in Item 7
hereof and the
Consolidated Financial Statements
in
Item 8 hereof and incorporated by reference herein.
Securities
and Exchange Commission Availability of Filings on Company Web
Site
Under Section 13 and 15(d) of the Securities Exchange Act
of 1934 the Company must file periodic and current reports with
the SEC. The public may read and copy any materials filed with
the SEC at the SEC’s Public Reference Room at
100 F Street N.E. Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room
by calling the Public Reference Room at
1-800-SEC-0330.
The Company electronically files the following reports with the
SEC:
Form 10-K
(Annual Report),
Form 10-Q
(Quarterly Report),
Form 11-K
(Annual Report for Employees’ Savings, Profit Sharing and
Stock Ownership Plan),
Form 8-K
(Report of Unscheduled Material Events),
Forms S-4,
S-3
and
8-A
(Registration Statements), and Form DEF 14A (Proxy
Statement). The Company may file additional forms. The SEC
maintains an internet site that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC, at
www.sec.gov
, in
which all forms filed electronically may be accessed.
Additionally, the Company’s annual
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report on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after the Company electronically files
such material with, or furnishes to, the SEC and additional
shareholder information are available free of charge on the
Company’s website:
www.RocklandTrust.com
(within the
investor relations tab). Information contained on the
Company’s website and the SEC website is not incorporated
by reference into this
Form 10-K.
The Company has included the web address and the SEC website
address only as inactive textual references and does not intend
them to be active links to our website or the SEC website. The
Company’s Code of Ethics and other Corporate Governance
documents are also available on the Company’s website in
the Investor Relations section of the website.
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| Item 1A. | Risk Factors |
Changes in interest rates could adversely impact the
Company’s financial condition and results of
operations.
The Company’s ability to make a
profit, like that of most financial institutions, substantially
depends upon its net interest income, which is the difference
between the interest income earned on interest earning assets,
such as loans and investment securities, and the interest
expense paid on interest-bearing liabilities, such as deposits
and borrowings. However, certain assets and liabilities may
react differently to changes in market interest rates. Further,
interest rates on some types of assets and liabilities may
fluctuate prior to changes in broader market interest rates,
while rates on other types of assets may lag behind.
Additionally, some assets such as adjustable-rate mortgages have
features, such as rate caps and floors, which restrict changes
in their interest rates.
Factors such as inflation, recession, unemployment, money
supply, global disorder, instability in domestic and foreign
financial markets, and other factors beyond the Company’s
control, may affect interest rates. Changes in market interest
rates will also affect the level of voluntary prepayments on
loans and the receipt of payments on mortgage-backed securities,
resulting in the receipt of proceeds that may have to be
reinvested at a lower rate than the loan or mortgage-backed
security being prepaid.
The state of the financial and credit markets may severely
impact the global and domestic economies and may lead to a
significantly tighter environment in terms of liquidity and
availability of credit. Economic growth may slow down and the
national economy may experience additional recession periods.
Market disruption, government, and central bank policy actions
intended to counteract the effects of recession, changes in
investor expectations regarding compensation for market risk,
credit risk and liquidity risk and changing economic data could
continue to have dramatic effects on both the volatility of and
the magnitude of the directional movements of interest rates.
Although the Company pursues an asset/liability management
strategy designed to control its risk from changes in interest
rates, changes in market interest rates can have a material
adverse effect on the Company’s profitability.
If the Company has higher than anticipated loan losses than
it has modeled, its earnings could materially
decrease.
The Company’s loan customers may
not repay loans according to their terms, and the collateral
securing the payment of loans may be insufficient to assure
repayment. The Company may therefore experience significant
credit losses which could have a material adverse effect on its
operating results and capital ratios. The Company makes various
assumptions and judgments about the collectability of its loan
portfolio, including the creditworthiness of borrowers and the
value of the real estate and other assets serving as collateral
for the repayment of loans. In determining the amount of the
allowance for loan losses, the Company relies on its experience
and its evaluation of economic conditions. If its assumptions
prove to be incorrect, its current allowance for loan losses may
not be sufficient to cover losses inherent in its loan portfolio
and an adjustment may be necessary to allow for different
economic conditions or adverse developments in its loan
portfolio. Consequently, a problem with one or more loans could
require the Company to significantly increase the level of its
provision for loan losses. In addition, federal and state
regulators periodically review the Company’s allowance for
loan losses and may require it to increase its provision for
loan losses or recognize further loan charge-offs. Material
additions to the allowance would materially decrease the
Company’s net income.
A significant amount of the Company’s loans are
concentrated in Massachusetts, and adverse conditions in this
area could negatively impact its
operations.
Substantially all of the loans the
Company originates are secured by properties located in, or are
made to businesses which operate in Massachusetts. Because of
the current concentration of the Company’s loan origination
activities in Massachusetts, in the event of continued adverse
economic conditions, including, but not limited to, increased
unemployment, continued downward pressure on the value of
residential and commercial real estate, political or business
developments, that may affect Massachusetts and the ability of
property owners and businesses in Massachusetts to make payments
of principal and interest on the underlying loans, the Company
would likely experience higher rates of loss and delinquency on
its loans than if its loans were more geographically
diversified, which could have an adverse effect on its results
of operations or financial condition.
The Company operates in a highly regulated environment and
may be adversely impacted by changes in law and
regulations.
The Company is subject to extensive
regulation, supervision and examination. See
“Regulation” in Item 1 hereof,
Business.
Any change in the laws or regulations and failure by the
Company to comply with applicable law and regulation, or a
change in regulators’ supervisory policies or examination
procedures, whether
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by the Massachusetts Commissioner of Banks, the FDIC, the
Federal Reserve Board, other state or federal regulators, the
United States Congress, or the Massachusetts legislature could
have a material adverse effect on the Company’s business,
financial condition, results of operations, and cash flows.
The Company has strong competition within its market area
which may limit the Company’s growth and
profitability.
The Company faces significant
competition both in attracting deposits and in the origination
of loans. See “Market Area and Competition” in
Item 1 hereof,
Business
. Commercial banks, credit
unions, savings banks, savings and loan associations operating
in the Company’s primary market area have historically
provided most of its competition for deposits. Competition for
the origination of real estate and other loans come from other
commercial banks, thrift institutions, credit unions, insurance
companies, finance companies, other institutional lenders and
mortgage companies.
The success of the Company is dependent on hiring and
retaining certain key personnel.
The
Company’s performance is largely dependent on the talents
and efforts of highly skilled individuals. The Company relies on
key personnel to manage and operate its business, including
major revenue generating functions such as loan and deposit
generation. The loss of key staff may adversely affect the
Company’s ability to maintain and manage these functions
effectively, which could negatively affect the Company’s
revenues. In addition, loss of key personnel could result in
increased recruiting and hiring expenses, which could cause a
decrease in the Company’s net income. The Company’s
continued ability to compete effectively depends on its ability
to attract new employees and to retain and motivate its existing
employees.
The Company’s business strategy of growth in part
through acquisitions could have an impact on its earnings and
results of operations that may negatively impact the value of
the Company’s stock.
In recent years, the
Company has focused, in part, on growth through acquisitions.
From time to time in the ordinary course of business, the
Company engages in preliminary discussions with potential
acquisition targets. The consummation of any future acquisitions
may dilute stockholder value.
Although the Company’s business strategy emphasizes organic
expansion combined with acquisitions, there can be no assurance
that, in the future, the Company will successfully identify
suitable acquisition candidates, complete acquisitions and
successfully integrate acquired operations into our existing
operations or expand into new markets. There can be no assurance
that acquisitions will not have an adverse effect upon the
Company’s operating results while the operations of the
acquired business are being integrated into the Company’s
operations. In addition, once integrated, acquired operations
may not achieve levels of profitability comparable to those
achieved by the Company’s existing operations, or otherwise
perform as expected. Further, transaction-related expenses may
adversely affect the Company’s earnings. These adverse
effects on the Company’s earnings and results of operations
may have a negative impact on the value of the Company’s
stock.
Difficult market conditions have adversely affected the
industry in which the Company operates.
Dramatic
declines in the housing market with falling real estate values
and increasing foreclosures and unemployment, have negatively
impacted the credit performance of mortgage loans and resulted
in significant write-downs of asset values by financial
institutions, including government-sponsored entities as well as
major commercial and investment banks. These write-downs,
initially of mortgage-backed securities but spreading to credit
default swaps and other derivative and cash securities, in turn,
have caused many financial institutions to seek additional
capital, to merge with larger and stronger institutions and, in
some cases to fail. Reflecting concern about the stability of
the financial markets generally and the strength of
counterparties, many lenders and institutional investors have
reduced or ceased providing funding to borrowers, including to
other financial institutions. This market turmoil and tightening
of credit have led to an increased level of commercial and
consumer delinquencies, lack of consumer confidence, increased
market volatility and widespread reduction of business activity
generally. The resulting economic pressure on consumers and lack
of confidence in the financial markets could materially affect
the Company’s business, financial condition and results of
operations. A worsening of these conditions would likely
exacerbate the adverse effects of these difficult market
conditions on the Company and others in the financial services
industry. In particular, the Company may face the following
risks in connection with these events:
| • | The Company may expect to face increased regulation of its industry. Compliance with such regulation may increase its costs and limit its ability to pursue business opportunities. |
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| • | Market developments may affect customer confidence levels and may cause increases in loan delinquencies and default rates, which the Company expects could impact its loan charge-offs and provision for loan losses. | |
| • | Continued illiquidity in the capital markets for certain types of investment securities may cause additional credit related other-than-temporary impairment charges to the Company’s income statement. | |
| • | The Company’s ability to borrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations. | |
| • | Competition in the industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions. | |
| • | The Company may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. | |
| • | It may become necessary or advisable for the Company, due to changes in regulatory requirements, change in market conditions, or for other reasons, to hold more capital or to alter the forms of capital it currently maintains. |
The Company’s securities portfolio performance in
difficult market conditions could have adverse effects on the
Company’s results of operations
. Under
Generally Accepted Accounting Principles, the Company is
required to review the Company’s investment portfolio
periodically for the presence of
other-than-temporary
impairment of its securities, taking into consideration current
market conditions, the extent and nature of changes in fair
value, issuer rating changes and trends, volatility of earnings,
current analysts’ evaluations, the Company’s ability
and intent to hold investments until a recovery of fair value,
as well as other factors. Adverse developments with respect to
one or more of the foregoing factors may require the Company to
deem particular securities to be
other-than-temporarily
impaired, with the credit related portion of the reduction in
the value recognized as a charge to the Company’s earnings.
Recent market volatility has made it extremely difficult to
value certain of the Company’s securities. Subsequent
valuations, in light of factors prevailing at that time, may
result in significant changes in the values of these securities
in future periods. Any of these factors could require the
Company to recognize further impairments in the value of the
Company’s securities portfolio, which may have an adverse
effect on the Company’s results of operations in future
periods.
Impairment of goodwill
and/or
intangible assets could require charges to earnings, which could
result in a negative impact on our results of
operations.
Goodwill arises when a business is
purchased for an amount greater than the net fair value of its
assets. The Bank has recognized goodwill as an asset on the
balance sheet in connection with several recent acquisitions
(see Note 6 “Goodwill and Identifiable Intangible
Assets” within Notes to the Consolidated Financial
Statements included in Item 8 hereof). When an intangible
asset is determined to have an indefinite useful life, it shall
not be amortized, and instead is evaluated for impairment. The
Company evaluates goodwill and intangibles for impairment at
least annually by comparing fair value to carrying amount.
Although the Company determined that goodwill and other
intangible assets were not impaired during 2010, a significant
and sustained decline in the Company’s stock price and
market capitalization, a significant decline in the Companys
expected future cash flows, a significant adverse change in the
business climate, slower growth rates or other factors could
result in impairment of goodwill or other intangible assets. If
the Company were to conclude that a future write-down of the
goodwill or intangible assets is necessary, then the Company
would record the appropriate charge to earnings, which could be
materially adverse to the results of operations and financial
position.
Deterioration in the Federal Home Loan Bank Boston’s
(“FHLBB”) capital might restrict the FHLBB’s
ability to meet the funding needs of its members, cause a
suspension of its dividend, and cause its stock to be determined
to be impaired.
Significant components of the
Bank’s liquidity needs are met through its access to
funding pursuant to its membership in the FHLBB. The FHLBB is a
cooperative that provides services to its member banking
institutions. The primary reason for joining the FHLBB is to
obtain funding from the FHLBB. The purchase of stock in the
FHLBB is a requirement for a member to gain access to funding.
Any deterioration in the FHLBB’s
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performance may affect the Companys access to funding and/or
require the Company to deem the required investment in FHLBB
stock to be impaired.
Reductions in the value of the Company’s deferred tax
assets could affect earnings adversely.
A
deferred tax asset is created by the tax effect of the
differences between an asset’s book value and its tax
basis. The Company assesses the deferred tax assets periodically
to determine the likelihood of the Company’s ability to
realize their benefits. These assessments consider the
performance of the associated business and its ability to
generate future taxable income. If the information available to
the Company at the time of assessment indicates there is a
greater than 50% chance that the Company will not realize the
deferred tax asset benefit, the Company is required to establish
a valuation allowance for it and reduce its future tax assets to
the amount the Company believes could be realized in future tax
returns. Recording such a valuation allowance could have a
material adverse effect on the results of operations or
financial position.
| Item 1B. | Unresolved Staff Comments |
None
| Item 2. | Properties |
At December 31, 2010, the Bank conducted its business from
its main office located at 288 Union Street, Rockland,
Massachusetts and sixty-nine banking offices located within
Barnstable, Bristol, Middlesex, Norfolk, Plymouth and Worcester
Counties in eastern Massachusetts. In addition to its main
office, the Bank leased fifty-two of its branches and owned the
remaining seventeen branches. In addition to these branch
locations, the Bank had five remote ATM locations all of which
were leased.
The Bank’s executive administration offices are located in
Hanover, while the remaining administrative and operations
locations are housed in several different campuses.
Additionally, there are a number of sales offices not associated
with a branch location throughout the Bank’s footprint.
For additional information regarding the Company’s premises
and equipment and lease obligations, see
Notes 5,
“Bank Premises and Equipment” and 18,
“Commitments and Contingencies,” respectively,
within Notes to Consolidated Financial Statements included
in Item 8 hereof.
| Item 3. | Legal Proceedings |
The Company is not involved in any legal proceedings other than
routine legal proceedings occurring in the ordinary course of
business. Management believes that those routine legal
proceedings involve, in the aggregate, amounts that are
immaterial to the Company’s financial condition and results
of operations.
26
Table of Contents
| Item 5. | Market for Independent Bank Corp.’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
(a.) Independent Bank Corp.’s common stock trades on the
National Association of Securities Dealers Automated Quotation
System (“NASDAQ”) under the symbol INDB. The Company
declared cash dividends of $0.72 per share in 2010 and in 2009.
The ratio of dividends paid to earnings in 2010 and 2009 was
37.9% and 82.8%, respectively.
Payment of dividends by the Company on its common stock is
subject to various regulatory restrictions and guidelines. Since
substantially all of the funds available for the payment of
dividends are derived from the Bank, future dividends will
depend on the earnings of the Bank, its financial condition, its
need for funds, applicable governmental policies and
regulations, and other such matters as the Board of Directors
deem appropriate. Management believes that the Bank will
continue to generate adequate earnings to continue to pay common
dividends on a quarterly basis.
On January 9, 2009, as part of the CPP established by the
U.S. Department of Treasury (“Treasury”) under
the EESA of 2008, the Company entered into a Letter Agreement
with the Treasury pursuant to which the Company issued and sold
to the Treasury 78,158 shares of the Company’s Fixed
Rate Cumulative Perpetual Preferred Stock, Series C, par
value $0.01 per share, having a liquidation preference of $1,000
per share and a ten-year warrant to purchase up to
481,664 shares of the Company’s common stock, par
value $0.01 per share.
Subsequently, on April 22, 2009 the Company repaid with
regulatory approval, the preferred stock issued to the Treasury
pursuant to the Capital Purchase Program. As a result, during
the second quarter of 2009 the Company recorded a
$4.4 million non-cash deemed dividend charged to earnings,
amounting to $0.22 per diluted share, associated with the
repayment of the preferred stock and an additional preferred
stock dividend of $141,000 for the second quarter of 2009. The
Company and the Bank remained well capitalized following this
event. The Company also repurchased the common stock warrant
issued to the Treasury for $2.2 million, the cost of which
was recorded as a reduction in capital during 2009, in
accordance with the United States Generally Accepted Accounting
Principles (“U.S. GAAP”).
On April 10, 2009 the Company completed its acquisition of
Ben Franklin, the parent of Benjamin Franklin Bank. The
transaction qualified as a tax-free reorganization for federal
income tax purposes, and former Ben Franklin shareholders
received 0.59 shares of the Company’s common stock for
each share of Ben Franklin common stock which they owned. Under
the terms of the merger, cash was issued in lieu of fractional
shares. Based upon the Company’s $18.27 per share closing
price on April 9, 2009, the transaction was valued at
$10.7793 per share of Ben Franklin common stock or approximately
$84.5 million in the aggregate. As a result of the
acquisition, the Company’s outstanding shares increased by
4,624,948 shares.
The following schedule summarizes the closing price range of
common stock and the cash dividends paid for the fiscal years
2010 and 2009:
Price
Range of Common Stock
|
2010
|
High | Low | Dividend | |||||||||
|
4th Quarter
|
$ | 28.09 | $ | 22.35 | $ | 0.18 | ||||||
|
3rd Quarter
|
25.55 | 20.91 | 0.18 | |||||||||
|
2nd Quarter
|
28.09 | 23.21 | 0.18 | |||||||||
|
1st Quarter
|
26.76 | 21.00 | 0.18 | |||||||||
27
Table of Contents
|
2009
|
High | Low | Dividend | |||||||||
|
4th Quarter
|
$ | 22.80 | $ | 20.06 | $ | 0.18 | ||||||
|
3rd Quarter
|
24.34 | 19.19 | 0.18 | |||||||||
|
2nd Quarter
|
21.75 | 14.93 | 0.18 | |||||||||
|
1st Quarter
|
26.26 | 10.94 | 0.18 | |||||||||
As of December 31, 2010 there were 21,220,801 shares
of common stock outstanding which were held by approximately
2,751 holders of record. The closing price of the Company’s
stock on December 31, 2010 was $27.05. The number of record
holders may not reflect the number of persons or entities
holding stock in nominee name through banks, brokerage firms,
and other nominees.
The information required by S-K Item 201(d) is incorporated
by reference from Item 12.
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
hereof.
28
Table of Contents
Comparative
Stock Performance Graph
The stock performance graph below and associated table compare
the cumulative total shareholder return of the Company’s
common stock from December 31, 2005 to December 31,
2010 with the cumulative total return of the NASDAQ Composite
Index (U.S. Companies) and the SNL Bank NASDAQ Index. The
lines in the graph and the numbers in the table below represent
monthly index levels derived from compounded daily returns that
include reinvestment or retention of all dividends. If the
monthly interval, based on the last day of a fiscal year, was
not a trading day, the preceding trading day was used. The index
value for all of the series was set to 100.00 on
December 31, 2005 (which assumes that $100.00 was invested
in each of the series on December 31, 2005).
Independent
Bank Corp.
Total Return Performance
Total Return Performance
| Period Ending | ||||||||||||||||||||||||
|
Index
|
12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | ||||||||||||||||||
|
Independent Bank Corp.
|
100.00 | 128.80 | 99.52 | 98.23 | 81.31 | 108.54 | ||||||||||||||||||
|
NASDAQ Composite
|
100.00 | 110.39 | 122.15 | 73.32 | 106.57 | 125.91 | ||||||||||||||||||
|
SNL Bank NASDAQ
|
100.00 | 112.27 | 88.14 | 64.01 | 51.93 | 61.27 | ||||||||||||||||||
Source: SNL Financial LC
(b.) Not applicable
(c.) Not applicable
29
Table of Contents
| Item 6. | Selected Financial Data |
The selected consolidated financial and other data of the
Company set forth below does not purport to be complete and
should be read in conjunction with, and is qualified in its
entirety by, the more detailed information, including the
Consolidated Financial Statements and related notes, appearing
elsewhere herein.
| As of or for the Years Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||
|
FINANCIAL CONDITION DATA:
|
||||||||||||||||||||
|
Securities available for sale
|
$ | 377,457 | $ | 508,650 | $ | 575,688 | $ | 427,998 | $ | 395,378 | ||||||||||
|
Securities held to maturity
|
202,732 | 93,410 | 32,789 | 45,265 | 76,747 | |||||||||||||||
|
Loans
|
3,555,679 | 3,395,515 | 2,652,536 | 2,031,824 | 2,013,050 | |||||||||||||||
|
Allowance for loan losses
|
46,255 | 42,361 | 37,049 | 26,831 | 26,815 | |||||||||||||||
|
Goodwill and core deposit intangibles
|
141,956 | 143,730 | 125,710 | 60,411 | 56,535 | |||||||||||||||
|
Total assets
|
4,695,738 | 4,482,021 | 3,628,469 | 2,768,413 | 2,828,919 | |||||||||||||||
|
Total deposits
|
3,627,783 | 3,375,294 | 2,579,080 | 2,026,610 | 2,090,344 | |||||||||||||||
|
Total borrowings
|
565,434 | 647,397 | 695,317 | 504,344 | 493,649 | |||||||||||||||
|
Stockholders’ equity
|
436,472 | 412,649 | 305,274 | 220,465 | 229,783 | |||||||||||||||
|
Non-performing loans
|
23,108 | 36,183 | 26,933 | 7,644 | 6,979 | |||||||||||||||
|
Non-performing assets
|
31,493 | 41,245 | 29,883 | 8,325 | 7,169 | |||||||||||||||
|
OPERATING DATA:
|
||||||||||||||||||||
|
Interest income
|
$ | 202,724 | $ | 202,689 | $ | 175,440 | $ | 158,524 | $ | 166,298 | ||||||||||
|
Interest expense
|
38,763 | 51,995 | 58,926 | 63,555 | 65,038 | |||||||||||||||
|
Net interest income
|
163,961 | 150,694 | 116,514 | 94,969 | 101,260 | |||||||||||||||
|
Provision for loan losses
|
18,655 | 17,335 | 10,888 | 3,130 | 2,335 | |||||||||||||||
|
Non-interest income
|
46,906 | 38,192 | 29,032 | 33,265 | 28,039 | |||||||||||||||
|
Non-interest expenses
|
139,745 | 141,815 | 104,143 | 87,932 | 79,354 | |||||||||||||||
|
Net income
|
40,240 | 22,989 | 23,964 | 28,381 | 32,851 | |||||||||||||||
|
Preferred stock dividend
|
— | 5,698 | — | — | — | |||||||||||||||
|
Net income available to the common shareholder
|
40,240 | 17,291 | 23,964 | 28,381 | 32,851 | |||||||||||||||
|
PER SHARE DATA:
|
||||||||||||||||||||
|
Net income — basic
|
$ | 1.90 | $ | 0.88 | $ | 1.53 | $ | 2.02 | $ | 2.20 | ||||||||||
|
Net income — diluted
|
1.90 | 0.88 | 1.52 | 2.00 | 2.17 | |||||||||||||||
|
Cash dividends declared
|
0.72 | 0.72 | 0.72 | 0.68 | 0.64 | |||||||||||||||
|
Book value(1)
|
20.57 | 19.58 | 18.75 | 16.04 | 15.65 | |||||||||||||||
|
OPERATING RATIOS:
|
||||||||||||||||||||
|
Return on average assets
|
0.88 | % | 0.40 | % | 0.73 | % | 1.05 | % | 1.12 | % | ||||||||||
|
Return on average common equity
|
9.46 | % | 4.29 | % | 8.20 | % | 12.93 | % | 14.60 | % | ||||||||||
|
Net interest margin (on a fully tax equivalent basis)
|
3.95 | % | 3.89 | % | 3.95 | % | 3.90 | % | 3.85 | % | ||||||||||
|
Equity to assets
|
9.30 | % | 9.21 | % | 8.41 | % | 7.96 | % | 8.12 | % | ||||||||||
|
Dividend payout ratio
|
37.93 | % | 82.79 | % | 48.95 | % | 33.41 | % | 29.10 | % | ||||||||||
|
ASSET QUALITY RATIOS:
|
||||||||||||||||||||
|
Non-performing loans as a percent of gross loans
|
0.65 | % | 1.07 | % | 1.02 | % | 0.38 | % | 0.35 | % | ||||||||||
30
Table of Contents
| As of or for the Years Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||
|
Non-performing assets as a percent of total assets
|
0.67 | % | 0.92 | % | 0.82 | % | 0.30 | % | 0.25 | % | ||||||||||
|
Allowance for loan losses as a percent of total loans
|
1.30 | % | 1.25 | % | 1.40 | % | 1.32 | % | 1.33 | % | ||||||||||
|
Allowance for loan losses as a percent of non-performing loans
|
200.17 | % | 117.07 | % | 137.56 | % | 351.01 | % | 384.22 | % | ||||||||||
|
CAPITAL RATIOS:
|
||||||||||||||||||||
|
Tier 1 leverage capital ratio
|
8.19 | % | 7.87 | % | 7.55 | % | 8.02 | % | 8.05 | % | ||||||||||
|
Tier 1 risk-based capital ratio
|
10.28 | % | 9.83 | % | 9.50 | % | 10.27 | % | 11.05 | % | ||||||||||
|
Total risk-based capital ratio
|
12.37 | % | 11.92 | % | 11.85 | % | 11.52 | % | 12.30 | % | ||||||||||
| (1) | Calculated by dividing total stockholders’ equity by the total outstanding shares as of the end of each period. |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The Company is a state chartered, federally registered bank
holding company, incorporated in 1985. The Company is the sole
stockholder of Rockland Trust, a Massachusetts trust company
chartered in 1907. For a full list of corporate entities see
Item 1 “Business — General”
hereto.
All material intercompany balances and transactions have been
eliminated in consolidation. When necessary, certain amounts in
prior year financial statements have been reclassified to
conform to the current year’s presentation. The following
should be read in conjunction with the Consolidated Financial
Statements and related notes thereto.
Executive
Level Overview
During 2010, the Company experienced strong origination volumes
across each of its primary business lines and continued strength
and stability in asset quality measures. The Company achieved
strong growth in the commercial and industrial portfolio which
increased by 34.7% in 2010. Additionally, the commercial real
estate portfolio and home equity portfolio experienced
significant growth, increasing by 6.4% and 22.8%, respectively,
during 2010. This growth is a result of the Company’s
continual relationship building efforts and by capitalizing on
marketplace opportunities. The following table illustrates key
performance measures for the periods indicated, highlighting
these positive results:
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Diluted Earnings Per Share
|
$ | 1.90 | $ | 0.88 | ||||
|
Return on Average Assets
|
0.88 | % | 0.40 | % | ||||
|
Return on Average Common Equity
|
9.46 | % | 4.29 | % | ||||
|
Net Interest Margin
|
3.95 | % | 3.89 | % | ||||
31
Table of Contents
The Company’s continued stability in asset quality was
marked by a decrease in nonperforming loans. Total nonperforming
loans decreased to 0.65% of total loans at December 31,
2010 compared to 1.07% at December 31, 2009.
Shown in the table presented below is a reconcilement of the
change in the Company’s nonperforming assets:
|
For the Year
|
||||
|
Ending
|
||||
|
December 31,
|
||||
| 2010 | ||||
|
Nonperforming Assets Beginning Balance
|
$ | 41,245 | ||
|
New to Nonperforming
|
47,220 | |||
|
Loans Charged-Off
|
(16,187 | ) | ||
|
Loans Paid-Off
|
(20,484 | ) | ||
|
Loans Transferred to Other Real Estate Owned/Other Assets
|
(10,836 | ) | ||
|
Loans Restored to Accrual Status
|
(11,878 | ) | ||
|
New to Other Real Estate Owned
|
10,836 | |||
|
Sale of Other Real Estate Owned
|
(7,500 | ) | ||
|
Other
|
(923 | ) | ||
|
Nonperforming Assets Ending Balance
|
$ | 31,493 | ||
32
Table of Contents
Loan delinquency, both early and late stage improved in 2010 due
to focused loan workout efforts and a relatively stable economy.
Net loan charge-offs increased modestly to 0.43% of loans in
2010 as compared to 0.38% of
loans in 2009.
loans in 2009.
The allowance for loan losses increased modestly in 2010 to
1.30% of loans from 1.25% of loans in 2009 largely due to shifts
in the composition of loan portfolio mix.
Despite the weak economic conditions, the Company was able to
achieve several significant accomplishments during 2010:
| • | Strong loan growth. |
| • | Strong growth realized in the commercial and industrial portfolio as the Bank continued to add high-quality corporate customers across a variety of industries. |
33
Table of Contents
| • | Home equity portfolio origination remained strong driven by refinancing volume and promotional campaigns. | |
| • | Residential real estate portfolio balances declined as loans refinanced into longer-term, fixed-rate loans, which are not commonly held in portfolio by the Company. | |
| • | Commercial real estate origination volumes maintained a healthy pace as the Company took advantage of opportunities in the marketplace. | |
| • | Commercial construction portfolio balances declined as projects transitioned to permanent financing, with the Company or elsewhere. |
| • | Higher fee revenue was a result of improved deposit fee revenue and wealth management revenue, as assets under administration reached $1.6 billion. | |
| • | Deposits grew significantly in 2010 as a result of the Company’s strategy to grow the municipal and commercial banking business. In addition, improving the deposit mix and focusing on lower cost core deposits has driven a steady decline in overall funding costs. |
The Company continues to generate adequate levels of capital
internally to fund future growth. The Company’s tangible
common equity ratio is 6.89%, pro forma to include the tax
deductibility of certain goodwill. Regulatory capital levels
exceeded prescribed thresholds, and the Company maintained a
common stock dividend of $0.72 per share for the year ended
December 31, 2010.
Key items affecting comparative earnings are as follows:
Net Interest Income
Although interest rates remained at historically low levels in
2010, the Company effectively managed its loan portfolio yield
and deposit cost to maintain strong net interest income.
Provision for Loan Losses
Net charge-off activity increased modestly on a
year-to-year
basis reflecting general economic weakness. Net charge-offs
amounted to $14.8 million, or 0.43% on an annualized basis
of average loans for the year ended December 31, 2010,
compared to $12.0 million or 0.38% for the year ended
December 31, 2009. The provision for loan losses was
$18.7 million and $17.3 million for the years ended
December 31, 2010 and December 31, 2009, respectively.
A number of non-core items in 2009, as described in the table
below, contributed to the improvement in earnings in 2010. The
following table summarizes the impact of non-core items recorded
for the time periods indicated below and reconciles them in
accordance with GAAP:
| For the Years Ended December 31, | ||||||||||||||||
|
Net Income
|
||||||||||||||||
|
Available to Common
|
Diluted
|
|||||||||||||||
| Shareholders | Earnings Per Share | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
AS REPORTED (GAAP)
|
||||||||||||||||
|
Net Income
|
$ | 40,240 | $ | 22,989 | $ | 1.90 | $ | 1.17 | ||||||||
|
Preferred Stock Dividend
|
— | (5,698 | ) | — | (0.29 | ) | ||||||||||
|
Net Income available to Common Shareholders (GAAP)
|
$ | 40,240 | $ | 17,291 | $ | 1.90 | $ | 0.88 | ||||||||
34
Table of Contents
| For the Years Ended December 31, | ||||||||||||||||
|
Net Income
|
||||||||||||||||
|
Available to Common
|
Diluted
|
|||||||||||||||
| Shareholders | Earnings Per Share | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Non-GAAP Measures:
|
||||||||||||||||
|
Non-Interest Income Components
|
||||||||||||||||
|
Net Gain on Sale of Securities, net of tax
|
(271 | ) | (880 | ) | (0.01 | ) | (0.04 | ) | ||||||||
|
Gain Resulting from Early Termination of Hedging Relationship,
net of tax
|
— | (2,456 | ) | — | (0.12 | ) | ||||||||||
|
Non-Interest Expense Components
|
||||||||||||||||
|
Merger & Acquisition Expenses, net of tax
|
— | 9,706 | — | 0.49 | ||||||||||||
|
Fair Value Mark on a Terminated Hedging Relationship, net of tax
|
328 | — | 0.01 | — | ||||||||||||
|
Deemed Preferred Stock Dividend
|
— | 4,384 | — | 0.22 | ||||||||||||
|
TOTAL IMPACT OF NON-CORE ITEMS
|
57 | 10,754 | — | 0.55 | ||||||||||||
|
AS ADJUSTED (NON-GAAP)
|
$ | 40,297 | $ | 28,045 | $ | 1.90 | $ | 1.43 | ||||||||
When management assesses the Company’s financial
performance for purposes of making
day-to-day
and strategic decisions, it does so based upon the performance
of its core banking business, which is primarily derived from
the combination of net interest income and non-interest or fee
income, reduced by operating expenses, the provision for loan
losses, and the impact of income taxes. The Company’s
financial performance is determined in accordance with Generally
Accepted Accounting Principles (“GAAP”) which
sometimes includes gain or loss due to items that management
does not believe are related to its core banking business, such
as gains or losses on the sales of securities, merger and
acquisition expenses, and other items. Management, therefore,
also computes the Company’s non-GAAP operating earnings,
which excludes these items, to measure the strength of the
Company’s core banking business and to identify trends that
may to some extent be obscured by gains or losses which
management deems not to be core to the Company’s
operations. Management believes that the financial impact of the
items excluded when computing non-GAAP operating earnings will
disappear or become immaterial within a near-term finite
period.
Management’s computation of the Company’s non-GAAP
operating earnings are set forth above because management
believes it may be useful for investors to have access to the
same analytical tool used by management to evaluate the
Company’s core operational performance so that investors
may assess the Company’s overall financial health and
identify business and performance trends that may be more
difficult to identify and evaluate when non-core items are
included. Management also believes that the computation of
non-GAAP operating earnings may facilitate the comparison of the
Company to other companies in the financial services
industry.
Non-GAAP operating earnings should not be considered a
substitute for GAAP operating results. An item which management
deems to be non-core and excludes when computing non-GAAP
operating earnings can be of substantial importance to the
Company’s results for any particular quarter or year. The
Company’s non-GAAP operating earnings set forth above are
not necessarily comparable to non-GAAP information which may be
presented by other companies.
Financial
Position
Securities Portfolio
The Company’s
securities portfolio consists of trading assets, securities
available for sale, and securities which management intends to
hold until maturity. Securities decreased by $20.4 million,
or 3.4%, at December 31, 2010 as compared to
December 31, 2009. The ratio of securities to total assets
as of December 31, 2010 was 12.5%, compared to 13.6% at
December 31, 2009.
35
Table of Contents
The Company continually reviews investment securities for the
presence of
other-than-temporary
impairment (“OTTI”). Further analysis of the
Company’s OTTI can be found in Note 3
“Securities” within Notes to Consolidated Financial
Statements included in Item 8 hereof.
The Company’s trading assets were $7.6 million and
$6.2 million at December 31, 2010 and 2009,
respectively. Trading assets are comprised of securities which
are held solely for the purpose of funding certain executive
non-qualified retirement obligations and equity securities which
are entirely comprised of a fund whose investment objective is
to invest in geographically specific private placement debt
securities designed to support underlying economic activities
such as community development and affordable housing.
The following table sets forth the fair value and percentage
distribution of securities available for sale at the dates
indicated:
Table
1 — Fair Value of Securities Available for
Sale
| At December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
U.S. Treasury Securities
|
$ | 717 | 0.2 | % | $ | 744 | 0.1 | % | $ | 710 | 0.1 | % | ||||||||||||
|
Agency Mortgage-Backed Securities
|
313,302 | 83.0 | % | 451,909 | 88.9 | % | 475,083 | 79.1 | % | |||||||||||||||
|
Agency Collateralized Mortgage Obligations
|
46,135 | 12.2 | % | 32,022 | 6.3 | % | 56,784 | 9.5 | % | |||||||||||||||
|
Corporate Debt Securities
|
— | — | — | — | 25,852 | 4.3 | % | |||||||||||||||||
|
Private Mortgage-Backed Securities
|
10,254 | 2.7 | % | 14,289 | 2.8 | % | 15,513 | 2.6 | % | |||||||||||||||
|
State, County and Municipal Securities
|
— | — | 4,081 | 0.8 | % | 18,954 | 3.2 | % | ||||||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks
|
4,221 | 1.1 | % | 3,010 | 0.6 | % | 2,202 | 0.4 | % | |||||||||||||||
|
Pooled Trust Preferred Securities Issued by Banks and
Insurers
|
2,828 | 0.7 | % | 2,595 | 0.5 | % | 5,193 | 0.8 | % | |||||||||||||||
|
Total
|
$ | 377,457 | 100.0 | % | $ | 508,650 | 100.0 | % | $ | 600,291 | 100.0 | % | ||||||||||||
The following table sets forth the amortized cost and percentage
distribution of securities held to maturity at the dates
indicated:
Table
2 — Amortized Cost of Securities Held to
Maturity
| At December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Agency Mortgage-Backed Securities
|
$ | 95,697 | 47.2 | % | $ | 54,064 | 57.9 | % | $ | 3,470 | 10.6 | % | ||||||||||||
|
Agency Collateralized Mortgage Obligations
|
89,823 | 44.3 | % | 14,321 | 15.3 | % | — | — | ||||||||||||||||
|
State, County and Municipal Securities
|
10,562 | 5.2 | % | 15,252 | 16.3 | % | 19,517 | 59.5 | % | |||||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks
|
6,650 | 3.3 | % | 9,773 | 10.5 | % | 9,803 | 29.9 | % | |||||||||||||||
|
Total
|
$ | 202,732 | 100.0 | % | $ | 93,410 | 100.0 | % | $ | 32,790 | 100.0 | % | ||||||||||||
36
Table of Contents
The following two tables set forth contractual maturities of the
Bank’s securities portfolio at December 31, 2010.
Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Table
3 — Fair Value of Securities Available for Sale
Amounts Maturing
|
Weighted
|
One Year
|
Weighted
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Within
|
%
|
Average
|
to Five
|
%
|
Average
|
Five Years
|
%
|
Average
|
Over
|
% of
|
Average
|
% of
|
Average
|
|||||||||||||||||||||||||||||||||||||||||||||||
| One Year | of Total | Yield | Years | of Total | Yield | to Ten Years | of Total | Yield | Ten Years | Total | Yield | Total | Total | Yield | ||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
U.S. Treasury Securities
|
$ | 717 | 0.2 | % | 0.9 | % | $ | — | 0.0 | % | 0.0 | % | $ | — | 0.0 | % | 0.0 | % | $ | — | 0.0 | % | 0.0 | % | $ | 717 | 0.2 | % | 0.9 | % | ||||||||||||||||||||||||||||||
|
Agency Mortgage-Backed Securities
|
— | 0.0 | % | 0.0 | % | 24,204 | 6.4 | % | 4.2 | % | 70,372 | 18.7 | % | 4.5 | % | 218,726 | 58.0 | % | 5.0 | % | 313,302 | 83.1 | % | 4.8 | % | |||||||||||||||||||||||||||||||||||
|
Agency Collateralized Mortgage Obligations
|
— | 0.0 | % | 0.0 | % | — | 0.0 | % | 0.0 | % | 19,395 | 5.1 | % | 3.9 | % | 26,740 | 7.1 | % | 1.0 | % | 46,135 | 12.2 | % | 2.2 | % | |||||||||||||||||||||||||||||||||||
|
Private Mortgage-Backed Securities
|
— | 0.0 | % | 0.0 | % | — | 0.0 | % | 0.0 | % | — | 0.0 | % | 0.0 | % | 10,254 | 2.7 | % | 6.0 | % | 10,254 | 2.7 | % | 6.0 | % | |||||||||||||||||||||||||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks
|
— | 0.0 | % | 0.0 | % | — | 0.0 | % | 0.0 | % | — | 0.0 | % | 0.0 | % | 4,221 | 1.1 | % | 7.7 | % | 4,221 | 1.1 | % | 7.7 | % | |||||||||||||||||||||||||||||||||||
|
Pooled Trust Preferred Securities Issued by Banks and
Insurers
|
— | 0.0 | % | 0.0 | % | — | 0.0 | % | 0.0 | % | — | 0.0 | % | 0.0 | % | 2,828 | 0.7 | % | 0.9 | % | 2,828 | 0.7 | % | 0.9 | % | |||||||||||||||||||||||||||||||||||
|
Total
|
$ | 717 | 0.2 | % | 0.9 | % | $ | 24,204 | 6.4 | % | 4.2 | % | $ | 89,767 | 23.8 | % | 4.4 | % | $ | 262,769 | 69.6 | % | 4.6 | % | $ | 377,457 | 100.0 | % | 4.6 | % | ||||||||||||||||||||||||||||||
Table
4 — Amortized Cost of Securities Held to Maturity
Amounts Maturing
|
Weighted
|
Weighted
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Within
|
%
|
Average
|
One Year
|
%
|
Average
|
Five Years
|
%
|
Average
|
Over
|
% of
|
Average
|
% of
|
Average
|
|||||||||||||||||||||||||||||||||||||||||||||||
| One Year | of Total | Yield | to Five Years | of Total | Yield | to Ten Years | of Total | Yield | Ten Years | Total | Yield | Total | Total | Yield | ||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Agency Mortgage-Backed Securities
|
$ | — | 0.0 | % | 0.0 | % | $ | — | 0.0 | % | 0.0 | % | $ | 1,849 | 0.9 | % | 5.5 | % | $ | 93,848 | 46.3 | % | 3.6 | % | $ | 95,697 | 47.2 | % | 3.6 | % | ||||||||||||||||||||||||||||||
|
Agency Collateralized Mortgage Obligations
|
— | 0.0 | % | 0.0 | % | — | 0.0 | % | 0.0 | % | — | 0.0 | % | 0.0 | % | 89,823 | 44.3 | % | 2.9 | % | 89,823 | 44.3 | % | 2.9 | % | |||||||||||||||||||||||||||||||||||
|
State, County and Municipal Securities
|
1,483 | 0.7 | % | 4.0 | % | 5,008 | 2.5 | % | 4.3 | % | 2,975 | 1.5 | % | 4.7 | % | 1,096 | 0.5 | % | 5.0 | % | 10,562 | 5.2 | % | 4.4 | % | |||||||||||||||||||||||||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks
|
— | 0.0 | % | 0.0 | % | — | 0.0 | % | 0.0 | % | — | 0.0 | % | 0.0 | % | 6,650 | 3.3 | % | 7.4 | % | 6,650 | 3.3 | % | 7.4 | % | |||||||||||||||||||||||||||||||||||
|
Total
|
$ | 1,483 | 0.7 | % | 4.0 | % | $ | 5,008 | 2.5 | % | 4.3 | % | $ | 4,824 | 2.4 | % | 5.0 | % | $ | 191,417 | 94.4 | % | 3.4 | % | $ | 202,732 | 100.0 | % | 3.5 | % | ||||||||||||||||||||||||||||||
At December 31, 2010 and 2009, the Bank had no investments
in obligations of individual states, counties or municipalities
which exceeded 10% of stockholders’ equity.
Residential Mortgage Loan Sales
The
Company’s primary loan sale activity arises from the sale
of government sponsored enterprise eligible residential mortgage
loans to other financial institutions. During 2010 and 2009, the
Bank originated residential loans with the intention of selling
them in the secondary market. Loans are sold with servicing
rights released and with servicing rights retained. The amounts
of loans originated and sold with servicing rights released were
$331.1 million and $338.5 million in 2010 and 2009,
respectively. The amounts of loans originated and sold with
servicing rights retained were $11.4 million and
$11.6 million in 2010 and 2009, respectively. The Company
recognizes a mortgage servicing assets when it sells a loan with
servicing rights retained. When the Company sells a loan with
servicing rights released the Company enters into agreements
that contain representations and warranties about the
characteristics of the loans sold and their origination. The
Company may be required to either repurchase mortgage loans or
to indemnify the purchaser from losses if representations and
warranties are breached. The Company has not at this time
established a reserve for loan repurchases as it believes
material losses are not probable.
Forward sale contracts of mortgage loans, considered derivative
instruments for accounting purposes, are utilized by the Company
in its efforts to manage risk of loss associated with its
mortgage loan commitments and mortgage loans held for sale.
Prior to closing and funding certain single-family residential
mortgage loans, an interest rate lock commitment is generally
extended to the borrower. During the period from commitment date
to closing date, the Company is subject to the risk that market
rates of interest may change. If market rates rise, investors
generally will pay less to purchase such loans resulting in a
reduction in the gain on sale of the loans or, possibly, a loss.
In an effort to mitigate such risk, forward delivery sales
commitments are executed, under which the Company agrees to
deliver whole mortgage loans to various investors. See
Note 12,
“Derivative and Hedging Activities”
within Notes to Consolidated Financial statements included
in Item 8 hereof for more information on mortgage loan
commitments and forward sales agreements.
37
Table of Contents
Effective July 1, 2010, pursuant to FASB ASC Topic
No. 825, “Financial Instruments,” the Company
elected to carry newly originated closed loans held for sale at
fair value. Changes in fair value relating to loans held for
sale and forward sale commitments are recorded in earnings and
are offset by changes in fair value relating to interest rate
lock commitments. Gains and losses on loan sales (sales proceeds
minus carrying amount) are recorded in mortgage banking income.
Loan Portfolio
Management has been focusing on
changing the overall composition of the balance sheet by
emphasizing the growth in commercial and home equity lending
categories, while placing less emphasis on the other lending
categories. Although changing the composition of the
Company’s loan portfolio has led to a slower growth rate,
management believes the change to be prudent, given the
prevailing interest rate and economic environment. At
December 31, 2010, the Bank’s loan portfolio amounted
to $3.6 billion, an increase of $160.2 million, or
4.7%, from December 31, 2009. The total commercial loan
category, which includes small business loans, increased by
$183.6 million, or 8.2%, with commercial and industrial
comprising most of the change with an increase of
$129.4 million, or 34.7%, and an increase in the commercial
real estate category of $102.6 million, or 6.4%, while the
commercial construction and small business categories decreased
by $45.9 million, or 26.2%, and $2.5 million, or 3.1%,
respectively. Home equity loans increased $107.4 million,
or 22.8%, during the year ended December 31, 2010. Consumer
loans decreased $43.0 million, or 38.4%, and residential
real estate loans decreased $87.9 million, or 15.5%, during
the year ended December 31, 2010, as loans refinanced into
longer-term, fixed-rate loans, which are not commonly held in
portfolio by the Company. The following table sets forth
information concerning the composition of the Bank’s loan
portfolio by loan type at the dates indicated:
Table
5 — Loan Portfolio Composition
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Commercial and Industrial
|
$ | 502,952 | 14.1 | % | $ | 373,531 | 11.0 | % | $ | 270,832 | 10.2 | % | $ | 190,522 | 9.4 | % | $ | 174,356 | 8.7 | % | ||||||||||||||||||||
|
Commercial Real Estate
|
1,717,118 | 48.4 | % | 1,614,474 | 47.5 | % | 1,126,295 | 42.4 | % | 797,416 | 39.2 | % | 740,517 | 36.7 | % | |||||||||||||||||||||||||
|
Commercial Construction
|
129,421 | 3.6 | % | 175,312 | 5.2 | % | 171,955 | 6.5 | % | 133,372 | 6.6 | % | 119,685 | 5.9 | % | |||||||||||||||||||||||||
|
Small Business
|
80,026 | 2.3 | % | 82,569 | 2.4 | % | 86,670 | 3.3 | % | 69,977 | 3.4 | % | 59,910 | 3.0 | % | |||||||||||||||||||||||||
|
Residential Real Estate
|
473,936 | 13.3 | % | 555,306 | 16.4 | % | 413,024 | 15.6 | % | 323,847 | 15.9 | % | 378,368 | 18.8 | % | |||||||||||||||||||||||||
|
Residential Construction
|
4,175 | 0.1 | % | 10,736 | 0.3 | % | 10,950 | 0.4 | % | 6,115 | 0.3 | % | 7,277 | 0.4 | % | |||||||||||||||||||||||||
|
Home Equity
|
579,278 | 16.3 | % | 471,862 | 13.9 | % | 406,240 | 15.3 | % | 308,744 | 15.2 | % | 277,015 | 13.8 | % | |||||||||||||||||||||||||
|
Consumer — Other
|
68,773 | 1.9 | % | 111,725 | 3.3 | % | 166,570 | 6.3 | % | 201,831 | 10.0 | % | 255,922 | 12.7 | % | |||||||||||||||||||||||||
|
Gross Loans
|
3,555,679 | 100.0 | % | 3,395,515 | 100.0 | % | 2,652,536 | 100.0 | % | 2,031,824 | 100.0 | % | 2,013,050 | 100.0 | % | |||||||||||||||||||||||||
|
Allowance for Loan Losses
|
46,255 | 42,361 | 37,049 | 26,831 | 26,815 | |||||||||||||||||||||||||||||||||||
|
Net Loans
|
$ | 3,509,424 | $ | 3,353,154 | $ | 2,615,487 | $ | 2,004,993 | $ | 1,986,235 | ||||||||||||||||||||||||||||||
The following table sets forth the scheduled contractual
amortization of the Bank’s loan portfolio at
December 31, 2010. Loans having no schedule of repayments
or no stated maturity are reported as due in one
38
Table of Contents
year or less. Adjustable rate mortgages are included in the
adjustable rate category. The following table also sets forth
the rate structure of loans scheduled to mature after one year:
Table
6 — Scheduled Contractual Loan Amortization At
December 31, 2010
|
Commercial
|
Commercial
|
Small
|
Residential
|
Residential
|
Consumer
|
Consumer
|
||||||||||||||||||||||||||||||||||
| Commercial | Real Estate | Construction | Business | Real Estate | Construction | Home Equity | Other | Total | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Amounts due in:
|
||||||||||||||||||||||||||||||||||||||||
|
One year or less
|
$ | 222,911 | $ | 345,021 | $ | 57,875 | $ | 26,533 | $ | 20,598 | $ | 4,175 | $ | 11,434 | $ | 29,714 | $ | 718,261 | ||||||||||||||||||||||
|
After one year through five years
|
207,642 | 872,774 | 38,986 | 31,153 | 80,940 | — | 49,600 | 32,197 | 1,313,292 | |||||||||||||||||||||||||||||||
|
Beyond five years
|
72,399 | 499,323 | 32,560 | 22,340 | 372,398 | — | 518,244 | 6,862 | 1,524,126 | |||||||||||||||||||||||||||||||
|
Total
|
$ | 502,952 | $ | 1,717,118 | $ | 129,421 | (1) | $ | 80,026 | $ | 473,936 | $ | 4,175 | $ | 579,278 | $ | 68,773 | $ | 3,555,679 | |||||||||||||||||||||
|
Interest rate terms on amounts due after one year:
|
||||||||||||||||||||||||||||||||||||||||
|
Fixed Rate
|
$ | 101,013 | $ | 561,593 | $ | 24,350 | $ | 24,437 | $ | 272,340 | $ | — | $ | 172,460 | $ | 39,059 | $ | 1,195,252 | ||||||||||||||||||||||
|
Adjustable Rate
|
179,028 | 810,504 | 47,196 | 29,056 | 180,998 | — | 395,384 | — | 1,642,166 | |||||||||||||||||||||||||||||||
| (1) | Includes certain construction loans that convert to commercial mortgages. These loans are reclassified to commercial real estate upon the completion of the construction phase. |
As of December 31, 2010, $3.8 million of loans
scheduled to mature within one year were nonperforming.
Generally, the actual maturity of loans is substantially shorter
than their contractual maturity due to prepayments and, in the
case of real estate loans,
due-on-sale
clauses, which generally gives the Bank the right to declare a
loan immediately due and payable in the event that, among other
things, the borrower sells the property subject to the mortgage
and the loan is not repaid. The average life of real estate
loans tends to increase when current real estate loan rates are
higher than rates on mortgages in the portfolio and, conversely,
tends to decrease when rates on mortgages in the portfolio are
higher than current real estate loan rates. Under the latter
scenario, the weighted average yield on the portfolio tends to
decrease as higher yielding loans are repaid or refinanced at
lower rates. Due to the fact that the Bank may, consistent with
industry practice, renew a significant portion of commercial and
commercial real estate loans at or immediately prior to their
maturity by renewing the loans on substantially similar or
revised terms, the principal repayments actually received by the
Bank are anticipated to be significantly less than the amounts
contractually due in any particular period. In other
circumstances, a loan, or a portion of a loan, may not be repaid
due to the borrower’s inability to satisfy the contractual
obligations of the loan.
Asset 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”).
Delinquency
The Bank’s philosophy toward
managing its loan portfolios is predicated upon careful
monitoring, which stresses early detection and response to
delinquent and default situations. The Bank seeks to make
arrangements to resolve any delinquent or default situation over
the shortest possible time frame. Generally, the Bank requires
that a delinquency notice be mailed to a borrower upon
expiration of a grace period (typically no longer than
15 days beyond the due date). Reminder notices may be sent
and telephone calls may be made prior to the expiration of the
grace period. If the delinquent status is not resolved within a
reasonable time frame following the mailing of a delinquency
notice, the Bank’s personnel charged with managing its loan
portfolios, contacts the borrower to ascertain the reasons for
delinquency and the prospects for payment. Any subsequent
actions taken to resolve the delinquency will depend upon the
nature of the loan and the length of time that the loan has been
delinquent. The borrower’s needs are considered as much as
reasonably possible without jeopardizing the Bank’s
position. A late charge is usually assessed on loans upon
expiration of the grace period.
Nonaccrual Loans
As permitted by banking
regulations, certain consumer loans past due 90 days or
more continue to accrue interest. In addition, certain
commercial and real estate loans that are more than 90 days
past due may be kept on an accruing status if the loan is well
secured and in the process of collection. As a general rule,
39
Table of Contents
within commercial, real estate, or home equity categories, loans
more than 90 days past due with respect to principal or
interest are classified as a nonaccrual loan. Income accruals
are suspended on all nonaccrual loans and all previously accrued
and uncollected interest is reversed against current income. A
loan remains on nonaccrual status until it becomes current with
respect to principal and interest (and in certain instances
remains current for up to six months), when the loan is
liquidated, or when the loan is determined to be uncollectible
and is charged-off against the allowance for loan losses.
Troubled Debt Restructurings
In the course of
resolving nonperforming loans, the Bank may choose to
restructure the contractual terms of certain loans. The Bank
attempts to work-out an alternative payment schedule with the
borrower in order to avoid foreclosure actions. Any loans that
are modified are reviewed by the Bank to identify if a TDR has
occurred, which is when, for economic or legal reasons related
to a borrower’s financial difficulties, the Bank grants a
concession to the borrower that it would not otherwise consider.
Terms may be modified to fit the ability of the borrower to
repay in line with its current financial status and the
restructuring of the loan may include the transfer of assets
from the borrower to satisfy the debt, a modification of loan
terms, or a combination of the two. If such efforts by the Bank
do not result in a satisfactory arrangement, the loan is
referred to legal counsel, at which time foreclosure proceedings
are initiated. At any time prior to a sale of the property at
foreclosure, the Bank may terminate foreclosure proceedings if
the borrower is able to work-out a satisfactory payment plan.
It is the Bank’s policy to have any restructured loans
which are on nonaccrual status prior to being modified remain on
nonaccrual status for approximately six months, subsequent to
being modified, before management considers its return to
accrual status. If the restructured loan is on accrual status
prior to being modified, it is reviewed to determine if the
modified loan should remain on accrual status. Loans that are
considered TDRs are classified as performing, unless they are on
nonaccrual status or greater than 90 days delinquent. All
TDRs are considered impaired by the Company, unless it is
determined that the borrower is performing under modified terms
and the restructuring agreement specified an interest rate
greater than or equal to an acceptable rate for a comparable new
loan. The Company individually reviews all material loans to
determine if a loan meets both of these criteria and smaller
balance loans are reviewed for a performance period of six
months before the Company will consider the TDR loan to no
longer be impaired.
Nonperforming Assets
Nonperforming assets are
comprised of nonperforming loans, nonperforming securities,
Other Real Estate Owned (“OREO”), and other assets in
possession. Nonperforming loans consist of loans that are more
than 90 days past due but still accruing interest and
nonaccrual loans.
Nonperforming securities consist of securities that are on
nonaccrual status. The Company holds six collateralized debt
obligation securities (“CDOs”) comprised of pools of
trust preferred securities issued by banks and insurance
companies, which are currently deferring interest payments on
certain tranches within the bonds’ structures including the
tranches held by the Company. The bonds are anticipated to
continue to defer interest until cash flows are sufficient to
satisfy certain collateralization levels designed to protect
more senior tranches. As a result the Company has placed the six
securities on nonaccrual status and has reversed any previously
accrued income related to these securities.
OREO
When a property is deemed to be in
control, it is recorded at fair value less cost to sell at the
date control is established, resulting in a new cost basis. The
amount by which the recorded investment in the loan exceeds the
fair value (net of estimated cost to sell) of the foreclosed
asset is charged to the allowance for loan losses. Subsequent
declines in the fair value of the foreclosed asset below the new
cost basis are recorded through the use of a valuation
allowance. Subsequent increases in the fair value are recorded
as reductions in the allowance, but not below zero. All costs
incurred thereafter in maintaining the property are charged to
non-interest expense. In the event the real estate is utilized
as a rental property, rental income and expenses are recorded as
incurred and included in non-interest income and non-interest
expense, respectively.
Other assets in possession reflect the estimated discounted cash
flow value of retention payments from the sale of a customer
list associated with a troubled borrower.
40
Table of Contents
The following table sets forth information regarding
nonperforming assets held by the Bank at the dates indicated:
Table
7 — Nonperforming Assets
| At December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Loans past due 90 days or more but still accruing
|
||||||||||||||||||||
|
Home Equity
|
$ | 4 | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
Consumer — Other
|
273 | 292 | 275 | 500 | 389 | |||||||||||||||
|
Total
|
$ | 277 | $ | 292 | $ | 275 | $ | 500 | $ | 389 | ||||||||||
|
Loans accounted for on a nonaccrual basis
(1)
|
||||||||||||||||||||
|
Commercial and Industrial
|
$ | 3,123 | $ | 4,205 | $ | 1,942 | $ | 306 | $ | 872 | ||||||||||
|
Small Business
|
887 | 793 | 1,111 | 439 | 74 | |||||||||||||||
|
Commercial Real Estate
|
9,836 | 18,525 | 12,370 | 2,568 | 2,346 | |||||||||||||||
|
Residential Real Estate
|
6,728 | 10,829 | 9,394 | 2,380 | 2,318 | |||||||||||||||
|
Home Equity
|
1,752 | 1,166 | 1,090 | 872 | 358 | |||||||||||||||
|
Consumer — Other
|
505 | 373 | 751 | 579 | 622 | |||||||||||||||
|
Total
|
$ | 22,831 | $ | 35,891 | $ | 26,658 | $ | 7,144 | $ | 6,590 | ||||||||||
|
Total nonperforming loans
|
$ | 23,108 | $ | 36,183 | $ | 26,933 | $ | 7,644 | $ | 6,979 | ||||||||||
|
Nonaccrual securities
|
1,051 | 920 | 910 | — | — | |||||||||||||||
|
Other assets in possession
|
61 | 148 | 231 | — | — | |||||||||||||||
|
Other real estate owned
|
7,273 | 3,994 | 1,809 | 681 | 190 | |||||||||||||||
|
Total nonperforming assets
|
$ | 31,493 | $ | 41,245 | $ | 29,883 | $ | 8,325 | $ | 7,169 | ||||||||||
|
Nonperforming loans as a percent of gross loans
|
0.65 | % | 1.07 | % | 1.02 | % | 0.38 | % | 0.35 | % | ||||||||||
|
Nonperforming assets as a percent of total assets
|
0.67 | % | 0.92 | % | 0.82 | % | 0.30 | % | 0.25 | % | ||||||||||
| (1) | There were $4.0 million, $3.4 million, and $74,000 TDRs on nonaccrual at December 31, 2010, 2009 and 2008, respectively, and none at December 31, 2007 and 2006. |
Potential problem loans are any loans which are not included in
nonaccrual or nonperforming loans and which are not considered
TDRs, where known information about possible credit problems of
the borrowers causes management to have concerns as to the
ability of such borrowers to comply with present loan repayment
terms. The table below shows the potential problem commercial
loans at the time periods indicated:
Table
8 — Potential Problem Commercial Loans
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Number of Loan Relationships
|
62 | 102 | ||||||
|
Aggregate Outstanding Balance
|
$ | 126,167 | $ | 122,140 | ||||
At December 31, 2010, these potential problem loans
continued to perform with respect to payments. Management
actively monitors these loans and strives to minimize any
possible adverse impact to the Bank.
41
Table of Contents
Income accruals are suspended on all nonaccrual loans and all
previously accrued and uncollected interest is reversed against
current income. The table below shows interest income that was
recognized or collected on nonaccrual and performing TDRs as of
the dates indicated:
Table
9 — Interest Income Recognized/Collected on Nonaccrual
and Troubled Debt Restructurings
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Interest income that would have been recognized if nonaccruing
loans had been performing
|
$ | 2,749 | $ | 2,004 | $ | 890 | ||||||
|
Interest income recognized on TDRs still accruing
|
1,425 | 330 | 21 | |||||||||
|
Interest collected on these nonaccrual and TDRs and included in
interest income
|
$ | 1,874 | $ | 359 | $ | 198 | ||||||
A loan is considered impaired when, based on current information
and events, it is probable that the Bank will be unable to
collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment
include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment
shortfalls on a
case-by-case
basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower’s prior
payment record, and the amount of the shortfall in relation to
the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial
and industrial, commercial real estate, and commercial
construction categories by either the present value of expected
future cash flows discounted at the loan’s effective
interest rate, the loan’s obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
For impaired loans deemed collateral dependent, where impairment
is measured using the fair value of the collateral, the Bank
will either order a new appraisal or use another available
source of collateral assessment such as a broker’s opinion
of value to determine a reasonable estimate of the fair value of
the collateral.
At December 31, 2010, impaired loans included all
commercial and industrial loans, commercial real estate loans,
commercial construction, and small business loans that are on
nonaccrual status, TDRs, and other loans that have been
categorized as impaired. Total impaired loans at
December 31, 2010 and 2009 were $47.4 million and
$42.7 million, respectively. For additional information
regarding the Bank’s asset quality, including delinquent
loans, nonaccruals, TDRs, and impaired loans, see
Note 4, “Loans, Allowance for Loan Losses, and
Credit Quality”
within Notes to Consolidated Financial
Statements included in Item 8 hereof.
Allowance for Loan Losses
The allowance for
loan losses is maintained at a level that management considers
adequate to provide for probable loan losses based upon
evaluation of known and inherent risks in the loan portfolio.
The allowance is increased by providing for loan losses through
a charge to expense and by recoveries of loans previously
charged-off and is reduced by loans being charged-off.
While management uses available information to recognize losses
on loans, future additions to the allowance may be necessary
based on increases in nonperforming loans, changes in economic
conditions, or for other reasons. Additionally, various
regulatory agencies, as an integral part of the Bank’s
examination process, periodically assess the adequacy of the
allowance for loan losses and may require it to increase its
provision for loan losses or recognize further loan charge-offs.
As of December 31, 2010, the allowance for loan losses
totaled $46.3 million, or 1.30% of total loans as compared
to $42.4 million, or 1.25% of total loans, at
December 31, 2009. The increase in allowance was due to a
combination of factors including shifts in the composition of
the loan portfolio mix, changes in asset quality and loan growth.
42
Table of Contents
The following table summarizes changes in the allowance for loan
losses and other selected statistics for the periods presented:
Table
10 — Summary of Changes in the Allowance for Loan
Losses
| Year Ending December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Average Total Loans
|
$ | 3,434,769 | $ | 3,177,949 | $ | 2,489,028 | $ | 1,994,273 | $ | 2,041,098 | ||||||||||
|
Allowance for Loan Losses, Beginning of Year
|
$ | 42,361 | $ | 37,049 | $ | 26,831 | $ | 26,815 | $ | 26,639 | ||||||||||
|
Charged-Off Loans:
|
||||||||||||||||||||
|
Commercial and Industrial
|
5,170 | 1,663 | 595 | 498 | 185 | |||||||||||||||
|
Commercial Real Estate
|
3,448 | 834 | — | — | — | |||||||||||||||
|
Commercial Construction
|
1,716 | 2,679 | — | — | — | |||||||||||||||
|
Small Business
|
2,279 | 2,047 | 1,350 | 789 | 401 | |||||||||||||||
|
Residential Real Estate
|
557 | 829 | 362 | — | — | |||||||||||||||
|
Residential Construction
|
— | — | — | — | — | |||||||||||||||
|
Home Equity
|
939 | 1,799 | 1,200 | 122 | — | |||||||||||||||
|
Consumer — Other
|
2,078 | 3,404 | 3,631 | 2,459 | 2,594 | |||||||||||||||
|
Total Charged-Off Loans
|
16,187 | 13,255 | 7,138 | 3,868 | 3,180 | |||||||||||||||
|
Recoveries on Loans Previously Charged-Off:
|
||||||||||||||||||||
|
Commercial and Industrial
|
361 | 27 | 168 | 63 | 219 | |||||||||||||||
|
Commercial Real Estate
|
1 | — | — | — | 1 | |||||||||||||||
|
Commercial Construction
|
— | — | — | — | — | |||||||||||||||
|
Small Business
|
217 | 204 | 159 | 26 | 92 | |||||||||||||||
|
Residential Real Estate
|
59 | 105 | — | — | — | |||||||||||||||
|
Residential Construction
|
— | — | — | — | — | |||||||||||||||
|
Home Equity
|
131 | 41 | 5 | — | — | |||||||||||||||
|
Consumer — Other
|
657 | 855 | 612 | 665 | 709 | |||||||||||||||
|
Total Recoveries
|
1,426 | 1,232 | 944 | 754 | 1,021 | |||||||||||||||
|
Net Loans Charged-Off
|
||||||||||||||||||||
|
Commercial and Industrial
|
4,809 | 1,636 | 427 | 435 | (34 | ) | ||||||||||||||
|
Commercial Real Estate
|
3,447 | 834 | — | — | (1 | ) | ||||||||||||||
|
Commercial Construction
|
1,716 | 2,679 | — | — | — | |||||||||||||||
|
Small Business
|
2,062 | 1,843 | 1,191 | 763 | 309 | |||||||||||||||
|
Residential Real Estate
|
498 | 724 | 362 | — | — | |||||||||||||||
|
Residential Construction
|
— | — | — | — | — | |||||||||||||||
|
Home Equity
|
808 | 1,758 | 1,195 | 122 | — | |||||||||||||||
|
Consumer — Other
|
1,421 | 2,549 | 3,019 | 1,794 | 1,885 | |||||||||||||||
|
Total Net Loans Charged-Off
|
14,761 | 12,023 | 6,194 | 3,114 | 2,159 | |||||||||||||||
|
Allowance Related to Business Combinations
|
— | — | 5,524 | — | — | |||||||||||||||
|
Provision for Loan Losses
|
18,655 | 17,335 | 10,888 | 3,130 | 2,335 | |||||||||||||||
|
Total Allowances for Loan Losses, End of Year
|
$ | 46,255 | $ | 42,361 | $ | 37,049 | $ | 26,831 | $ | 26,815 | ||||||||||
|
Net Loans Charged-Off as a Percent of Average Total Loans
|
0.43 | % | 0.38 | % | 0.25 | % | 0.16 | % | 0.11 | % | ||||||||||
|
Allowance for Loan Losses as a Percent of Total Loans
|
1.30 | % | 1.25 | % | 1.40 | % | 1.32 | % | 1.33 | % | ||||||||||
|
Allowance for Loan Losses as a Percent of Nonperforming Loans
|
200.17 | % | 117.07 | % | 137.56 | % | 351.01 | % | 384.22 | % | ||||||||||
|
Net Loans Charged-Off as a Percent of Allowance for Loan Losses
|
31.91 | % | 28.38 | % | 16.72 | % | 11.61 | % | 8.05 | % | ||||||||||
|
Recoveries as a Percent of Charge-Offs
|
8.81 | % | 9.29 | % | 13.22 | % | 19.49 | % | 32.11 | % | ||||||||||
For purposes of the allowance for loan losses, management
segregates the loan portfolio into the portfolio segments
detailed in the table below. The allocation of the allowance for
loan losses is made to each loan category using the analytical
techniques and estimation methods described herein. While these
amounts represent management’s best estimate of the
distribution of probable losses at the evaluation dates, they
are not necessarily indicative of either the categories in which
actual losses may occur or the extent of such actual losses that
may be recognized within each category. Each of these loan
categories possess unique risk characteristics that are
considered when determining the appropriate level of allowance
for each segment. The total allowance is available to absorb
losses from any segment of the loan portfolio.
43
Table of Contents
The following table sets forth the allocation of the allowance
for loan losses by loan category at the dates indicated:
Table
11 — Summary of Allocation of Allowance for Loan
Losses
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
|
Percent of
|
Percent of
|
Percent of
|
Percent of
|
Percent of
|
||||||||||||||||||||||||||||||||||||
|
Loans
|
Loans
|
Loans
|
Loans
|
Loans
|
||||||||||||||||||||||||||||||||||||
|
Allowance
|
In Category
|
Allowance
|
In Category
|
Allowance
|
In Category
|
Allowance
|
In Category
|
Allowance
|
In Category
|
|||||||||||||||||||||||||||||||
| Amount | To Total Loans | Amount | To Total Loans | Amount | To Total Loans | Amount | To Total Loans | Amount | To Total Loans | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Allocated Allowance:
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial and Industrial
|
$ | 10,423 | 14.1 | % | $ | 7,545 | 11.0 | % | $ | 5,532 | 10.2 | % | $ | 3,850 | 9.4 | % | $ | 3,615 | 8.7 | % | ||||||||||||||||||||
|
Commercial Real Estate
|
21,939 | 52.0 | % | 19,451 | 47.5 | % | 15,942 | 42.4 | % | 13,939 | 39.2 | % | 13,136 | 36.7 | % | |||||||||||||||||||||||||
|
Commercial Construction
|
2,145 | 0.1 | % | 2,457 | 5.5 | % | 4,203 | 6.9 | % | 3,408 | 6.9 | % | 2,955 | 6.3 | % | |||||||||||||||||||||||||
|
Small Business
|
3,740 | 2.3 | % | 3,372 | 2.4 | % | 2,170 | 3.3 | % | 1,265 | 3.4 | % | 1,340 | 3.0 | % | |||||||||||||||||||||||||
|
Residential Real Estate(1)
|
2,915 | 13.3 | % | 2,840 | 16.4 | % | 2,447 | 15.6 | % | 741 | 15.9 | % | 566 | 18.8 | % | |||||||||||||||||||||||||
|
Home Equity
|
3,369 | 16.3 | % | 3,945 | 13.9 | % | 3,091 | 15.3 | % | 1,326 | 15.2 | % | 1,024 | 13.8 | % | |||||||||||||||||||||||||
|
Consumer — Other
|
1,724 | 1.9 | % | 2,751 | 3.3 | % | 3,664 | 6.3 | % | 2,302 | 10.0 | % | 2,718 | 12.7 | % | |||||||||||||||||||||||||
|
Imprecision Allowance
|
— | N/A | — | N/A | — | N/A | — | N/A | 1,461 | N/A | ||||||||||||||||||||||||||||||
|
Total Allowance for Loan Losses
|
$ | 46,255 | 100.0 | % | $ | 42,361 | 100.0 | % | $ | 37,049 | 100.0 | % | $ | 26,831 | 100.0 | % | $ | 26,815 | 100.0 | % | ||||||||||||||||||||
| (1) | Includes residential construction. |
When available information confirms that specific loans or
financing receivables, or portions thereof, are uncollectible,
these amounts are promptly charged-off against the allowance for
loan losses. All charge-offs of loans or financing receivables
are charged directly to the allowance for loan losses and any
recoveries of such previously charged-off amounts are credited
to the allowance.
Loans whose collectability is sufficiently questionable that
management can no longer justify showing the receivable as an
asset on the balance sheet are charged-off. To determine if a
loan should be charged-off, all possible sources of repayment
are analyzed. Possible sources of repayment include the
potential for future cash flows, the value of the Bank’s
collateral, and the strength of co-makers or guarantors.
Regardless of whether a loan is unsecured or collateralized, the
Company charges off the amount of any confirmed loan loss in the
period when the loans, or portions of loans, are deemed
uncollectible. For troubled, collateral-dependent loans,
loss-confirming events may include an appraisal or other
valuation that reflects a shortfall between the value of the
collateral and the book value of the loan or receivable, or a
deficiency balance following the sale of the collateral. During
2010, allocated allowance amounts increased by approximately
$3.9 million to $46.3 million at December 31,
2010.
For additional information regarding the Bank’s allowance
for loan losses, see
Note 1, “Summary of
Significant Accounting Policies” and Note 4,
“Loans, Allowance for Loan Losses, and Credit Quality”
within Notes to Consolidated Financial Statements included
in Item 8 hereof.
Federal Home Loan Bank Stock
The Bank held an
investment in Federal Home Loan Bank Boston (“FHLBB”)
of $35.9 million at December 31, 2010 and
December 31, 2009, respectively. The FHLBB is a cooperative
that provides services to its member banking institutions. The
primary reason for the FHLBB membership is to gain access to a
reliable source of wholesale funding, particularly term funding,
as a tool to manage interest rate risk. The purchase of stock in
the FHLBB is a requirement for a member to gain access to
funding. The Company purchases FHLBB stock proportional to the
volume of funding received and views the purchases as a
necessary long-term investment for the purposes of balance sheet
liquidity and not for investment return.
During 2010 the FHLBB continued the moratorium on excess stock
repurchases that was put into effect during 2008, as the
FHLBB’s board of directors have continued to focus on
building retained earnings while delivering core solutions of
liquidity and longer-term funding to their members. As a result
of these efforts the FHLBB was able to restore a modest dividend
as announced on February 22, 2011.
44
Table of Contents
Goodwill and Identifiable Intangible Assets
Goodwill and Identifiable Intangible Assets were
$142.0 million and $143.7 million at December 31,
2010 and December 31, 2009, respectively. For additional
information regarding the goodwill and identifiable intangible
assets, see
Note 6, “Goodwill and Identifiable
Intangible Assets”
within Notes to Consolidated
Financial Statements included in Item 8 hereof.
Bank Owned Life Insurance
The bank holds Bank
Owned Life Insurance (“BOLI”) for the purpose of
offsetting the Bank’s future obligations to its employees
under its retirement and benefits plans. The value of BOLI was
$82.7 and $79.3 million at December 31, 2010 and
December 31, 2009, respectively. The bank recorded tax
exempt income from BOLI of $3.2 million in 2010,
$2.9 million in 2009, and $2.6 million in 2008.
Deposits
As of December 31, 2010,
deposits of $3.6 billion were $252.5 million, or 7.5%,
higher than the prior year-end. Core deposits increased by
$477.1 million, or 19.4%, during 2010 and now comprise
80.9% of total deposits.
The following table sets forth the average balances of the
Bank’s deposits for the periods indicated:
Table
12 — Average Balances of Deposits
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Demand Deposits
|
$ | 773,718 | 22.0 | % | $ | 659,916 | 21.0 | % | $ | 533,543 | 21.9 | % | ||||||||||||
|
Savings and Interest Checking
|
1,183,247 | 33.7 | % | 913,881 | 29.2 | % | 688,336 | 28.3 | % | |||||||||||||||
|
Money Market
|
739,264 | 21.1 | % | 639,231 | 20.4 | % | 472,065 | 19.4 | % | |||||||||||||||
|
Time Certificates of Deposits
|
814,462 | 23.2 | % | 921,787 | 29.4 | % | 740,779 | 30.4 | % | |||||||||||||||
|
Total
|
$ | 3,510,691 | 100.0 | % | $ | 3,134,815 | 100.0 | % | $ | 2,434,723 | 100.0 | % | ||||||||||||
The Bank’s time certificates of deposit in an amount of
$100,000 or more totaled $219.5 million at
December 31, 2010. The maturity of these certificates is as
follows:
Table
13 — Maturities of Time Certificate of Deposits Over
$100,000
| Balance | Percentage | |||||||
| (Dollars in thousands) | ||||||||
|
1 to 3 months
|
$ | 66,494 | 30.3 | % | ||||
|
4 to 6 months
|
61,407 | 28.0 | % | |||||
|
7 to 12 months
|
58,364 | 26.6 | % | |||||
|
Over 12 months
|
33,215 | 15.1 | % | |||||
|
Total
|
$ | 219,480 | 100.0 | % | ||||
The Bank also participates in the Certificate of Deposit
Registry Service (“CDARS”) program, allowing the Bank
to provide easy access to multi-million dollar FDIC deposit
insurance protection on certificate of deposits investments for
consumers, businesses and public entities. The economic downturn
and subsequent flight to safety makes CDARS an attractive
product for customers and as of December 31, 2010 and 2009,
CDARS deposits totaled $13.6 million and
$52.9 million, respectively.
Borrowings
The Company’s borrowings
amounted to $565.4 million at December 31, 2010, a
decrease of $82.0 million from year-end 2009. At
December 31, 2010, the Bank’s borrowings consisted
primarily of FHLBB borrowings totaling $302.4 million, a
decrease of $60.5 million from the prior year-end. The
remaining borrowings consisted of federal funds purchased,
assets sold under repurchase agreements, junior subordinated
debentures and other borrowings. These borrowings totaled
$263.0 million at December 31, 2010, a decrease of
$21.4 million from the prior year-end. See
Note 8,
“Borrowings” within Notes to Consolidated Financial
Statements
included in Item 8 hereof for a schedule of
borrowings outstanding, their interest rates, and other
information related to the Company’s borrowings.
45
Table of Contents
The following table shows the balance of borrowings at the
periods indicated:
Table
14 — Borrowings by Category
| December 31, | ||||||||||||
| 2010 | 2009 | %Change | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Federal Home Loan Bank Advances
|
$ | 302,414 | $ | 362,936 | −16.7 | % | ||||||
|
Fed Funds Purchased and Assets Sold
|
||||||||||||
|
Under Repurchase Agreements
|
168,119 | 190,452 | −11.7 | % | ||||||||
|
Junior Subordinated Debentures
|
61,857 | 61,857 | 0.0 | % | ||||||||
|
Subordinated Debentures
|
30,000 | 30,000 | 0.0 | % | ||||||||
|
Other Borrowings
|
3,044 | 2,152 | 41.4 | % | ||||||||
|
Total Borrowings
|
$ | 565,434 | $ | 647,397 | −12.7 | % | ||||||
Capital Resources
The Federal Reserve, the
FDIC, and other regulatory agencies have established capital
guidelines for banks and bank holding companies. Risk-based
capital guidelines issued by the federal regulatory agencies
require banks to meet a minimum Tier 1 risk-based capital
ratio of 4.0% and a total risk-based capital ratio of 8.0%. A
minimum requirement of 4.0% Tier 1 leverage capital is also
mandated. At December 31, 2010, the Company and the Bank
exceeded the minimum requirements for Tier 1 risk-based,
total risk-based capital, and Tier 1 leverage capital. See
Note 19, “Regulatory Capital Requirements”
within Notes to Consolidated Financial Statements included
in Item 8 hereof for more information regarding capital
requirements.
Capital Purchase Program
On January 9,
2009, the Company participated in the CPP established by the
Treasury and subsequently exited the program on April 22,
2009. See
Note 11, “Capital Purchase Program”
within Notes to Consolidated Financial Statements included
in Item 8 hereof for more information regarding the Capital
Purchase Program.
Wealth
Management
Investment Management
As of December 31,
2010, the Rockland Trust Investment Management Group had
assets under administration of $1.6 billion which
represents approximately 3,181 trust, fiduciary, and agency
accounts. At December 31, 2009, assets under administration
were $1.3 billion, representing approximately 2,922 trust,
fiduciary, and agency accounts. Revenue from the Investment
Management Group amounted to $10.3 million,
$8.6 million, and $9.9 million for 2010, 2009, and
2008, respectively. Additionally, during 2010 the Company
established Bright Rock Capital Management, LLC, a registered
investment advisor to provide institutional quality investment
management services to the institutional/intermediary
marketplace. At December 31, 2010 Bright Rock had
$103.6 million of assets under administration.
Retail Investments and Insurance
For the
years ending December 31, 2010, 2009 and 2008, retail
investments and insurance revenue was $1.4 million,
$1.4 million, and $1.2 million, respectively. Retail
investments and insurance includes revenue from LPL Financial
(“LPL”) and its affiliates, LPL Insurance Associates,
Inc., Savings Bank Life Insurance of Massachusetts
(“SBLI”), Independent Financial Market Group, Inc.
(“IFMG”) and their insurance subsidiary IFS Agencies,
Inc. (“IFS”).
Mortgage
Banking
Servicing assets are recorded at fair value and recognized as
separate assets when rights are acquired through sale of loans
with servicing rights retained. Mortgage servicing assets are
amortized into non-interest income in proportion to, and over
the period of, the estimated net servicing income. The principal
balance of loans serviced by the Bank on behalf of investors
amounted to $279.7 million at December 31, 2010 and
$350.5 million at December 31, 2009. Upon sale, the
mortgage servicing asset (“MSA”) is established, which
represents the then current estimated fair value based on market
prices for comparable mortgage servicing contracts, when
available or alternatively, is based on a valuation model that
calculates the present value of estimated future net servicing
46
Table of Contents
income. The valuation model incorporates assumptions that market
participants would use in estimating future net servicing
income, such as the cost to service, the discount rate, an
inflation rate, ancillary income, prepayment speeds and default
rates and losses. Impairment is determined by stratifying the
rights based on predominant characteristics, such as interest
rate, loan type and investor type. Impairment is recognized
through a valuation allowance, to the extent that fair value is
less than the capitalized amount. If the Company later
determines that all or a portion of the impairment no longer
exists, a reduction of the allowance may be recorded as an
increase to income. Servicing rights are recorded in other
assets and are amortized in proportion to, and over the period
of estimated net servicing income and are assessed for
impairment based on fair value at each reporting date. MSAs are
reported in other assets in the consolidated balance sheets. The
following table shows fair value of the servicing rights
associated with these loans and the changes for the periods
indicated:
Table
15 — Mortgage Servicing Asset
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Balance as of January 1,
|
$ | 2,195 | $ | 1,498 | ||||
|
Additions
|
77 | 1,642 | (1) | |||||
|
Amortization
|
(652 | ) | (802 | ) | ||||
|
Change in Valuation Allowance
|
(1 | ) | (143 | ) | ||||
|
Balance as of December 31,
|
$ | 1,619 | $ | 2,195 | ||||
| (1) | Included in this number is a mortgage servicing asset of $1.2 million acquired as part of the Ben Franklin acquisition. |
The Bank’s mortgage banking revenue consists primarily of
premiums received on loans sold with servicing released,
origination fees, and gains and losses on sold mortgages which
are recorded as mortgage banking income. The gains and losses
resulting from the sales of loans with servicing retained are
adjusted to recognize the present value of future servicing fee
income over the estimated lives of the related loans.
RESULTS
OF OPERATIONS
The following table provides a summary of results of operations:
Table
16 — Summary of Results of Operations
| As of December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Net Income
|
$ | 40,240 | $ | 22,989 | ||||
|
Preferred Stock Dividend
|
$ | — | $ | 5,698 | ||||
|
Net Income Available to Common Shareholders
|
$ | 40,240 | $ | 17,291 | ||||
|
Diluted Earnings Per Share
|
$ | 1.90 | $ | 0.88 | ||||
|
Return on Average Assets
|
0.88 | % | 0.40 | % | ||||
|
Return on Average Equity
|
9.46 | % | 4.29 | % | ||||
|
Stockholders’ Equity as % of Assets
|
9.30 | % | 9.21 | % | ||||
Results of operations for 2009 were impacted by the
Company’s recording of several large expenses associated
with the Ben Franklin acquisition, as well as costs associated
with the recession including loan workout costs, loss
provisions, and deposit insurance assessment fees. In addition,
the cost of entering and exiting the U.S. Treasury CPP
program were significant.
Net Interest Income
The amount of net
interest income is affected by changes in interest rates and by
the volume, mix, and interest rate sensitivity of
interest-earning assets and interest-bearing liabilities.
On a fully tax-equivalent basis, net interest income was
$165.1 million in 2010, an 8.8% increase from 2009 net
interest income of $151.7 million.
47
Table of Contents
The following table presents the Company’s average
balances, net interest income, interest rate spread, and net
interest margin for 2010, 2009, and 2008. Non-taxable income
from loans and securities is presented on a fully tax-equivalent
basis whereby tax-exempt income is adjusted upward by an amount
equivalent to the prevailing income taxes that would have been
paid if the income had been fully taxable.
Table
17 — Average Balance, Interest
Earned/Paid & Average Yields
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
|
Interest
|
Interest
|
Interest
|
||||||||||||||||||||||||||||||||||
|
Average
|
Earned/
|
Average
|
Average
|
Earned/
|
Average
|
Average
|
Earned/
|
Average
|
||||||||||||||||||||||||||||
| Balance | Paid | Yield | Balance | Paid | Yield | Balance | Paid | Yield | ||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
|
Interest-Earning Assets:
|
||||||||||||||||||||||||||||||||||||
|
Interest Bearing Cash, Federal Funds Sold, and Short Term
Investments
|
$ | 132,019 | $ | 337 | 0.26 | % | $ | 67,296 | $ | 290 | 0.43 | % | $ | 5,908 | $ | 148 | 2.51 | % | ||||||||||||||||||
|
Securities:
|
||||||||||||||||||||||||||||||||||||
|
Trading Assets
|
7,225 | 262 | 3.63 | % | 12,126 | 239 | 1.97 | % | 3,060 | 140 | 4.58 | % | ||||||||||||||||||||||||
|
Taxable Investment Securities
|
569,069 | 23,722 | 4.17 | % | 605,453 | 28,456 | 4.70 | % | 447,343 | 22,359 | 5.00 | % | ||||||||||||||||||||||||
|
Non-Taxable Investment Securities(1)
|
15,877 | 1,138 | 7.17 | % | 22,671 | 1,457 | 6.43 | % | 41,203 | 2,597 | 6.30 | % | ||||||||||||||||||||||||
|
Total Securities
|
592,171 | 25,122 | 4.24 | % | 640,250 | 30,152 | 4.71 | % | 491,606 | 25,096 | 5.10 | % | ||||||||||||||||||||||||
|
Loans Held for Sale
|
||||||||||||||||||||||||||||||||||||
|
Loans(2)
|
16,266 | 666 | 4.09 | % | 14,320 | 629 | 4.39 | % | 6,242 | 325 | 5.21 | % | ||||||||||||||||||||||||
|
Commercial and Industrial
|
427,004 | 19,457 | 4.56 | % | 336,776 | 15,955 | 4.74 | % | 246,500 | 14,574 | 5.91 | % | ||||||||||||||||||||||||
|
Commercial Real Estate
|
1,646,419 | 94,217 | 5.72 | % | 1,418,997 | 86,016 | 6.06 | % | 1,026,190 | 67,652 | 6.59 | % | ||||||||||||||||||||||||
|
Commercial Construction
|
155,524 | 7,507 | 4.83 | % | 193,498 | 9,502 | 4.91 | % | 160,330 | 9,275 | 5.78 | % | ||||||||||||||||||||||||
|
Small Business
|
81,091 | 4,829 | 5.96 | % | 85,567 | 5,143 | 6.01 | % | 81,459 | 5,771 | 7.08 | % | ||||||||||||||||||||||||
|
Total Commercial
|
2,310,038 | 126,010 | 5.45 | % | 2,034,838 | 116,616 | 5.73 | % | 1,514,479 | 97,272 | 6.42 | % | ||||||||||||||||||||||||
|
Residential Real Estate
|
525,203 | 25,235 | 4.80 | % | 542,758 | 27,333 | 5.04 | % | 406,565 | 21,329 | 5.25 | % | ||||||||||||||||||||||||
|
Residential Construction
|
6,565 | 334 | 5.09 | % | 12,798 | 805 | 6.29 | % | 9,637 | 631 | 6.55 | % | ||||||||||||||||||||||||
|
Consumer — Home Equity
|
504,886 | 19,369 | 3.84 | % | 447,890 | 17,523 | 3.91 | % | 367,825 | 18,857 | 5.13 | % | ||||||||||||||||||||||||
|
Total Consumer Real Estate
|
1,036,654 | 44,938 | 4.33 | % | 1,003,446 | 45,661 | 4.55 | % | 784,027 | 40,817 | 5.21 | % | ||||||||||||||||||||||||
|
Total Other Consumer
|
88,077 | 6,799 | 7.72 | % | 139,665 | 10,338 | 7.40 | % | 184,280 | 13,158 | 7.14 | % | ||||||||||||||||||||||||
|
Total Loans
|
3,434,769 | 177,747 | 5.17 | % | 3,177,949 | 172,615 | 5.43 | % | 2,482,786 | 151,247 | 6.09 | % | ||||||||||||||||||||||||
|
Total Interest-Earning Assets
|
$ | 4,175,225 | $ | 203,872 | 4.88 | % | $ | 3,899,815 | $ | 203,686 | 5.22 | % | $ | 2,986,542 | $ | 176,816 | 5.92 | % | ||||||||||||||||||
|
Cash and Due from Banks
|
62,103 | 65,509 | 65,992 | |||||||||||||||||||||||||||||||||
|
Federal Home Loan Bank Stock
|
35,854 | 33,135 | 23,325 | |||||||||||||||||||||||||||||||||
|
Other Assets
|
316,234 | 278,057 | 219,517 | |||||||||||||||||||||||||||||||||
|
Total Assets
|
$ | 4,589,416 | $ | 4,276,516 | $ | 3,295,376 | ||||||||||||||||||||||||||||||
|
Interest-Bearing Liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||||||||||||||
|
Savings and Interest Checking Accounts
|
$ | 1,183,247 | $ | 4,397 | 0.37 | % | $ | 913,881 | $ | 4,753 | 0.52 | % | $ | 688,336 | $ | 6,229 | 0.90 | % | ||||||||||||||||||
|
Money Market
|
739,264 | 4,565 | 0.62 | % | 639,231 | 6,545 | 1.02 | % | 472,065 | 9,182 | 1.95 | % | ||||||||||||||||||||||||
|
Time Certificates of Deposits
|
814,462 | 11,292 | 1.39 | % | 921,787 | 19,865 | 2.16 | % | 740,779 | 23,485 | 3.17 | % | ||||||||||||||||||||||||
|
Total Interest Bearing Deposits
|
2,736,973 | 20,254 | 0.74 | % | 2,474,899 | 31,163 | 1.26 | % | 1,901,180 | 38,896 | 2.05 | % | ||||||||||||||||||||||||
|
Borrowings:
|
||||||||||||||||||||||||||||||||||||
|
Federal Home Loan Bank Borrowings
|
318,151 | 9,589 | 3.01 | % | 409,551 | 11,519 | 2.81 | % | 312,451 | 10,714 | 3.43 | % | ||||||||||||||||||||||||
|
Federal Funds Purchased and Assets Sold Under
|
||||||||||||||||||||||||||||||||||||
|
Repurchase Agreements
|
182,467 | 3,084 | 1.69 | % | 180,632 | 3,396 | 1.88 | % | 154,440 | 4,663 | 3.02 | % | ||||||||||||||||||||||||
|
Junior Subordinated Debentures
|
61,857 | 3,666 | 5.93 | % | 61,857 | 3,739 | 6.04 | % | 60,166 | 3,842 | 6.39 | % | ||||||||||||||||||||||||
|
Subordinated Debt
|
30,000 | 2,170 | 7.23 | % | 30,000 | 2,178 | 7.26 | % | 10,410 | 750 | 7.20 | % | ||||||||||||||||||||||||
|
Other Borrowings
|
2,802 | — | 0.00 | % | 2,054 | — | 0.00 | % | 2,381 | 61 | 2.56 | % | ||||||||||||||||||||||||
|
Total Borrowings
|
595,277 | 18,509 | 3.11 | % | 684,094 | 20,832 | 3.05 | % | 539,848 | 20,030 | 3.71 | % | ||||||||||||||||||||||||
|
Total Interest-Bearing Liabilities
|
$ | 3,332,250 | $ | 38,763 | 1.16 | % | $ | 3,158,993 | $ | 51,995 | 1.65 | % | $ | 2,441,028 | $ | 58,926 | 2.41 | % | ||||||||||||||||||
|
Demand Deposits
|
773,718 | 659,916 | 533,543 | |||||||||||||||||||||||||||||||||
|
Other Liabilities
|
58,199 | 54,697 | 28,692 | |||||||||||||||||||||||||||||||||
|
Total Liabilities
|
$ | 4,164,167 | $ | 3,873,606 | $ | 3,003,263 | ||||||||||||||||||||||||||||||
|
Stockholders’ Equity
|
425,249 | 402,910 | 292,113 | |||||||||||||||||||||||||||||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 4,589,416 | $ | 4,276,516 | $ | 3,295,376 | ||||||||||||||||||||||||||||||
|
Net Interest Income(1)
|
$ | 165,109 | $ | 151,691 | $ | 117,890 | ||||||||||||||||||||||||||||||
|
Interest Rate Spread(3)
|
3.72 | % | 3.58 | % | 3.51 | % | ||||||||||||||||||||||||||||||
|
Net Interest Margin(4)
|
3.95 | % | 3.89 | % | 3.95 | % | ||||||||||||||||||||||||||||||
|
Supplemental Information:
|
||||||||||||||||||||||||||||||||||||
|
Total Deposits, Including Demand Deposits
|
$ | 3,510,691 | $ | 20,254 | $ | 3,134,815 | $ | 31,163 | $ | 2,434,723 | $ | 38,896 | ||||||||||||||||||||||||
|
Cost of Total Deposits
|
0.58 | % | 0.99 | % | 1.60 | % | ||||||||||||||||||||||||||||||
|
Total Funding Liabilities, Including Demand Deposits
|
$ | 4,105,968 | $ | 38,763 | $ | 3,818,909 | $ | 51,995 | $ | 2,974,571 | $ | 58,926 | ||||||||||||||||||||||||
|
Cost of Total Funding Liabilities
|
0.94 | % | 1.36 | % | 1.98 | % | ||||||||||||||||||||||||||||||
48
Table of Contents
| (1) | The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $1,148, $997 and $1,376 in 2010, 2009 and 2008, respectively. | |
| (2) | Average nonaccruing loans are included in loans. | |
| (3) | Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average costs of interest-bearing liabilities. | |
| (4) | Net interest margin represents net interest income as a percentage of average interest-earning assets. |
The following table presents certain information on a fully-tax
equivalent basis regarding changes in the Company’s
interest income and interest expense for the periods indicated.
For each category of interest-earning assets and
interest-bearing liabilities, information is provided with
respect to changes attributable to (1) changes in rate
(change in rate multiplied by prior year volume),
(2) changes in volume (change in volume multiplied by prior
year rate) and (3) changes in volume/rate (change in rate
multiplied by change in volume) which is allocated to the change
due to rate column.
Table
18 — Volume Rate Analysis
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2010 Compared To 2009 | 2009 Compared To 2008 | 2008 Compared To 2007 | ||||||||||||||||||||||||||||||||||
|
Change
|
Change
|
Change
|
Change
|
Change
|
Change
|
|||||||||||||||||||||||||||||||
|
Due to
|
Due to
|
Total
|
Due to
|
Due to
|
Total
|
Due to
|
Due to
|
Total
|
||||||||||||||||||||||||||||
| Rate(1) | Volume | Change | Rate(1) | Volume | Change | Rate(1) | Volume | Change | ||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
|
Income on Interest-Earning Assets:
|
||||||||||||||||||||||||||||||||||||
|
Interest Bearing Cash, Federal Funds Sold and Short Term
Investments
|
$ | (232 | ) | $ | 279 | $ | 47 | $ | (1,396 | ) | $ | 1,538 | $ | 142 | $ | (178 | ) | $ | (1,142 | ) | $ | (1,320 | ) | |||||||||||||
|
Securities:
|
||||||||||||||||||||||||||||||||||||
|
Trading Assets
|
120 | (97 | ) | 23 | (316 | ) | 415 | 99 | 53 | 39 | 92 | |||||||||||||||||||||||||
|
Taxable Securities
|
(3,024 | ) | (1,710 | ) | (4,734 | ) | (1,806 | ) | 7,903 | 6,097 | 822 | 1,791 | 2,613 | |||||||||||||||||||||||
|
Non-Taxable Securities(2)
|
118 | (437 | ) | (319 | ) | 28 | (1,168 | ) | (1,140 | ) | (50 | ) | (641 | ) | (691 | ) | ||||||||||||||||||||
|
Total Securities
|
(2,786 | ) | (2,244 | ) | (5,030 | ) | (2,094 | ) | 7,150 | 5,056 | 825 | 1,189 | 2,014 | |||||||||||||||||||||||
|
Loans Held for Sale
|
(48 | ) | 85 | 37 | (117 | ) | 421 | 304 | 26 | (34 | ) | (8 | ) | |||||||||||||||||||||||
|
Loans(2)(3)
|
(8,818 | ) | 13,950 | 5,132 | (20,980 | ) | 42,348 | 21,368 | (18,037 | ) | 33,743 | 15,706 | ||||||||||||||||||||||||
|
Total
|
$ | (11,884 | ) | $ | 12,070 | $ | 186 | $ | (24,587 | ) | $ | 51,457 | $ | 26,870 | $ | (17,364 | ) | $ | 33,756 | $ | 16,392 | |||||||||||||||
|
Expense of Interest-Bearing Liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||||||||||||||
|
Savings and Interest Checking Accounts
|
$ | (1,757 | ) | $ | 1,401 | $ | (356 | ) | $ | (3,517 | ) | $ | 2,041 | $ | (1,476 | ) | $ | (3,021 | ) | $ | 1,519 | $ | (1,502 | ) | ||||||||||||
|
Money Market
|
(3,004 | ) | 1,024 | (1,980 | ) | (5,888 | ) | 3,251 | (2,637 | ) | (4,894 | ) | 287 | (4,607 | ) | |||||||||||||||||||||
|
Time Certificates of Deposits
|
(6,260 | ) | (2,313 | ) | (8,573 | ) | (9,359 | ) | 5,739 | (3,620 | ) | (7,371 | ) | 8,737 | 1,366 | |||||||||||||||||||||
|
Total Interest-Bearing Deposits
|
(11,021 | ) | 112 | (10,909 | ) | (18,764 | ) | 11,031 | (7,733 | ) | (15,286 | ) | 10,543 | (4,743 | ) | |||||||||||||||||||||
|
Borrowings:
|
||||||||||||||||||||||||||||||||||||
|
Federal Home Loan Bank Borrowings
|
641 | (2,571 | ) | (1,930 | ) | (2,525 | ) | 3,330 | 805 | (3,178 | ) | 2,576 | (602 | ) | ||||||||||||||||||||||
|
Federal Funds Purchased and Assets Sold Under Repurchase
Agreements
|
(346 | ) | 34 | (312 | ) | (2,058 | ) | 791 | (1,267 | ) | (132 | ) | 1,400 | 1,268 | ||||||||||||||||||||||
|
Junior Subordinated Debentures
|
(73 | ) | — | (73 | ) | (211 | ) | 108 | (103 | ) | (1,224 | ) | 18 | (1,206 | ) | |||||||||||||||||||||
|
Subordinated Debt
|
(8 | ) | — | (8 | ) | 17 | 1,411 | 1,428 | 750 | — | 750 | |||||||||||||||||||||||||
|
Other Borrowings
|
— | — | — | (53 | ) | (8 | ) | (61 | ) | (81 | ) | (15 | ) | (96 | ) | |||||||||||||||||||||
|
Total Borrowings
|
214 | (2,537 | ) | (2,323 | ) | (4,830 | ) | 5,632 | 802 | (3,865 | ) | 3,979 | 114 | |||||||||||||||||||||||
|
Total
|
$ | (10,807 | ) | $ | (2,425 | ) | $ | (13,232 | ) | $ | (23,594 | ) | $ | 16,663 | $ | (6,931 | ) | $ | (19,151 | ) | $ | 14,522 | $ | (4,629 | ) | |||||||||||
|
Change in Net Interest Income
|
$ | (1,077 | ) | $ | 14,495 | $ | 13,418 | $ | (993 | ) | $ | 34,794 | $ | 33,801 | $ | 1,787 | $ | 19,234 | $ | 21,021 | ||||||||||||||||
| (1) | The changes for each category of interest income and expense are divided between the portion of change attributable to the variance in volume and the portion of the change attributable to the variances in rate for that category. The unallocated change in rate or volume variance has been allocated to the rate variances. | |
| (2) | The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $1,148, $997 and $1,376 in 2010, 2009 and 2008, respectively. |
49
Table of Contents
| (3) | Loans include portfolio loans and nonaccrual loans, however unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. |
The increase in net interest income is driven mainly by
reductions in the Company’s overall cost of funding,
stemming from the Company’s strategy to create a funding
mix that focuses on core deposits. Although loan balances
(including held for sale) increased by $174.6 million, a
decline in the size of and yield on the securities portfolio, as
well as a reduction in loan yields, reduced overall growth in
interest income.
Interest expense for the year ended December 31, 2010
decreased to $38.8 million from the $52.0 million
recorded in 2009, a decrease of $13.2 million, or 25.4%, of
which $11.0 million is due to the decrease in rates on
deposits. The total cost of funds decreased 42 basis points
to 0.94% for 2010 as compared to 1.36% for 2009. Average
interest-bearing deposits increased $262.1 million, or
10.6%, over the prior year while the cost of these deposits
decreased from 1.26% to 0.74% primarily attributable to the
active management of deposit costs.
Average borrowings decreased in 2010 by $88.8 million, or
13.0%, from the 2009 average balance. The average cost of
borrowings increased to 3.11% from 3.05%.
Provision For Loan Losses
The provision for
loan losses represents the charge to expense that is required to
maintain an adequate level of allowance for loan losses. The
provision for loan losses totaled $18.7 million in 2010,
compared with $17.3 million in 2009, an increase of
$1.3 million. The Company’s allowance for loan losses,
as a percentage of total loans, was 1.30%, as compared to 1.25%
at December 31, 2009. For the year ended December 31,
2010, net loan charge-offs totaled $14.8 million, an
increase of $2.7 million from the prior year.
The increase in the amount of the provision for loan losses is
the result of a combination of factors including: shifting
growth rates among various components of the Bank’s loan
portfolio with differing facets of risk; higher levels of net
loan charge-offs; and continued uncertainty with respect to the
economic environment. While the total loan portfolio increased
by 4.7% for the year ended December 31, 2010, as compared
to 2.1% organic growth, excluding the impact of acquisition, for
2009, growth among the commercial components of 8.2% continued
to outpace the consumer lending components which decreased 2.0%.
These lending categories each exhibit different credit risk
characteristics.
While the economic environment remains challenging, regional and
local general economic conditions showed improvement during
2010, as measured in terms of employment levels, statewide
economic activity, and other regional economic indicators. Local
residential real estate markets fundamentals weakened toward the
end of the year, resulting from the expiration of the Federal
Housing Tax Credit earlier in 2010. Additionally, Massachusetts
foreclosures increased in 2010 compared to 2009, although
activity slowed toward the end of the year. Regional commercial
real estate market conditions were mixed during 2010, with some
areas experiencing a slow recovery, while others were
characterized by higher vacancy rates and negative absorption.
Leading economic indicators signal continued economic
improvement in 2011, however uncertainty persists and growth is
expected to be slow.
Management’s periodic evaluation of the adequacy of the
allowance for loan losses considers past loan loss experience,
known and inherent risks in the loan portfolio, adverse
situations which may affect the borrowers’ ability to
repay, the estimated value of the underlying collateral, if any,
and current and prospective economic conditions. Substantial
portions of the Bank’s loans are secured by real estate in
Massachusetts. Accordingly, the ultimate collectability of a
substantial portion of the Bank’s loan portfolio is
susceptible to changes in property values within the state.
50
Table of Contents
Non-Interest Income
The following table sets
forth information regarding non-interest income for the periods
shown:
Table
19 — Non-Interest Income
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Service charges on deposit accounts
|
$ | 18,708 | $ | 17,060 | $ | 15,595 | ||||||
|
Wealth management
|
11,723 | 10,047 | 11,133 | |||||||||
|
Mortgage banking
|
5,041 | 4,857 | 3,072 | |||||||||
|
Bank owned life insurance
|
3,192 | 2,939 | 2,555 | |||||||||
|
Net gain/(loss) on sales of securities
|
458 | 1,354 | (609 | ) | ||||||||
|
Gain resulting from early termination of hedging relationship
|
— | 3,778 | — | |||||||||
|
Loan level derivatives
|
3,000 | 5,436 | — | |||||||||
|
Gross change on write-down of certain investments to fair value
|
497 | (7,382 | ) | (7,211 | ) | |||||||
|
Less: non-credit related
other-than-temporary
impairment(1)
|
(831 | ) | (1,576 | ) | — | |||||||
|
Net loss on write-down of certain investments to fair value
|
(334 | ) | (8,958 | ) | (7,211 | ) | ||||||
|
Other non-interest income
|
5,118 | 1,679 | 4,497 | |||||||||
|
Total
|
$ | 46,906 | $ | 38,192 | $ | 29,032 | ||||||
| (1) | Represents losses previously recognized in other comprehensive income not determined to be credit related. |
Non-interest income, which is generated by deposit account
service charges, investment management services, mortgage
banking activities, BOLI, and miscellaneous other sources,
amounted to $46.9 million in 2010, a $8.7 million, or
22.8%, increase from the prior year.
Service charges on deposit accounts, which represented 39.9% of
total non-interest income in 2010, increased from
$17.1 million in 2009 to $18.7 million in 2010, mainly
due to service charges related to debit card usage and overdraft
privileges on checking accounts.
Wealth management revenue increased by $1.7 million, or
16.7%, for the year ended December 31, 2010, as compared to
the same period in 2009. Assets under administration at
December 31, 2010 were $1.6 billion, an increase of
$295.8 million, or 23.2%, as compared to December 31,
2009. This increase is largely due to strong sales results and
general market appreciation.
Mortgage banking revenue of $5.0 million in 2010, increased
by 3.8% from the $4.9 million recorded in 2009. Capitalized
servicing rights are reported as mortgage servicing rights and
are amortized into non-interest income in proportion to, and
over the period of, the estimated future servicing of the
underlying financial assets. The Bank’s assumptions with
respect to prepayments, which affect the estimated average life
of the loans, are adjusted periodically to consider market
consensus loan prepayment predictions at that date. At
December 31, 2010 the mortgage servicing rights asset
totaled $1.6 million, or 0.63% of the serviced loan
portfolio. At December 31, 2009 the mortgage servicing
rights asset totaled $2.2 million, or 0.63%, of the
serviced loan portfolio.
A $458,000 net gain on the sale of securities was recorded
for the year ended December 31, 2010 as compared to a
$1.4 million net gain on the sale of securities for the
year ended December 31, 2009.
The Company recorded total credit related impairment charges on
certain pooled trust preferred securities and one private
mortgage-backed securities of $334,000 and $9.0 million,
pre-tax, for the years ended December 31, 2010 and
December 31, 2009, respectively.
Other non-interest income increased by $1.0 million, or
14.1%, for the year ended December 31, 2010, as compared to
the same period in 2009, largely attributable to increases in
income from the Company’s loan level derivatives program.
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Table of Contents
Non-Interest Expense
The following table sets
forth information regarding non-interest expense for the periods
shown:
Table
20 — Non-Interest Expense
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Salaries and employee benefits
|
$ | 76,983 | $ | 68,257 | $ | 58,275 | ||||||
|
Occupancy and equipment expenses
|
16,011 | 15,673 | 12,757 | |||||||||
|
Data processing and facilities management
|
5,773 | 5,779 | 5,574 | |||||||||
|
Merger and acquisition expense
|
— | 12,423 | 1,120 | |||||||||
|
FDIC assessment
|
5,247 | 6,975 | 1,388 | |||||||||
|
Legal fees
|
3,277 | 2,961 | 1,154 | |||||||||
|
Consulting
|
2,523 | 1,951 | 1,852 | |||||||||
|
Advertising
|
2,171 | 2,199 | 2,016 | |||||||||
|
Telephone
|
2,101 | 2,635 | 1,694 | |||||||||
|
Other intangibles amortization
|
2,080 | 2,539 | 1,803 | |||||||||
|
Software maintenance
|
1,963 | 1,862 | 1,486 | |||||||||
|
Other non-interest expense
|
21,616 | 18,561 | 15,024 | |||||||||
|
Total
|
$ | 139,745 | $ | 141,815 | $ | 104,143 | ||||||
Non-interest expense decreased by $2.1 million, or 1.5%,
during the year ended December 31, 2010 as compared to the
same period in 2009. Excluding the merger and acquisition
expense, associated with the Ben Franklin acquisition in 2009,
the primary reason for the increase in non-interest expense by
category in the table shown above is the annualized impact of
the Ben Franklin acquisition, other variance explanations are
noted below:
Salaries and employee benefits increased by $8.7 million,
or 12.8%, for the year ended December 31, 2010, as compared
to the same period in 2009, attributable to the addition of
employees as a result of Ben Franklin acquisition in April 2009,
as well as higher levels of performance based incentive
compensation, pension expense, and medical insurance increases.
There were no merger and acquisition expenses for the year ended
December 31, 2010. Merger and acquisition related
expenditures totaled $12.4 million for the year ended
December 31, 2009, associated with the Ben Franklin
acquisition in April 2009.
Total other non-interest expense increased by $3.0 million,
or 9.2%, for the year ended December 31, 2010, as compared
to the same period in 2009. The increase is primarily
attributable to the increases in loan level derivative expense
of $945,000, computer software write-off of $560,000, consultant
fees of $572,000, and loan work-out costs of $427,000, offset by
decreases in telephone expense of $534,000.
Income Taxes
For the years ended
December 31, 2010, 2009, and 2008 the Company recorded
combined federal and state income tax provisions of
$12.2 million, $6.7 million and $6.6 million,
respectively. These provisions reflect effective income tax
rates of 23.3%, 22.7% and 21.5%, in 2010, 2009, and 2008,
respectively, which are less than the Bank’s blended 2010
federal and state statutory tax rate of 40.9%. The lower
effective income tax rates are attributable to certain tax
preference assets such as BOLI and tax exempt bonds as well as
federal tax credits recognized in connection with the New
Markets Tax Credit (“NMTC”) program. Effective
July 1, 2008 Massachusetts state legislation was passed
which enacted corporate tax reform. As a result of this new
legislation, the state tax rate is being reduced 1.5% over a
three year period which began on January 1, 2010.
Deferred tax assets generally represent items that can be used
as a tax deduction or credit in future income tax returns, for
which a financial statement tax benefit has already been
recognized. The realization of the net deferred tax asset
generally depends upon future levels of taxable income and the
existence of prior years’ taxable income to which
“carry-back” refund claims could be made. Valuation
allowances are established against those deferred tax
52
Table of Contents
assets determined not likely to be realized. The Company had no
recorded tax valuation allowance as of December 31, 2010
and 2009.
The Company has several wholly-owned community development
entity subsidiaries which are described above in the
“General” section of Item 1 Business
.
These entities provide financing to low income communities and
as a result the Company has been awarded tax credits under the
New Markets Tax Credit program.
To date the Company has been awarded a total of
$125.0 million in tax credit allocation authority under the
Federal New Markets Tax Credit Program. Tax credits are eligible
to be recognized over a seven year period totaling 39% of the
total award, as capital is invested into a subsidiary which will
lend to qualifying businesses in low income communities.
Accordingly, the Company will be eligible to receive aggregate
tax credits totaling $48.8 million. The tax effect of all
income and expense transactions is recognized by the Company in
each year’s consolidated statements of income, regardless
of the year in which the transactions are reported for income
tax purposes. The following table details the tax credit
recognition by year associated with this program:
Table
21 — New Markets Tax Credit Recognition
Schedule
|
Total
|
||||||||||||||||||||||||||||||||||||||||
| Investment | 2004 - 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | Credits | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
|
2004
|
$ | 15 M | $ | 4,950 | $ | 900 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 5,850 | ||||||||||||||||||||
|
2005
|
15 M | 4,050 | 900 | 900 | — | — | — | — | — | 5,850 | ||||||||||||||||||||||||||||||
|
2007
|
38.2 M | 5,730 | 2,292 | 2,292 | 2,292 | 2,292 | — | — | — | 14,898 | ||||||||||||||||||||||||||||||
|
2008
|
6.8 M | 680 | 340 | 408 | 408 | 408 | 408 | — | — | 2,652 | ||||||||||||||||||||||||||||||
|
2009
|
10 M | 500 | 500 | 500 | 600 | 600 | 600 | 600 | — | 3,900 | ||||||||||||||||||||||||||||||
|
2010
|
40 M | — | 2,000 | 2,000 | 2,000 | 2,400 | 2,400 | 2,400 | 2,400 | 15,600 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 125 M | $ | 15,910 | $ | 6,932 | $ | 6,100 | $ | 5,300 | $ | 5,700 | $ | 3,408 | $ | 3,000 | $ | 2,400 | $ | 48,750 | ||||||||||||||||||||
Dividends
The Company declared cash dividends
of $0.72 per common share in 2010 and in 2009. The 2010 and 2009
ratio of dividends paid to earnings was 37.93% and 82.79%,
respectively.
Since substantially all of the funds available for the payment
of dividends are derived from the Bank, future dividends of the
Company will depend on the earnings of the Bank, its financial
condition, its need for funds, applicable governmental policies
and regulations, and other such matters as the Board of
Directors deem appropriate.
Comparison of 2009 vs. 2008
The
Company’s total assets increased by $853.6 million, or
23.5%, increasing to $4.5 billion at December 31, 2009
compared to December 31, 2008. Total average assets were
$4.3 billion and $3.3 billion in 2009 and 2008,
respectively. Total securities of $608.2 million, at
December 31, 2009, decreased $27.6 million compared to
the $635.8 million reported on December 31, 2008.
Total loans of $3.4 billion, at December 31, 2009
increased $743.0 million compared to the prior year ended
December 31, 2008. Total deposits of $3.4 billion at
December 31, 2009 reflected an increase of
$796.2 million, or 30.9%, compared to December 31,
2008. Borrowings decreased by $47.9 million, or 6.9%,
during the year ended December 31, 2009. Stockholders’
equity increased by $107.4 million in 2009. The increases
in the Company’s balance sheet for the year ended
December 31, 2009 versus 2008 are primarily a result of the
Benjamin Franklin acquisition which closed in April 2009 as well
as organic growth.
On April 10, 2009 the Company completed its acquisition of
Ben Franklin, the parent of Benjamin Franklin Bank, and opened
eleven new Rockland Trust branches, located primarily in the
Middlesex and Norfolk counties. There were $1.0 billion in
total assets acquired, of which $687.4 million were
attributable to the loan portfolio, and $921.9 million in
total liabilities acquired, of which $701.4 million were
attributable to total deposits. The transaction was valued at
approximately $84.5 million.
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Table of Contents
Net income for 2009 was $23.0 million, or $0.88 per diluted
share, compared to $24.0 million, or $1.52 per diluted
share, for 2008. Return on average assets and return on average
common equity were 0.40% and 4.29%, respectively, for 2009 and
0.73% and 8.20%, respectively, for 2008.
Net interest income on a fully tax-equivalent basis increased by
$33.8 million in 2009 compared to 2008. Interest income on
a fully tax-equivalent basis increased by $26.9 million, or
15.2%, to $203.7 million in 2009 as compared to the prior
year. Interest income on a fully tax equivalent basis on the
loan portfolio increased $21.4 million in 2009. Interest
income from taxable securities increased by $6.1 million,
or 27.3%, to $28.5 million in 2009 as compared to the prior
year. The overall yield on interest earning assets decreased by
70 basis points to 5.22% in 2009 as compared to 5.92% in
2008.
Interest expense for the year ended December 31, 2009
decreased to $52.0 million from the $58.9 million
recorded in 2008, a decrease of $6.9 million, or 11.8%. The
total cost of funds decreased 62 basis points to 1.36% for
2009 as compared to 1.98% for 2008. Average interest-bearing
deposits increased $573.7 million, or 30.2%, over the prior
year while the cost of these deposits decreased from 2.05% to
1.26% primarily attributable to a lower rate environment.
Average borrowings increased in 2009 by $144.2 million, or
26.7%, from the 2008 average balance. The majority of this
increase is attributable to the Ben Franklin acquisition and
organic loan growth. The average cost of borrowings decreased to
3.05% from 3.71%.
The provision for loan losses totaled $17.3 million in
2009, compared with $10.9 million in 2008, an increase of
$6.4 million. The Company’s allowance for loan losses,
as a percentage of total loans, was 1.25%, as compared to 1.39%
at December 31, 2008. For the year ended December 31,
2009, net loan charge-offs totaled $12.0 million, an
increase of $5.8 million from the prior year.
The increase in the amount of the provision for loan losses is
the result of a combination of factors including: shifting
growth rates among various components of the Bank’s loan
portfolio with differing facets of risk; higher levels of net
loan charge-offs in 2009; and changing expectations with respect
to the economic environment, increases in specific allocations
for impaired loans, and the level of loan delinquencies and
non-performing loans. While the total loan portfolio increased
by 28.0% for the year ended December 31, 2009, as compared
to 30.5% for 2008, growth among the commercial components of the
loan portfolio outpaced growth among those consumer components,
which exhibit different credit risk characteristics.
Non-interest income, which is generated by deposit account
service charges, investment management services, mortgage
banking activities, and miscellaneous other sources, amounted to
$38.2 million in 2009, a $9.2 million, or 31.6%,
increase from the prior year.
Service charges on deposit accounts, which represented 44.7% of
total non-interest income in 2009, increased from
$15.6 million in 2008 to $17.1 million in 2009,
primarily due to the Ben Franklin acquisition.
Wealth management revenue decreased by $1.1 million, or
9.8%, for the year ended December 31, 2009, as compared to
the same period in 2008. Assets under administration at
December 31, 2009 were $1.3 billion, an increase of
$155.0 million, or 13.8%, as compared to December 31,
2008.
Mortgage banking revenue of $4.9 million in 2009, increased
by 58.1% from the $3.1 million recorded in 2008. At
December 31, 2009 the mortgage servicing rights asset
totaled $2.2 million, or 0.63% of the serviced loan
portfolio. At December 31, 2008 the mortgage servicing
rights asset totaled $1.5 million, or 0.60%, of the
serviced loan portfolio.
BOLI income increased compared to the prior year by $384,000, or
15.0%. The increase was primarily due to insurance policies
assumed as part of the Ben Franklin acquisition.
A $1.4 million net gain on the sale of securities was
recorded for the year ended December 31, 2009. A
$609,000 net loss on the sale of securities was recorded
for the year ended December 31, 2008.
The Company recorded total credit related impairment charges on
certain pooled trust preferred securities and one private
mortgage-backed security of $9.0 million and
$7.2 million, pre-tax, for the years ended
December 31, 2009 and December 31, 2008, respectively.
Included in the $9.0 million of OTTI was $1.6 million
which the
54
Table of Contents
Company reclassed from other comprehensive income to earnings
for OTTI previously considered to be non-credit related. For the
year ended December 31, 2008 the Company recorded OTTI on
certain investment grade pooled trust preferred securities,
which resulted in a charge to non-interest income of
$7.2 million. Pursuant to the Investments — Debt
and Equity Securities topic of the FASB ASC which states that
previously recorded impairment charges which did not relate to
credit loss should be reclassified from retained earnings to OCI
as of January 1, 2009, the Company recorded a cumulative
effect adjustment that increased retained earnings and decreased
OCI by $6.0 million, or $3.8 million, net of tax. The
remaining $1.2 million of the original $7.2 million
OTTI charge was deemed to be credit related.
Other non-interest income increased by $2.6 million, or
58.2%, for the year ended December 31, 2009, as compared to
the same period in 2008, largely attributable to increases in
trading asset income of $991,000, gains on the disposition of
other real estate owned of $606,000, and a gain on tax credits
purchased of $413,000.
Non-interest expense increased by $37.7 million, or 36.2%,
during the year ended December 31, 2009 as compared to the
same period in 2008.
Salaries and employee benefits increased by $10.0 million,
or 17.1%, for the year ended December 31, 2009, as compared
to the same period in 2008. The increase in salaries and
benefits is primarily attributable to the Ben Franklin
acquisition in the second quarter of 2009 as well as incentive
compensation, sales commissions, and medical insurance increases.
Occupancy and equipment expense increased by $2.9 million,
or 22.9%, for the year ended December 31, 2009, as compared
to the same period in 2008. The increase is mainly due to
increases in rent expense due to the effects of the Ben Franklin
acquisition.
Data processing and facilities management expense increased by
$205,000, or 3.7%, in 2009 compared to 2008.
Merger and acquisition related expenditures totaled
$12.4 million and $1.1 million, for the year ended
December 31, 2009 and 2008, respectively, associated with
the Ben Franklin acquisition in April 2009 and the Slades
acquisition in March 2008.
The FDIC deposit insurance assessment increased
$5.6 million for the year ended December 31, 2009, as
compared to the same period in 2008, partially due to a special
assessment imposed to replenish the Deposit Insurance Fund
during 2009.
Total other non-interest expense increased by $7.2 million,
or 28.5%, for the year ended December 31, 2009, as compared
to the same period in 2008. The increase is primarily
attributable to the increases in loan work-out costs of
$2.6 million, telephone expenses of $941,000, amortization
of intangible assets of $736,000, OREO valuation adjustments of
$450,000, software maintenance of $376,000, and internet banking
of $226,000.
Risk Management
The Company’s Board of
Directors and Executive Management have identified seven
significant “Risk Categories” consisting of credit,
interest rate, liquidity, operations, compliance, reputation,
and strategic risk. The Board of Directors has approved a Risk
Management Policy that addresses each category of risk. The
chief executive officer, chief financial officer, chief
technology and operations officer, the senior lending officer
and other members of management provide regular reports to the
Board of Directors that review the level of risk to limits
established by the Risk Management Policy and other policies
approved by the Board of Directors that address risk and any key
risk issues and plans to address these issues.
Market Risk
Market risk is the sensitivity of
income to changes in interest rates, foreign exchange rates,
commodity prices and other market-driven rates or prices. The
Company has no trading operations, with the exception of funds
held for the purpose of funding an executive non-qualified
supplemented retirement plan managed by the Company’s
investment management group (see
Note 3,
“Securities”
within the Notes to the Consolidated
Financial Statements included in Item 8 hereof).
Interest-rate risk is the most significant non-credit risk to
which the Company is exposed. Interest-rate risk is the
sensitivity of income to changes in interest rates. Changes in
interest rates, as well as fluctuations in the level and
duration of assets and liabilities, affect net interest income,
the Company’s primary source of revenue. Interest-rate
55
Table of Contents
risk arises directly from the Company’s core banking
activities. In addition to directly impacting net interest
income, changes in the level of interest rates can also affect
the amount of loans originated, the timing of cash flows on
loans and securities, and the fair value of securities and
derivatives, as well as other effects.
The primary goal of interest-rate risk management is to control
this risk within limits approved by the Board of Directors.
These limits reflect the Company’s tolerance for
interest-rate risk over both short-term and long-term horizons.
The Company attempts to control interest-rate risk by
identifying, quantifying, and where appropriate, hedging its
exposure. The Company manages its interest-rate exposure using a
combination of on and off-balance sheet instruments, primarily
fixed rate portfolio securities, and interest rate swaps.
The Company quantifies its interest-rate exposures using net
interest income simulation models, as well as simpler gap
analysis, and Economic Value of Equity (“EVE”)
analysis. Key assumptions in these simulation analyses relate to
behavior of interest rates and behavior of the Company’s
deposit and loan customers. The most material assumptions relate
to the prepayment of mortgage assets (including mortgage loans
and mortgage-backed securities) and the life and sensitivity of
non-maturity deposits (e.g. DDA, NOW, savings and money market).
The risk of prepayment tends to increase when interest rates
fall. Since future prepayment behavior of loan customers is
uncertain, the resultant interest rate sensitivity of loan
assets cannot be determined exactly.
To mitigate these uncertainties, the Company gives careful
attention to its assumptions. In the case of prepayment of
mortgage assets, assumptions are derived from published dealer
median prepayment estimates for comparable mortgage loans.
The Bank may choose to utilize interest rate swap agreements and
interest rates caps and floors to mitigate interest-rate risk.
An interest rate swap is an agreement whereby one party agrees
to pay a floating rate of interest on a notional principal
amount in exchange for receiving a fixed rate of interest on the
same notional amount for a predetermined period of time from a
second party. Interest rate caps and floors are agreements
whereby one party agrees to pay a floating rate of interest on a
notional principal amount for a predetermined period of time to
a second party if certain market interest rate thresholds are
realized. The amounts relating to the notional principal amount
are not actually exchanged. See
Note 12,
“Derivatives and Hedging Activities”
within Notes
to Consolidated Financial Statements included in Item 8
hereof for additional information regarding the Company’s
Derivative Financial Instruments.
The Company manages the interest-rate risk inherent in its
mortgage banking operations by entering into forward sales
contracts. An increase in market interest rates between the time
the Company commits to terms on a loan and the time the Company
ultimately sells the loan in the secondary market will have the
effect of reducing the gain (or increasing the loss) the Company
records on the sale. The Company attempts to mitigate this risk
by entering into forward sales commitments in amounts sufficient
to cover all closed loans and a majority of interest rate-locked
loan commitments.
The Company’s earnings are not directly and materially
impacted by movements in foreign currency rates or commodity
prices. Movements in equity prices may have an indirect but
modest impact on earnings by affecting the volume of activity or
the amount of fees from investment-related business lines, as
well as changes in the fair value of trading securities.
The Company’s policy on interest-rate risk simulation
specifies that if interest rates were to shift gradually up or
down 200 basis points, estimated net interest income for
the subsequent 12 months should decline by less than 6.0%.
Given the unusually low rate environment at December 31,
2009 and 2008, the Company also assumed a 100 basis point
decline in interest rates, for certain points of the yield
curve, in addition to the normal 200 basis point increase
in rates. The Company was well within policy limits at
December 31, 2010 and 2009. The Company also reviews
numerous other scenarios, such as, the 500 basis point
increasing rate scenario. This scenario assumes a flattening
yield curve where short term rates move up by 500 basis
points while longer term rates only increase marginally.
56
Table of Contents
The following table sets forth the estimated effects on the
Company’s net interest income over a
12-month
period following the indicated dates in the event of the
indicated increases or decreases in market interest rates:
Table
22 — Interest Rate Sensitivity
|
500 Basis Point
|
||||||||||||
|
200 Basis Point
|
100 Basis Point
|
Rate Increase
|
||||||||||
| Rate Increase | Rate Decrease | Flattening Curve | ||||||||||
|
December 31, 2010
|
+1.1 | % | +0.4 | % | +1.1 | % | ||||||
|
December 31, 2009
|
(0.9 | )% | +0.4 | % | (1.8 | %) | ||||||
It should be emphasized, however, that the results are dependent
on material assumptions such as those discussed above. For
instance, asymmetrical rate behavior can have a material impact
on the simulation results. If competition for deposits forced
the Company to raise rates on those liabilities quicker than is
assumed in the simulation analysis without a corresponding
increase in asset yields, net interest income may be negatively
impacted. Alternatively, if the Company is able to lag increases
in deposit rates as loans re-price upward net interest income
would be positively impacted.
The most significant factors affecting market risk exposure of
the Company’s net interest income during 2010 were
(i) the shape of the U.S. Government securities and
interest rate swap yield curve, (ii) the level of
U.S. prime interest rate and LIBOR rates, and
(iii) the level of interest rates being offered on
long-term fixed rate loans.
The table below provides information about the Company’s
derivative financial instruments and other financial instruments
that are sensitive to changes in interest rates, including
interest rate swaps, and debt obligations. For debt obligations,
the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. For interest
rate swaps, the table presents notional amounts and weighted
average interest rates by expected maturity dates. Notional
amounts are used to calculate the contractual payments to be
exchanged under the contract. Weighted average variable rates
are based on implied forward rates at the reporting date. The
Company is not including its loan level derivatives in this
table due to the offsetting nature of these instruments.
Table
23 — Expected Maturities of Long Term Debt and
Interest Rate Derivatives
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
|
LIABILITIES
|
||||||||||||||||||||||||||||||||
|
Long Term debt:(1)
|
||||||||||||||||||||||||||||||||
|
Fixed Rate
|
$ | 45,003 | $ | 93,003 | $ | 25,003 | $ | 5,003 | $ | 3,003 | $ | 60,101 | $ | 231,116 | $ | 235,199 | ||||||||||||||||
|
Average interest rate
|
3.80 | % | 3.78 | % | 3.15 | % | 4.59 | % | 5.95 | % | 5.53 | % | 4.22 | % | ||||||||||||||||||
|
Variable Rate
|
— | — | — | — | — | $ | 61,857 | $ | 61,857 | $ | 60,796 | |||||||||||||||||||||
|
Average interest rate
|
— | — | — | — | — | 2.00 | % | 2.00 | % | |||||||||||||||||||||||
|
INTEREST RATE DERIVATIVES
|
||||||||||||||||||||||||||||||||
|
Interest Rate Swaps:
|
||||||||||||||||||||||||||||||||
|
Variable to Fixed
|
$ | — | $ | — | $ | 50,000 | $ | 50,000 | $ | — | $ | 75,000 | $ | 175,000 | $ | (12,206 | ) | |||||||||||||||
|
Average pay rate
|
— | — | 2.62 | % | 3.04 | % | — | 4.34 | % | 3.48 | % | |||||||||||||||||||||
|
Average receive rate
|
— | — | 0.30 | % | 0.30 | % | — | 0.30 | % | 0.30 | % | |||||||||||||||||||||
|
Fixed to Variable
|
— | — | — | — | — | — | — | |||||||||||||||||||||||||
|
Average pay rate
|
— | — | — | — | — | — | — | |||||||||||||||||||||||||
|
Average receive rate
|
— | — | — | — | — | — | — | |||||||||||||||||||||||||
| (1) | Long-term classification is based upon original maturity. |
Liquidity Risk
Liquidity, as it pertains to
the Company, is the ability to generate adequate amounts of cash
in the most economical way for the institution to meet its
ongoing obligations to pay deposit withdrawals and to fund
57
Table of Contents
loan commitments. The Company’s primary sources of funds
are deposits, borrowings, and the amortization, prepayment and
maturities of loans and securities.
The Bank utilizes its extensive branch network to access retail
customers who provide a stable base of in-market core deposits.
These funds are principally comprised of demand deposits,
interest checking accounts, savings accounts, and money market
accounts. Deposit levels are greatly influenced by interest
rates, economic conditions, and competitive factors. The Bank
has also established repurchase agreements, with major brokerage
firms as potential sources of liquidity. At December 31,
2010, the Bank had $50.0 million outstanding of such
repurchase agreements. In addition to agreements with brokers,
the Bank also had customer repurchase agreements outstanding
amounting to $118.1 million at December 31, 2010. As a
member of the FHLBB, the Bank has access to approximately
$370.4 million of remaining borrowing capacity. On
December 31, 2010, the Bank had $302.4 million
outstanding in FHLBB borrowings. Also, the Bank has
$176.2 million of unpledged securities. The Bank has a
$630.8 million available borrowing capacity with the
Federal Reserve Bank of Boston. At December 31, 2010, the
Company had no outstanding borrowings with the Federal Reserve
Bank of Boston.
Also included in borrowings at December 31, 2010 were
$61.8 million of junior subordinated debentures, comprised
primarily of trust preferred debt issued to the public. During
2008, the Bank issued $30.0 million of subordinated debt.
Asset/Liability Management
The Bank’s
asset/liability management process monitors and manages, among
other things, the interest rate sensitivity of the balance
sheet, the composition of the securities portfolio, funding
needs and sources, and the liquidity position. All of these
factors, as well as projected asset growth, current and
potential pricing actions, competitive influences, national
monetary and fiscal policy, and the regional economic
environment are considered in the asset/liability management
process.
The Asset/Liability Management Committee (“ALCO”),
whose members are comprised of the Bank’s senior
management, develop procedures consistent with policies
established by the Board of Directors, which monitor and
coordinate the Bank’s interest rate sensitivity and the
sources, uses, and pricing of funds. Interest rate sensitivity
refers to the Bank’s exposure to fluctuations in interest
rates and its effect on earnings. If assets and liabilities do
not re-price simultaneously and in equal volume, the potential
for interest rate exposure exists. It is management’s
objective to maintain stability in the growth of net interest
income through the maintenance of an appropriate mix of
interest-earning assets and interest-bearing liabilities and,
when necessary, within prudent limits, through the use of
off-balance sheet hedging instruments such as interest rate
swaps, floors and caps. The ALCO employs simulation analyses in
an attempt to quantify, evaluate, and manage the impact of
changes in interest rates on the Bank’s net interest
income. In addition, the Bank engages an independent consultant
to render advice with respect to asset and liability management
strategy.
The Bank is careful to increase deposits without adversely
impacting the weighted average cost of those funds. Accordingly,
management has implemented funding strategies that include FHLB
advances and repurchase agreement lines. These non-deposit funds
are also viewed as a contingent source of liquidity and, when
profitable lending and investment opportunities exist, access to
such funds provides a means to grow the balance sheet.
The Company actively manages its liquidity position under the
direction of the ALCO. Periodic review under prescribed policies
and procedures is intended to ensure that the Company will
maintain adequate levels of available funds. At
December 31, 2010 the Company’s liquidity position was
well above policy guidelines. Management believes that the Bank
has adequate liquidity available to respond to current and
anticipated liquidity demands.
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Table of Contents
Contractual
Obligations, Commitments, Contingencies, and Off-Balance Sheet
Financial Instruments
The Company has entered into contractual obligations,
commitments, and off-balance sheet financial instruments. The
following tables summarize the Company’s contractual
obligations, other commitments, contingencies, and off-balance
sheet financial instruments at December 31, 2010:
Table
24 — Contractual Obligations, Commitments,
Contingencies, and Off-Balance Sheet
Financial Instruments by Maturity
Financial Instruments by Maturity
| Payments Due — By Period | ||||||||||||||||||||
|
Contractual Obligations, Commitments and
|
Less than
|
One to
|
Four to
|
After
|
||||||||||||||||
|
Contingencies
|
Total | One Year | Three Years | Five Years | Five Years | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
FHLB advances(1)
|
$ | 302,414 | $ | 45,522 | $ | 118,512 | $ | 58,213 | $ | 80,167 | ||||||||||
|
Junior subordinated debentures(1)
|
61,857 | — | — | — | 61,857 | |||||||||||||||
|
Subordinated debt
|
30,000 | — | — | — | 30,000 | |||||||||||||||
|
Lease obligations
|
65,056 | 6,921 | 13,391 | 12,671 | 32,073 | |||||||||||||||
|
Data processing and core systems
|
17,222 | 4,829 | 7,785 | 4,608 | — | |||||||||||||||
|
Other vendor contracts
|
2,166 | 1,741 | 425 | — | — | |||||||||||||||
|
Retirement benefit obligations(2)
|
34,914 | 337 | 705 | 806 | 33,066 | |||||||||||||||
|
Other
|
||||||||||||||||||||
|
Securities sold under repurchase agreements
|
50,000 | — | 50,000 | — | — | |||||||||||||||
|
Customer repurchase agreements
|
118,119 | 118,119 | — | — | — | |||||||||||||||
|
Other borrowings
|
3,044 | 3,044 | — | — | — | |||||||||||||||
|
Total contractual obligations
|
$ | 684,792 | $ | 180,513 | $ | 190,818 | $ | 76,298 | $ | 237,163 | ||||||||||
| Amount of Commitment Expiring — By Period | ||||||||||||||||||||
|
Off-Balance Sheet
|
Less than
|
One to
|
Four to
|
After
|
||||||||||||||||
|
Financial Instruments
|
Total | One Year | Three Years | Five Years | Five Years | |||||||||||||||
|
Lines of credit
|
$ | 519,157 | $ | 123,366 | $ | — | $ | — | $ | 395,791 | ||||||||||
|
Standby letters of credit
|
21,524 | 21,524 | — | — | — | |||||||||||||||
|
Other loan commitments
|
588,855 | 425,938 | 80,313 | 7,184 | 75,420 | |||||||||||||||
|
Forward commitments to sell loans
|
62,818 | 62,818 | — | — | — | |||||||||||||||
|
Interest rate swaps — notional value(1)(3)
|
175,000 | — | 50,000 | 50,000 | 75,000 | |||||||||||||||
|
Customer-related positions
|
||||||||||||||||||||
|
Foreign exchange contracts(4)
|
41,706 | 41,706 | — | — | — | |||||||||||||||
|
Loan level interest rate swaps(5)
|
306,950 | — | 21,624 | 208,746 | 76,580 | |||||||||||||||
|
Total Commitments
|
$ | 1,716,010 | $ | 675,352 | $ | 151,937 | $ | 265,930 | $ | 622,791 | ||||||||||
| (1) | The Company has hedged certain short-term borrowings and variable rate junior subordinated debentures. | |
| (2) | Retirement benefit obligations include expected contributions to the Company’s frozen pension plan, post retirement plan, and supplemental executive retirement plans. Expected contributions for the pension plan have been included only through plan year July 1, 2010 — June 30, 2011. Contributions beyond this plan year can not be quantified as they will be determined based upon the return on the investments in the plan. Expected contributions for the post retirement plan and supplemental executive retirement plans include obligations that are payable over the life of the participants. | |
| (3) | Interest rate swaps on borrowings and junior subordinated debentures (Bank pays fixed, receives variable). | |
| (4) | Offsetting positions to interest rate foreign exchange contracts offered to commercial borrowers through the Company’s hedging program. | |
| (5) | Offsetting positions to Interest rate swaps offered to commercial borrowers through the Company’s hedging program. |
59
Table of Contents
Impact of Inflation and Changing Prices
The
consolidated financial statements and related notes thereto
presented elsewhere herein have been prepared in accordance with
accounting principles generally accepted in the United States of
America which require the measurement of financial position and
operating results in terms of historical dollars without
considering changes in the relative purchasing power of money
over time due to inflation.
The financial nature of the Company’s consolidated
financial statements is more clearly affected by changes in
interest rates than by inflation. Interest rates do not
necessarily fluctuate in the same direction or in the same
magnitude as the prices of goods and services. However,
inflation does affect the Company because, as prices increase,
the money supply grows and interest rates are affected by
inflationary expectations. The impact on the Company is a noted
increase in the size of loan requests with resulting growth in
total assets. In addition, operating expenses may increase
without a corresponding increase in productivity. There is no
precise method, however, to measure the effects of inflation on
the Company’s consolidated financial statements.
Accordingly, any examination or analysis of the financial
statements should take into consideration the possible effects
of inflation.
Critical
Accounting Policies
Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and could
potentially result in materially different results under
different assumptions and conditions. Management believes that
the Company’s most critical accounting policies upon which
the Company’s financial condition depends, and which
involve the most complex or subjective decisions or assessments,
are as follows:
Allowance for Loan Losses
The Company’s
allowance for loan losses provides for probable losses based
upon evaluations of known and inherent risks in the loan
portfolio. Arriving at an appropriate amount of allowance for
loan losses involves a high degree of judgment.
The Company makes use of two types of allowances for loan
losses: specific and general. A specific allowance may be
assigned to a loan that is considered to be impaired. Certain
loans are evaluated individually for impairment and are judged
to be impaired when management believes it is probable that the
Bank will not collect all of the contractual interest and
principal payments as scheduled in the loan agreement. Judgment
is required with respect to designating a loan as impaired and
determining the amount of the required specific allowance.
Management’s judgment is based upon its assessment of
probability of default, loss given default, and exposure at
default. Changes in these estimates could be due to a number of
circumstances which may have a direct impact on the provision
for loan losses and may result in changes to the amount of
allowance.
The general allowance is determined based upon the application
of the Company’s methodology for assessing the adequacy of
the allowance for loan losses, which considers historical and
expected loss factors, loan portfolio composition and other
relevant indicators. This methodology involves management’s
judgment regarding the application and use of such factors,
including the effects of changes to the prevailing economic
environment in its estimate of the required amounts of general
allowance.
The allowance is increased by provisions for loan losses and by
recoveries of loans previously charged-off and is reduced by
loans charged-off. For additional discussion of the
Company’s methodology of assessing the adequacy of the
allowance for loan losses, see
Note 4, “Loans,
Allowance for Loan Losses, and Credit Quality”
within
Notes to Consolidated Financial Statements included in
Item 8 hereof.
Income Taxes
The Company accounts for income
taxes using two components of income tax expense, current and
deferred. Taxes are discussed in more detail in
Note 13,
“Income Taxes”
within Notes to the Consolidated
Financial Statements included in Item 8 hereof. Accrued
taxes represent the net estimated amount due to or to be
received from taxing authorities in the current year. In
estimating accrued taxes, management assesses the relative
merits and risks of the appropriate tax treatment of
transactions taking into account statutory, judicial, and
regulatory guidance in the context of the Company’s tax
position. Deferred tax assets and liabilities represent
differences between when a tax benefit or expense is recognized
for book purposes and on the Company’s tax return. Future
tax assets are assessed for recoverability. The Company would
record a valuation allowance if it
60
Table of Contents
believes based on available evidence that it is more likely than
not that the future tax assets recognized will not be realized
before their expiration. The amount of the future income tax
asset recognized and considered realizable could be reduced if
projected income is not achieved due to various factors such as
unfavorable business conditions. If projected income is not
expected to be achieved, the Company would record a valuation
allowance to reduce its future tax assets to the amount that it
believes can be realized in its future tax returns. The Company
had no recorded tax valuation allowance as of December 31,
2010. Additionally, deferred tax assets and liabilities are
calculated based on tax rates expected to be in effect in future
periods. Previously recorded tax assets and liabilities need to
be adjusted when the expected date of the future event is
revised based upon current information. The Company may record a
liability for unrecognized tax benefits related to uncertain tax
positions taken by the Company on its tax returns for which
there is less than a 50% likelihood of being recognized upon a
tax examination. All movements in unrecognized tax benefits are
recognized through the provision for income taxes.
Valuation of Goodwill/Intangible Assets and Analysis for
Impairment
The Company has increased its market
share through the acquisition of entire financial institutions
accounted for under the acquisition method of accounting, as
well as from the acquisition of branches (not the entire
institution) and other non-banking entities. For all
acquisitions, the Company is required to record assets acquired
and liabilities assumed at their fair value, which is an
estimate determined by the use of internal or other valuation
techniques. Goodwill is subject to ongoing periodic impairment
tests and is evaluated using a two step impairment approach.
Step one of the impairment testing compares book value to the
market value of the Company’s stock, or to the fair value
of the reporting unit. If test one is failed, a more detailed
analysis is performed, which involves measuring the excess of
the fair value of the reporting unit, as determined in step one,
over the aggregate fair value of the individual assets,
liabilities, and identifiable intangibles by utilizing a
comparable analysis of relevant price multiples in recent market
transactions. The Company’s intangible assets are also
subject to ongoing periodic impairment testing. The Company
tests each of the intangibles by comparing the carrying value of
the intangible to the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the
asset.
Valuation of Securities and Analysis for
Impairment
Securities that the Company has the
ability and intent to hold until maturity are classified as
securities
held-to-maturity
and are accounted for using historical cost, adjusted for
amortization of premium and accretion of discount. Trading
securities are carried at fair value, with unrealized gains and
losses recorded in other non-interest income. All other
securities are classified as securities
available-for-sale
and are carried at fair market value. The fair values of
securities are based on either quoted market price, third party
pricing services, or third party valuations. Unrealized gains
and losses on securities
available-for-sale
are reported, on an after-tax basis, as a separate component of
stockholders’ equity in accumulated other comprehensive
income.
On a quarterly basis, the Company makes an assessment to
determine whether there have been any events or circumstances to
indicate that a security for which there is an unrealized loss
is impaired on an
other-than-temporary
basis. The Company considers many factors, including the
severity and duration of the impairment; 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, recent events specific to the
issuer or industry; and for debt securities, external credit
ratings and recent downgrades. The term
other-than-temporary
is not intended to indicate that the decline is permanent. It
indicates that the prospects for near-term recovery are not
necessarily favorable or that there is a lack of evidence to
support fair values greater than or equal to the carrying value
of the investment. Management prepares an estimate of the
expected cash flows for investment securities that potentially
may be deemed to have OTTI. This estimate begins with the
contractual cash flows of the security. This amount is then
reduced by an estimate of probable credit losses associated with
the security. When estimating the extent of probable losses on
the securities, management considers the strength of the
underlying issuers of the securities. Indicators of diminished
credit quality of the issuers include defaults, interest
deferrals, or “payments in kind.” Management also
considers numerous factors when estimating the ultimate
realizability of the cash flow for each individual security. The
resulting estimate of cash flows after considering credit is
then subject to a present value computation using a discount
rate equal to the current yield used to accrete the beneficial
interest or, the effective interest rate implicit in the
security at the date of acquisition. If the present value of the
estimated cash flows is less than the current amortized cost
basis, an OTTI is considered to have occurred and the security
is written down to the fair value
61
Table of Contents
indicated by the cash flows analysis. Any portion of decline in
fair value considered to be an OTTI charge that is not due to
the reduction in cash flows due to credit is considered a
decline due to other factors such as liquidity or interest rates
and accordingly is recorded in other comprehensive income. Any
portion of the decline which is related to credit is recorded in
earnings.
RECENT
ACCOUNTING DEVELOPMENTS
See
Note 1, “Summary of Significant Accounting
Policies”
within Notes to Consolidated Financial
Statements included in Item 8 hereof.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Assets and
Liability Management” in Item 7 hereof.
62
Table of Contents
| Item 8. | Financial Statements and Supplementary Data |
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Independent Bank Corp.:
We have audited the accompanying consolidated balance sheets of
Independent Bank Corp. and subsidiaries (the
“Company”) as of December 31, 2010 and 2009, and
the related consolidated statements of income,
stockholders’ equity, and cash flows for the years then
ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Independent Bank Corp. and subsidiaries at
December 31, 2010 and 2009, and the consolidated results of
their operations and their cash flows for the years then ended,
in conformity with U.S. generally accepted accounting
principles.
During 2009, the Company changed its method of accounting for
impairment losses on investment securities (see Note 1 to
the financial statements) and business combinations (see
Note 2 to the financial statements).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of
December 31, 2010, based on criteria established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated
March 4, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 4, 2011
63
Table of Contents
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Independent Bank Corp.:
We have audited the accompanying consolidated statements of
income, stockholders’ equity, and cash flow for the year
ended December 31, 2008 of Independent Bank Corp. and
subsidiaries (the “Company”). These consolidated
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the results
of the Company’s operations and their cash flow for the
year ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
March 10, 2009
64
Table of Contents
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
ASSETS
|
||||||||
|
CASH AND DUE FROM BANKS
|
$ | 42,112 | $ | 121,905 | ||||
|
INTEREST EARNING DEPOSITS WITH BANKS
|
119,170 | — | ||||||
|
SECURITIES
|
||||||||
|
TRADING ASSETS
|
7,597 | 6,171 | ||||||
|
SECURITIES AVAILABLE FOR SALE
|
377,457 | 508,650 | ||||||
|
SECURITIES HELD TO MATURITY (fair value $201,234 and $93,438)
|
202,732 | 93,410 | ||||||
|
TOTAL SECURITIES
|
587,786 | 608,231 | ||||||
|
LOANS HELD FOR SALE (amortized cost $28,510 at December 31,
2010)
|
27,917 | 13,466 | ||||||
|
LOANS
|
||||||||
|
COMMERCIAL AND INDUSTRIAL
|
502,952 | 373,531 | ||||||
|
COMMERCIAL REAL ESTATE
|
1,717,118 | 1,614,474 | ||||||
|
COMMERCIAL CONSTRUCTION
|
129,421 | 175,312 | ||||||
|
SMALL BUSINESS
|
80,026 | 82,569 | ||||||
|
RESIDENTIAL REAL ESTATE
|
473,936 | 555,306 | ||||||
|
RESIDENTIAL CONSTRUCTION
|
4,175 | 10,736 | ||||||
|
HOME EQUITY
|
579,278 | 471,862 | ||||||
|
CONSUMER — OTHER
|
68,773 | 111,725 | ||||||
|
TOTAL LOANS
|
3,555,679 | 3,395,515 | ||||||
|
LESS: ALLOWANCE FOR LOAN LOSSES
|
(46,255 | ) | (42,361 | ) | ||||
|
NET LOANS
|
3,509,424 | 3,353,154 | ||||||
|
FEDERAL HOME LOAN BANK STOCK
|
35,854 | 35,854 | ||||||
|
BANK PREMISES AND EQUIPMENT, NET
|
45,712 | 44,235 | ||||||
|
GOODWILL
|
129,617 | 129,348 | ||||||
|
IDENTIFIABLE INTANGIBLE ASSETS
|
12,339 | 14,382 | ||||||
|
BANK OWNED LIFE INSURANCE
|
82,711 | 79,252 | ||||||
|
OTHER REAL ESTATE OWNED & OTHER FORECLOSED ASSETS
|
7,333 | 3,994 | ||||||
|
OTHER ASSETS
|
95,763 | 78,200 | ||||||
|
TOTAL ASSETS
|
$ | 4,695,738 | $ | 4,482,021 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
DEPOSITS
|
||||||||
|
DEMAND DEPOSITS
|
$ | 842,067 | $ | 721,792 | ||||
|
SAVINGS AND INTEREST CHECKING ACCOUNTS
|
1,375,254 | 1,073,990 | ||||||
|
MONEY MARKET
|
717,286 | 661,731 | ||||||
|
TIME CERTIFICATES OF DEPOSIT OVER $100,000
|
219,480 | 304,621 | ||||||
|
OTHER TIME CERTIFICATES OF DEPOSIT
|
473,696 | 613,160 | ||||||
|
TOTAL DEPOSITS
|
3,627,783 | 3,375,294 | ||||||
|
FEDERAL HOME LOAN BANK BORROWINGS
|
302,414 | 362,936 | ||||||
|
FEDERAL FUNDS PURCHASED AND ASSETS SOLD UNDER
|
||||||||
|
REPURCHASE AGREEMENTS
|
168,119 | 190,452 | ||||||
|
JUNIOR SUBORDINATED DEBENTURES
|
61,857 | 61,857 | ||||||
|
SUBORDINATED DEBENTURES
|
30,000 | 30,000 | ||||||
|
OTHER BORROWINGS
|
3,044 | 2,152 | ||||||
|
TOTAL BORROWINGS
|
565,434 | 647,397 | ||||||
|
OTHER LIABILITIES
|
66,049 | 46,681 | ||||||
|
TOTAL LIABILITIES
|
4,259,266 | 4,069,372 | ||||||
|
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
|
||||||||
|
Issued and Outstanding : 21,220,801 Shares in 2010 and
21,072,196 Shares in 2009
|
210 | 209 | ||||||
|
(includes 219,900 and 136,775 shares of unvested restricted
stock awards, respectively)
|
||||||||
|
SHARES HELD IN RABBI TRUST AT COST 178,382 Shares
in 2010 and 176,507 Shares in 2009
|
(2,738 | ) | (2,482 | ) | ||||
|
DEFERRED COMPENSATION OBLIGATION
|
2,738 | 2,482 | ||||||
|
ADDITIONAL PAID IN CAPITAL
|
226,708 | 225,088 | ||||||
|
RETAINED EARNINGS
|
210,320 | 184,599 | ||||||
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
|
(766 | ) | 2,753 | |||||
|
TOTAL STOCKHOLDERS’ EQUITY
|
436,472 | 412,649 | ||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 4,695,738 | $ | 4,482,021 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
65
Table of Contents
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||
|
INTEREST INCOME
|
||||||||||||
|
Interest on Loans
|
$ | 177,064 | $ | 172,128 | $ | 150,780 | ||||||
|
Taxable Interest and Dividends on Securities
|
23,984 | 28,695 | 23,447 | |||||||||
|
Non-taxable Interest and Dividends on Securities
|
673 | 947 | 740 | |||||||||
|
Interest on Loans Held for Sale
|
666 | 629 | 325 | |||||||||
|
Interest on Federal Funds Sold and Short-Term Investments
|
337 | 290 | 148 | |||||||||
|
Total Interest Income
|
202,724 | 202,689 | 175,440 | |||||||||
|
INTEREST EXPENSE
|
||||||||||||
|
Interest on Deposits
|
20,254 | 31,163 | 38,896 | |||||||||
|
Interest on Borrowings
|
18,509 | 20,832 | 20,030 | |||||||||
|
Total Interest Expense
|
38,763 | 51,995 | 58,926 | |||||||||
|
Net Interest Income
|
163,961 | 150,694 | 116,514 | |||||||||
|
PROVISION FOR LOAN LOSSES
|
18,655 | 17,335 | 10,888 | |||||||||
|
Net Interest Income After Provision For Loan Losses
|
145,306 | 133,359 | 105,626 | |||||||||
|
NON-INTEREST INCOME
|
||||||||||||
|
Service Charges on Deposit Accounts
|
18,708 | 17,060 | 15,595 | |||||||||
|
Wealth Management
|
11,723 | 10,047 | 11,133 | |||||||||
|
Mortgage Banking Income
|
5,041 | 4,857 | 3,072 | |||||||||
|
BOLI Income
|
3,192 | 2,939 | 2,555 | |||||||||
|
Net Loss/Gain on Sales of Securities
|
458 | 1,354 | (609 | ) | ||||||||
|
Gain Resulting From Early Termination of Hedging Relationship
|
— | 3,778 | — | |||||||||
|
Gross Change on Write-Down of Certain Investments to Fair Value
|
497 | (7,382 | ) | (7,211 | ) | |||||||
|
Less: Non-Credit Related
Other-Than-Temporary
Impairment
|
(831 | ) | (1,576 | ) | — | |||||||
|
Net Loss on Write-Down of Certain Investments to Fair Value
|
(334 | ) | (8,958 | ) | (7,211 | ) | ||||||
|
Other Non-Interest Income
|
8,118 | 7,115 | 4,497 | |||||||||
|
Total Non-Interest Income
|
46,906 | 38,192 | 29,032 | |||||||||
|
NON-INTEREST EXPENSES
|
||||||||||||
|
Salaries and Employee Benefits
|
76,983 | 68,257 | 58,275 | |||||||||
|
Occupancy and Equipment Expenses
|
16,011 | 15,673 | 12,757 | |||||||||
|
Data Processing & Facilities Management
|
5,773 | 5,779 | 5,574 | |||||||||
|
FDIC Assessment
|
5,247 | 6,975 | 1,388 | |||||||||
|
Legal Fees
|
3,277 | 2,961 | 1,154 | |||||||||
|
Consulting Expense
|
2,523 | 1,951 | 1,852 | |||||||||
|
Advertising Expense
|
2,171 | 2,199 | 2,016 | |||||||||
|
Telephone Expense
|
2,101 | 2,635 | 1,694 | |||||||||
|
Other Intangibles Amortization
|
2,080 | 2,539 | 1,803 | |||||||||
|
Software Maintenance
|
1,963 | 1,862 | 1,486 | |||||||||
|
Merger and Acquisition Expense
|
— | 12,423 | 1,120 | |||||||||
|
Other Non-Interest Expenses
|
21,616 | 18,561 | 15,024 | |||||||||
|
Total Non-Interest Expenses
|
139,745 | 141,815 | 104,143 | |||||||||
|
INCOME BEFORE INCOME TAXES
|
52,467 | 29,736 | 30,515 | |||||||||
|
PROVISION FOR INCOME TAXES
|
12,227 | 6,747 | 6,551 | |||||||||
|
NET INCOME
|
$ | 40,240 | $ | 22,989 | $ | 23,964 | ||||||
|
PREFERRED STOCK DIVIDEND
|
$ | — | $ | 5,698 | $ | — | ||||||
|
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
|
$ | 40,240 | $ | 17,291 | $ | 23,964 | ||||||
|
BASIC EARNINGS PER SHARE
|
$ | 1.90 | $ | 0.88 | $ | 1.53 | ||||||
|
DILUTED EARNINGS PER SHARE
|
$ | 1.90 | $ | 0.88 | $ | 1.52 | ||||||
|
Weighted Average Common Shares (Basic)
|
21,178,117 | 19,642,965 | 15,694,555 | |||||||||
|
Common stock equivalents
|
25,798 | 30,191 | 64,927 | |||||||||
|
Weighted average common shares (Diluted)
|
21,203,915 | 19,673,156 | 15,759,482 | |||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
66
Table of Contents
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
Value of
|
Accumulated
|
|||||||||||||||||||||||||||||||
|
Common
|
Shares
|
Deferred
|
Additional
|
Other
|
||||||||||||||||||||||||||||
|
Preferred
|
Shares
|
Common
|
Held in
|
Compensation
|
Paid-In
|
Retained
|
Comprehensive
|
|||||||||||||||||||||||||
| Stock | Outstanding | Stock | Rabbi Trust | Obligation | Capital | Earnings | Income/(loss) | |||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||||||||||||||
|
BALANCE DECEMBER 31, 2007
|
$ | — | 13,760,561 | $ | 137 | $ | (2,012 | ) | $ | 2,012 | $ | 60,632 | $ | 164,565 | $ | (4,869 | ) | |||||||||||||||
|
COMPREHENSIVE INCOME:
|
||||||||||||||||||||||||||||||||
|
Net Income
|
— | — | — | — | — | — | 23,964 | — | ||||||||||||||||||||||||
|
Change in Unrealized Gain on Securities Available For Sale, Net
of Tax and Realized Gains
|
— | — | — | — | — | — | — | 1,732 | ||||||||||||||||||||||||
|
Change in Fair Value of Cash Flow Hedges, Net of Tax, and
Realized Gains
|
— | — | — | — | — | — | — | (6,615 | ) | |||||||||||||||||||||||
|
Amortization of Prior Service Cost
|
— | — | — | — | — | — | — | (118 | ) | |||||||||||||||||||||||
|
Other Comprehensive Loss
|
(5,001 | ) | ||||||||||||||||||||||||||||||
|
TOTAL COMPREHENSIVE INCOME
|
||||||||||||||||||||||||||||||||
|
COMMON DIVIDEND DECLARED ($0.72 PER SHARE)
|
— | — | — | — | — | — | (11,730 | ) | — | |||||||||||||||||||||||
|
COMMON STOCK ISSUED FOR ACQUISITION
|
— | 2,492,195 | 25 | — | — | 76,203 | — | — | ||||||||||||||||||||||||
|
PROCEEDS FROM EXERCISE OF STOCK OPTIONS
|
— | 44,934 | 1 | — | — | — | 694 | — | ||||||||||||||||||||||||
|
TAX EXPENSE RELATED TO EQUITY AWARD ACTIVITY
|
— | — | — | — | — | 131 | — | — | ||||||||||||||||||||||||
|
EQUITY BASED COMPENSATION
|
— | — | — | — | — | 526 | — | — | ||||||||||||||||||||||||
|
RESTRICTED SHARED ISSUED, NET OF AWARDS SURRENDERED
|
— | 3,715 | — | — | — | (4 | ) | — | — | |||||||||||||||||||||||
|
DEFERRED COMPENSATION OBLIGATION
|
— | — | — | (255 | ) | 255 | — | — | — | |||||||||||||||||||||||
|
BALANCE DECEMBER 31, 2008
|
$ | — | 16,301,405 | $ | 163 | $ | (2,267 | ) | $ | 2,267 | $ | 137,488 | $ | 177,493 | $ | (9,870 | ) | |||||||||||||||
|
CUMULATIVE EFFECT ACCOUNTING ADJUSTMENT, NET OF TAX(1)
|
— | — | — | — | — | — | 3,823 | (3,823 | ) | |||||||||||||||||||||||
|
COMPREHENSIVE INCOME:
|
||||||||||||||||||||||||||||||||
|
Net Income
|
— | — | — | — | — | — | 22,989 | — | ||||||||||||||||||||||||
|
Change in Unrealized Gain on Securities Available For Sale, Net
of Tax and Realized Gains
|
— | — | — | — | — | — | — | 9,588 | ||||||||||||||||||||||||
|
Change in Fair Value of Cash Flow Hedges, Net of Tax, and
Realized Gains
|
— | — | — | — | — | — | — | 7,446 | ||||||||||||||||||||||||
|
Amortization of Prior Service Cost
|
— | — | — | — | — | — | — | (588 | ) | |||||||||||||||||||||||
|
Other Comprehensive Income
|
— | — | — | — | — | — | — | 16,446 | ||||||||||||||||||||||||
|
TOTAL COMPREHENSIVE INCOME
|
— | — | — | — | — | — | — | |||||||||||||||||||||||||
|
DIVIDENDS DECLARED:
|
||||||||||||||||||||||||||||||||
|
Common Declared ($0.72 per share)
|
— | — | — | — | — | — | (14,315 | ) | — | |||||||||||||||||||||||
|
Preferred Declared(2)
|
— | — | — | — | — | — | (5,698 | ) | — | |||||||||||||||||||||||
|
COMMON STOCK ISSUED FOR ACQUISITION
|
— | 4,624,948 | 46 | — | — | 84,452 | — | — | ||||||||||||||||||||||||
|
PROCEEDS FROM EXERCISE OF STOCK OPTIONS
|
— | 23,400 | — | — | — | 307 | — | |||||||||||||||||||||||||
|
TAX EXPENSE RELATED TO EQUITY AWARD ACTIVITY
|
— | — | — | — | — | (3 | ) | — | — | |||||||||||||||||||||||
|
EQUITY BASED COMPENSATION
|
— | — | — | — | — | 774 | — | — | ||||||||||||||||||||||||
|
RESTRICTED SHARED ISSUED, NET OF AWARDS SURRENDERED
|
— | 122,443 | — | — | — | (3 | ) | — | — | |||||||||||||||||||||||
|
DEFERRED COMPENSATION OBLIGATION
|
— | — | — | (215 | ) | 215 | — | — | — | |||||||||||||||||||||||
|
ISSUANCE OF PREFERRED STOCK AND WARRANTS
|
73,578 | — | — | — | — | 4,580 | — | — | ||||||||||||||||||||||||
|
REDEMPTION OF PREFERRED STOCK AND WARRANTS
|
(73,578 | ) | — | — | — | — | (2,200 | ) | — | — | ||||||||||||||||||||||
|
BALANCE DECEMBER 31, 2009
|
$ | — | 21,072,196 | $ | 209 | $ | (2,482 | ) | $ | 2,482 | $ | 225,088 | $ | 184,599 | $ | 2,753 | ||||||||||||||||
|
COMPREHENSIVE INCOME:
|
||||||||||||||||||||||||||||||||
|
Net Income
|
— | — | — | — | — | — | 40,240 | — | ||||||||||||||||||||||||
|
Change in Unrealized Gain on Securities Available For Sale, Net
of Tax and Realized Gains/(Losses)
|
— | — | — | — | — | — | — | 1,912 | ||||||||||||||||||||||||
|
Change in Fair Value of Cash Flow Hedges, Net of Tax and
Realized Gains/(Losses)
|
— | — | — | — | — | — | — | (5,549 | ) | |||||||||||||||||||||||
|
Amortization of Prior Service Cost, net of tax
|
— | — | — | — | — | — | — | 118 | ||||||||||||||||||||||||
|
Other Comprehensive Loss
|
— | — | — | — | — | — | — | (3,519 | ) | |||||||||||||||||||||||
|
TOTAL COMPREHENSIVE INCOME
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
COMMON DIVIDEND DECLARED ($0.72 PER SHARE)
|
— | — | — | — | — | — | (15,261 | ) | — | |||||||||||||||||||||||
|
PROCEEDS FROM EXERCISE OF STOCK OPTIONS
|
— | 44,930 | 1 | — | — | — | 742 | — | ||||||||||||||||||||||||
|
TAX EXPENSE RELATED TO EQUITY AWARD ACTIVITY
|
— | — | — | — | — | 68 | — | — | ||||||||||||||||||||||||
|
EQUITY BASED COMPENSATION
|
— | — | — | — | — | 1,666 | — | — | ||||||||||||||||||||||||
|
RESTRICTED STOCK AWARDS GRANTED, NET OF AWARDS SURRENDER
|
— | 103,675 | — | — | — | (114 | ) | — | — | |||||||||||||||||||||||
|
DEFERRED COMPENSATION OBLIGATION
|
— | — | — | (256 | ) | 256 | — | — | — | |||||||||||||||||||||||
|
BALANCE DECEMBER 31, 2010
|
$ | — | 21,220,801 | $ | 210 | $ | (2,738 | ) | $ | 2,738 | $ | 226,708 | $ | 210,320 | $ | (766 | ) | |||||||||||||||
| (1) | Represents reclassification of the non-credit related component of previously recorded Other-Than-Temporary impairment, pursuant to the provisions of the Investments-Debt and Equity Securities Topic of FASB ASC. | |
| (2) | Includes $196 discount of accretion on preferred stock and $4,384 of deemed dividend associated with the Company’s exit from the U.S. Treasury’s Capital Purchase Program. |
The accompanying notes are an integral part of these
consolidated financial statements.
67
Table of Contents
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net Income
|
$ | 40,240 | $ | 22,989 | $ | 23,964 | ||||||
|
ADJUSTMENTS TO RECONCILE NET INCOME TO
|
||||||||||||
|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
|
||||||||||||
|
Depreciation and amortization
|
9,880 | 5,744 | 4,636 | |||||||||
|
Provision for loan losses
|
18,655 | 17,335 | 10,888 | |||||||||
|
Deferred income tax benefit
|
(2,494 | ) | (2,281 | ) | (7,871 | ) | ||||||
|
Net (gain) loss on sale of investments
|
(458 | ) | (1,354 | ) | 609 | |||||||
|
Loss on write-down of investments in securities available for
sale
|
334 | 8,958 | 7,216 | |||||||||
|
Loss on sale of fixed assets
|
280 | 85 | 2 | |||||||||
|
Gain Resulting from Early Termination of a Hedging Relationship
|
— | (3,778 | ) | — | ||||||||
|
Loss on sale of other real estate owned
|
367 | 415 | 217 | |||||||||
|
Realized gain on sale leaseback transaction
|
(1,034 | ) | (1,034 | ) | (689 | ) | ||||||
|
Stock based compensation
|
1,666 | 774 | 526 | |||||||||
|
Increase in cash surrender value of bank-owned life insurance
|
(3,192 | ) | (2,651 | ) | (2,556 | ) | ||||||
|
Net change in:
|
||||||||||||
|
Trading assets
|
(1,426 | ) | (3,470 | ) | 686 | |||||||
|
Loans held for sale
|
(14,451 | ) | (5,115 | ) | 2,777 | |||||||
|
Other assets
|
(15,608 | ) | 9,820 | (23,149 | ) | |||||||
|
Other liabilities
|
13,894 | (15,021 | ) | 4,786 | ||||||||
|
TOTAL ADJUSTMENTS
|
6,413 | 8,427 | (1,922 | ) | ||||||||
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
46,653 | 31,416 | 22,042 | |||||||||
|
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
|
||||||||||||
|
Proceeds from sales of Securities Available For Sale
|
6,423 | 168,556 | 109,689 | |||||||||
|
Proceeds from maturities and principal repayments of Securities
Available For Sale
|
173,608 | 158,458 | 91,335 | |||||||||
|
Purchases of Securities Available For Sale
|
(46,349 | ) | (92,966 | ) | (267,101 | ) | ||||||
|
Proceeds from maturities and principal repayments of Securities
Held to Maturity
|
22,570 | 7,660 | 12,543 | |||||||||
|
Purchases of Securities Held to Maturity
|
(132,331 | ) | (68,381 | ) | — | |||||||
|
Purchases of Federal Home Loan Bank stock
|
— | — | (642 | ) | ||||||||
|
Purchases of Bank Owned Life Insurance
|
(267 | ) | (267 | ) | (267 | ) | ||||||
|
Net increase in Loans
|
(187,374 | ) | (69,905 | ) | (156,137 | ) | ||||||
|
Cash Paid for Acquisitions, Net of Cash Acquired
|
(269 | ) | 97,335 | (13,670 | ) | |||||||
|
Purchase of Bank Premises and Equipment
|
(7,022 | ) | (6,601 | ) | (8,220 | ) | ||||||
|
Proceeds from the sale of Bank Premises and Equipment
|
37 | 67 | 57 | |||||||||
|
Proceeds Resulting from Early Termination of a Hedging
Relationship
|
— | 6,099 | — | |||||||||
|
Proceeds from the sale of other real estate owned
|
7,190 | 5,124 | 718 | |||||||||
|
Proceeds from Sale Leaseback Transaction
|
— | — | 31,433 | |||||||||
|
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
(163,784 | ) | 205,179 | (200,262 | ) | |||||||
|
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
|
||||||||||||
|
Net increase (decrease) in Time Deposits
|
(224,605 | ) | (170,699 | ) | 136,307 | |||||||
|
Net increase in Other Deposits
|
477,094 | 265,506 | 5,394 | |||||||||
|
Net increase (decrease) in Federal Funds Purchased
|
||||||||||||
|
and Assets Sold Under Repurchase Agreements
|
(22,333 | ) | 19,572 | 32,277 | ||||||||
|
Net increase (decrease) in Short Term Federal Home Loan Bank
Advances
|
(10,000 | ) | (81,000 | ) | 65,000 | |||||||
|
Repayment of Long Term Federal Home Loan Bank Advances
|
(50,000 | ) | (180,910 | ) | (97,631 | ) | ||||||
|
Net increase (decrease) in Treasury Tax & Loan Notes
|
892 | (794 | ) | (123 | ) | |||||||
|
Proceeds from Issuance of Subordinated Debentures
|
— | — | 30,000 | |||||||||
|
Proceeds from issuance of Preferred Stock and Stock Warrants
|
— | 78,158 | — | |||||||||
|
Redemption of Preferred Stock
|
— | (78,158 | ) | — | ||||||||
|
Redemption of Warrants
|
— | (2,200 | ) | — | ||||||||
|
Proceeds from exercise of stock options
|
743 | 307 | 695 | |||||||||
|
Tax Expense (Benefit) from Stock Option Expense
|
68 | (3 | ) | 131 | ||||||||
|
Restricted Shares Surrendered
|
(114 | ) | (3 | ) | (4 | ) | ||||||
|
Dividends paid
|
||||||||||||
|
Preferred Dividends
|
— | (1,118 | ) | — | ||||||||
|
Common Dividends
|
(15,237 | ) | (13,455 | ) | (11,135 | ) | ||||||
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
156,508 | (164,797 | ) | 160,911 | ||||||||
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
39,377 | 71,798 | (17,309 | ) | ||||||||
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
121,905 | 50,107 | 67,416 | |||||||||
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
$ | 161,282 | $ | 121,905 | $ | 50,107 | ||||||
|
Cash paid during the year for:
|
||||||||||||
|
Interest on deposits and borrowings
|
$ | 38,528 | $ | 52,884 | $ | 59,340 | ||||||
|
Income taxes
|
12,627 | 4,877 | 16,817 | |||||||||
|
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
|
||||||||||||
|
Transfer of loans, net of charge-offs, to foreclosed assets
|
$ | 10,836 | $ | 4,440 | $ | 2,063 | ||||||
|
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
|
$ | — | $ | 84,498 | $ | 76,228 | ||||||
|
Fair value of assets acquired, net of cash acquired
|
— | 908,359 | 676,115 | |||||||||
|
Fair value of liabilities assumed
|
— | 921,945 | 586,419 | |||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
68
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
| (1) | Summary of Significant Accounting Policies |
Independent Bank Corp. (“the Company”) is a bank
holding company whose principal subsidiary is Rockland
Trust Company (“Rockland Trust” or the
“Bank”). Rockland Trust is a state-chartered
commercial bank, which operates 67 full service and three
limited service retail branches, eight commercial banking
centers, four investment management offices and four mortgage
lending centers, all of which are located in eastern
Massachusetts, including Cape Cod, with the exception of an
investment management group office located in Rhode Island.
Rockland Trust deposits are insured by the Federal Deposit
Insurance Corporation, subject to regulatory limits. The
Company’s primary source of income is from providing loans
to individuals and
small-to-medium
sized businesses in its market area.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company, the Bank and other wholly-owned subsidiaries,
except subsidiaries that are not deemed necessary to be
consolidated. All significant intercompany balances and
transactions have been eliminated in consolidation. The Company
consolidates subsidiaries in which it holds, directly or
indirectly, more than 50% of the voting rights and where it
exercises control. Entities where the Company holds 20% to 50%
of the voting rights, or has the ability to exercise significant
influence or both, are accounted for under the equity method.
The Company would consolidate entities deemed to be variable
interest entities (VIEs) when it is determined to be the primary
beneficiary. A legal entity is referred to as a VIE if any of
the following conditions exist: (1) the total equity
investment at risk is insufficient to permit the legal entity to
finance its activities without additional subordinated financial
support from other parties, or (2) the entity has equity
investors that cannot make significant decisions about the
entity’s operations or that do not absorb their
proportionate share of the expected losses or receive the
expected returns of the entity.
A VIE must be consolidated by the Company if the Company is
deemed to be the primary beneficiary of the VIE, which is the
party involved with the VIE that will absorb a majority of the
expected losses, receive a majority of the expected residual
returns, or both.
Reclassification
Certain previously reported amounts have been reclassified to
conform to the current year’s presentation.
Accounting
Standards Codification
The Financial Accounting Standards Board’s (FASB)
Accounting Standards Codification (ASC) became effective on
July 1, 2009. At that date, the ASC became FASB’s
officially recognized source of authoritative
U.S. generally accepted accounting principles (GAAP)
applicable to all public and non-public non-governmental
entities, superseding existing FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force, and
related literature. Rules and interpretive releases of the SEC
under the authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. All other accounting
literature is considered nonauthoritative. The switch to the ASC
affects the way companies refer to U.S. GAAP in financial
statements and accounting policies. Citing particular content in
the ASC involves specifying the unique numeric path to the
content through the Topic, Subtopic, Section, and Paragraph
structure.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could
vary from these estimates. Material estimates that are
particularly susceptible to significant changes in the near-term
relate to the determination of the allowance for loan losses,
income taxes, valuation and potential impairment of investment
69
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
securities fair value and
other-than-temporary
impairment of certain investment securities, and valuation of
goodwill and other intangibles and their respective analysis of
impairment.
Significant
Concentrations of Credit Risk
The vast majority of the Bank’s lending activities are
conducted in the Commonwealth of Massachusetts. The Bank
originates commercial and residential real estate loans,
commercial and industrial loans, small business loans, consumer
home equity loans, and other loans for its portfolio. The Bank
considers a concentration of credit to a particular industry to
exist when the aggregate credit exposure which includes direct,
indirect or contingent obligations to a borrower, an affiliated
group of borrowers or a non-affiliated group of borrowers
engaged in one industry, exceeds 10% of the Bank’s loan
portfolio.
Loans originated by the Bank to lessors of non-residential
buildings represented 13.9% and 13.2% of the total loan
portfolio as of December 31, 2010 and 2009, respectively.
Within this concentration category the Company is well
diversified among collateral property types and tenant
industries.
Cash
and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, federal funds sold
and assets purchased under resale agreements. Generally, federal
funds are sold for up to two week periods. Included in cash and
due from banks are interest bearing reserves held at the Federal
Reserve Bank.
Securities
Trading assets are recorded at fair value with subsequent
charges in fair value recorded in earnings.
Debt securities that management has the positive intent and
ability to hold to maturity are classified as “held to
maturity” and recorded at amortized cost. Securities not
classified as held to maturity or trading, including equity
securities with readily determinable fair values, are classified
as “available for sale” and recorded at fair value,
with changes in fair value excluded from earnings and reported
in other comprehensive income, net of related tax. Purchase
premiums and discounts are recognized in interest income, using
the interest method, to arrive at periodic interest income at a
constant effective yield, thereby reflecting the securities
market yield. Gains and losses on the sale of securities are
recorded on the trade date and are determined using the specific
identification method.
Declines in the fair value of held to maturity and available for
sale securities below their amortized cost deemed to be OTTI are
written down to fair value as determined by a cash flow
analysis. To the extent the estimated cash flows do not support
the amortized cost, that amount is considered credit loss and
recognized in earnings and the remainder of the OTTI charge is
considered due to other factors, such as liquidity or interest
rates, and thus is not recognized in earnings, but rather
through other comprehensive income, net of related tax. The
Company evaluates individual securities that have fair values
below cost for six months or longer or for a shorter period of
time if considered appropriate by management to determine if the
decline in fair value is
other-than-temporary.
Consideration is given to the obligor of the security, whether
the security is guaranteed, whether there is a projected adverse
change in cash flows, the liquidity of the security, the type of
security, the capital position of security issuers, and payment
history of the security, amongst other factors when evaluating
these individual securities.
Loans
Held for Sale
Prior to July 1, 2010, loans originated and intended for
sale in the secondary market were carried at the lower of cost
or fair value (“LOCOM”). Effective July 1, 2010,
pursuant to FASB ASC Topic No. 825, “Financial
Instruments,” the Company elected to carry newly originated
closed loans intended for sale at fair value. Changes in fair
value relating to loans intended for sale and forward sale
commitments are recorded in earnings and are offset by changes
in fair value relating to interest rate lock commitments. Gains
and losses on residential loan sales (sales proceeds minus
carrying amount) are recorded in Mortgage Banking Income.
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CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Loans
Loans are carried at the principal amounts outstanding, or
amortized acquired fair value in the case of acquired loans,
adjusted by partial charge-offs and net deferred loan costs or
fees. Loan fees and certain direct origination costs are
deferred and amortized into interest income over the expected
term of the loan using the level-yield method. When a loan is
paid off, the unamortized portion is recognized into interest
income. Interest income for commercial, small business, real
estate, and consumer loans is accrued based upon the daily
principal amount outstanding except for loans on nonaccrual
status.
Loans are generally placed on nonaccrual status if the payment
of principal or interest is past due more than 90 days or
sooner if management considers such action to be prudent. As
permitted by banking regulations, consumer loans past due
90 days or more may continue to accrue interest however,
such loans are usually charged-off after 120 days of
delinquency. In addition, certain commercial and real estate
loans that are more than 90 days past due may be kept on an
accruing status if the loan is well secured and in the process
of collection. As a general rule, a commercial or real estate
loan more than 90 days past due with respect to principal
or interest is classified as a nonaccrual loan. Income accruals
are suspended on all nonaccrual loans and all previously accrued
and uncollected interest is reversed against current income. A
loan remains on nonaccrual status until it becomes current with
respect to principal and interest (and in certain instances
remains current for up to six months), when management no longer
has doubt about the collection of principal and interest, when
the loan is liquidated, or when the loan is determined to be
uncollectible and charged-off against the allowance for loan
losses. When doubt exists as to the collectability of any
payments received are applied to reduce the recorded investment
in the asset to the extent necessary to eliminate such doubt.
In cases where a borrower experiences financial difficulties and
the Company makes certain concessionary modifications to
contractual terms, the loan is classified as a troubled debt
restructuring (“TDR”). Modifications may include rate
reductions, principal forgiveness, forbearance and other actions
intended to minimize economic loss and avoid foreclosure or
repossession of collateral. Generally, a nonaccrual loan that is
restructured remains on nonaccrual for a period of six months to
demonstrate the borrower can meet the restructured terms.
However, performance prior to the restructuring, or significant
events that coincide with the restructuring, are considered in
assessing whether the borrower can meet the new terms and may
result in the loan being returned to accrual status at the time
of the restructuring or after a shorter performance period. If
the borrower’s ability to meet the revised payment schedule
is not reasonably assured, the loan remains as a nonaccrual
loan. Loans classified as a TDR remains classified as such until
the loan is paid off.
Loans purchased with evidence of credit deterioration since
origination and for which it is probable that all contractually
required payments will not be collected are considered to be
credit impaired. Evidence of credit quality deterioration as of
the purchase date may include information such as past due and
nonaccrual status, borrower credit scores and recent loan to
value percentages. Purchased credit-impaired loans are accounted
for under the FASB ASC Topic
No. 310-30,
“Receivables — Loans and Debt Securities Acquired
with Deteriorated Credit Quality” and are initially
measured at fair value, which includes estimated future credit
losses expected to be incurred over the life of the loan.
Accordingly, an allowance for credit losses related to these
loans is not carried over and recorded at the acquisition date.
Allowance
for Loan Losses
The allowance for loan losses is established based upon the
level of estimated probable losses in the current loan
portfolio. Loan losses are charged against the allowance when
management believes the collectability of a loan balance is
doubtful. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is allocated to loan types using
both a formula-based approach applied to groups of loans and an
analysis of certain individual loans for impairment. The
formula-based approach emphasizes loss factors derived from
actual historical portfolio loss rates, which are combined with
an assessment of certain qualitative factors to determine the
allowance amounts allocated to the various loan categories.
Allowance amounts are determined based on an estimate of
historical average annual percentage rate of loan loss for each
loan category,
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STATEMENTS — (Continued)
a temporal estimate of the incurred loss emergence and
confirmation period for each loan category, and certain
qualitative risk factors considered in the computation of the
allowance for loan losses.
The qualitative risk factors impacting the inherent risk of loss
within the portfolio include the following:
| • | National and local economic and business conditions | |
| • | Level and trend of delinquencies | |
| • | Level and trend of charge-offs and recoveries | |
| • | Trends in volume and terms of loans | |
| • | Risk selection, lending policy and underwriting standards | |
| • | Experience and depth of management | |
| • | Banking industry conditions and other external factors | |
| • | Concentration risk |
The formula-based approach evaluates groups of loans with common
characteristics, which consist of similar loan types with
similar terms and conditions, to determine the allocation
appropriate within each portfolio section. This approach
incorporates qualitative adjustments based upon
management’s assessment of various market and portfolio
specific risk factors into its formula-based estimate. Due to
the imprecise nature of the loan loss estimation process and
ever changing conditions, the qualitative risk attributes may
not adequately capture amounts of incurred loss in the
formula-based loan loss components used to determine allocations
in the Bank’s analysis of the adequacy of the allowance for
loan losses.
The Bank evaluates certain loans within the commercial and
industrial, commercial real estate, commercial construction and
small business portfolios individually for specific impairment.
A loan is considered impaired when, based on current information
and events, it is probable that the Bank will be unable to
collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment
include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Loans are
selected for evaluation based upon a change in internal risk
rating, occurrence of delinquency, loan classification, or
nonaccrual status. A specific allowance amount is allocated to
an individual loan when such loan has been deemed impaired and
when the amount of the probable loss is able to be estimated.
Estimates of loss may be determined by the present value of
anticipated future cash flows or the loan’s observable fair
market value, or the fair value of the collateral, if the loan
is collateral dependent. However, for collateral dependent
loans, the amount of the recorded investment in a loan that
exceeds the fair value of the collateral is charged-off against
the allowance for loan losses in lieu of an allocation of a
specific allowance amount when such an amount has been
identified definitively as uncollectable.
Large groups of small-balance homogeneous loans such as the
residential real estate, residential construction, home equity
and other consumer portfolios are collectively evaluated for
impairment. As such, the Bank does not typically identify
individual loans within these groupings as impaired loans or for
impairment evaluation and disclosure. The Bank evaluates all
TDRs for impairment on an individual loan basis regardless of
loan type.
In the ordinary course of business, the Company enters into
commitments to extend credit, commercial letters of credit, and
standby letters of credit. Such financial instruments are
recorded in the financial statements when they become payable.
The credit risk associated with these commitments is evaluated
in a manner similar to the allowance for loan losses. The
reserve for unfunded lending commitments is included in other
liabilities in the balance sheet. At December 31, 2010, the
reserve for unfunded commitments was $493,000, compared to
$415,000 at December 31, 2009.
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Loan
Servicing
Servicing assets are recognized as separate assets when rights
are acquired through sale of loans with servicing rights
retained. The valuation model incorporates assumptions that
market participants would use in estimating future net servicing
income, such as the cost to service, the discount rate, the
custodial earnings rate, an inflation rate, ancillary income,
prepayment speeds and default rates and losses. Impairment is
determined by stratifying the rights based on predominant
characteristics, such as interest rate, loan type and investor
type. Impairment is recognized through a valuation allowance, to
the extent that fair value is less than the capitalized amount.
Fair value is based on market prices for comparable mortgage
servicing contracts, when available, or alternatively, is based
on a valuation model that calculates the present value of
estimated future net servicing income. If the Company later
determines that all or a portion of the impairment no longer
exists, a reduction of the allowance may be recorded as an
increase to income. Servicing rights are recorded in other
assets and are amortized in proportion to and over the period of
estimated net servicing income. The servicing asset is assessed
for impairment based on fair value at each reporting date.
Servicing fee income is recorded for fees earned for servicing
loans for investors. The fees are based on a contractual
percentage of the outstanding principal or a fixed amount per
loan, and are recorded as income when earned. The amortization
of mortgage servicing rights is netted against loan servicing
fee income.
Federal
Home Loan Bank Stock
The Company, as a member of the Federal Home Loan Bank of Boston
(“FHLBB”), is required to maintain an investment in
capital stock of the FHLBB. Based on redemption provisions, the
stock has no quoted market value and is carried at cost. The
Company continually reviews its investment to determine if OTTI
exists. The Company reviews recent public filings, rating agency
analysis and other factors, when making the determination. There
can be no assurance as to the outcome of management’s
future evaluation of the Company’s investment in the FHLBB.
Bank
Premises and Equipment
Land is carried at cost. Bank premises and equipment are stated
at cost less accumulated depreciation. Depreciation is computed
using the straight-line half year convention method over the
estimated useful lives of the assets. Leasehold improvements are
amortized over the shorter of the lease terms or the estimated
useful lives of the improvements. Expected terms include lease
option periods to the extent that the exercise of such options
is reasonably assured, not to exceed fifteen years.
Goodwill
and Identifiable Intangible Assets
Goodwill is the price paid which exceeds the net fair value of
acquired businesses and is not amortized. Goodwill is evaluated
for impairment at least annually, or more often in certain
circumstances, by comparing fair value to carrying amount.
Goodwill is subject to ongoing periodic impairment tests and is
evaluated using a two step impairment approach. Step one of the
impairment testing compares book value to the market value of
the Company’s stock, or to the fair value of the reporting
unit. If test one is failed, a more detailed analysis is
performed, which involves measuring the excess of the fair value
of the reporting unit, as determined in step one, over the
aggregate fair value of the individual assets, liabilities, and
identifiable intangibles as if the reporting unit was being
acquired in a business combination. As a result of such
impairment testing, the Company determined goodwill was not
impaired.
Identifiable intangible assets consist of core deposit
intangibles, non-compete agreements, customer lists, and a brand
name, and are amortized over their estimated lives on a method
that approximates the amount of economic benefits that are
realized by the Company. They are reviewed for impairment
whenever events or changes in
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CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
circumstances indicate that the carrying amount of the assets
may not be recoverable. The range of useful lives are as follows:
|
Core Deposit Intangibles
|
7 - 10 Years | |
|
Non-Compete Agreements
|
5 Years | |
|
Customer Lists
|
10 Years | |
|
Brand name
|
5 Years | |
|
Leases
|
2 - 29 Years |
The determination of which intangible assets have finite lives
is subjective, as is the determination of the amortization
period for such intangible assets.
Impairment
of Long-Lived Assets Other Than Goodwill
The Company reviews long-lived assets, including premises and
equipment, for impairment whenever events or changes in business
circumstances indicate that the remaining useful life may
warrant revision or that the carrying amount of the long-lived
asset may not be fully recoverable. The Company performs
undiscounted cash flow analyses to determine if impairment
exists. If impairment is determined to exist, any related
impairment loss is calculated based on fair value. Impairment
losses on assets to be disposed of, if any, are based on the
estimated proceeds to be received, less costs of disposal.
Bank
Owned Life Insurance
Increases in the cash surrender value (“CSV”) of bank
owned life insurance (“BOLI”) policies, as well as
death benefits received net of any CSV, are recorded in other
non-interest income, and are not subject to income taxes. The
CSV of the policies are recorded as assets of the Bank. Any
amounts owed to employees from policy benefits are recorded as
liabilities of the Bank. The Company reviews the financial
strength of the insurance carriers prior to the purchase of BOLI
and annually thereafter. BOLI with any individual carrier is
limited to 15% of tier one capital and BOLI in total is limited
to 25% of tier one capital.
Other
Real Estate Owned and Other Foreclosed Assets
Assets in control of the Company or acquired through foreclosure
are held for sale and are initially recorded at fair value less
cost to sell at the date control is established, resulting in a
new cost basis (“new cost basis”). The amount by which
the recorded investment in the loan exceeds the fair value (net
of estimated cost to sell) of the foreclosed asset is charged to
the allowance for loan losses. Subsequent declines in the fair
value of the foreclosed asset below the new cost basis are
recorded through the use of a valuation allowance. Subsequent
increases in the fair value are recorded as reductions in the
allowance, but not below zero. Rental revenue received on
foreclosed assets is included in Other Non-Interest Income,
whereas operating expenses and changes in the valuation
allowance relating to foreclosed assets are included in Other
Non-Interest Expense.
Derivatives
Derivative instruments are carried at fair value in the
Company’s financial statements. The accounting for changes
in the fair value of a derivative instrument is determined by
whether it has been designated and qualifies as part of a
hedging relationship, and further, by the type of hedging
relationship. For those derivative instruments that are
designated and qualify as hedging instruments, the Company
designated the hedging instrument, based upon the exposure being
hedged, as either a fair value hedge or a cash flow hedge. For
derivative instruments that are designated and qualify as a cash
flow hedge (i.e., hedging the exposure to variability in
expected future cash flows that is attributable to a particular
risk), the effective portion of the gain or loss on the
derivative instrument is reported as a component of other
comprehensive income, net of related tax, and reclassified into
earnings in the same period or periods during which the hedged
transactions affect earnings. The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the
present value of future cash flows of the hedged item
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(i.e., the ineffective portion), if any, is recognized in
current earnings during the period. For derivative instruments
designated and qualifying as a fair value hedge (i.e., hedging
the exposure to changes in the fair value of an asset or
liability or an identified portion thereof that is attributable
to the hedged risk), the gain or loss on the derivative
instrument, as well as the offsetting gain or loss on the hedged
item attributable to the hedged risk, are recognized in current
earnings during the period of the change in fair values. For
derivative instruments not designated as hedging instruments,
the gain or loss is recognized in current earnings during the
period of change. At the inception of a hedge, the Company
documents certain items, including but not limited to the
following: the relationship between hedging instruments and
hedged items, Company risk management objectives, hedging
strategies, and the evaluation of hedge transaction
effectiveness. Documentation includes linking all derivatives
designated as fair value or cash flow hedges to specific assets
and liabilities on the balance sheet or to specific forecasted
transactions.
Hedge accounting is discontinued prospectively when (1) a
derivative is no longer highly effective in offsetting changes
in the fair value or cash flow of a hedged item, (2) a
derivative expires or is sold, (3) a derivative is
de-designated as a hedge, because it is unlikely that a
forecasted transaction will occur, or (4) it is determined
that designation of a derivative as a hedge is no longer
appropriate.
As part of its mortgage banking activities, the Company
originates residential loan mortgages to be held for sale. In
connection with these loans, the Company often offers interest
rate lock commitments to prospective borrowers. The Company
manages this interest rate risk by entering into offsetting
forward sale agreements with third party investors. Both the
interest rate lock commitments and forward sale agreements are
off balance sheet commitments that are considered to be
derivatives. The fair value of these derivatives are recognized
in the income statement as Mortgage Banking Income.
The Company also enters into forward sales agreements for
certain funded loans and loan commitments. The Company records
unfunded commitments intended for sale and forward sales
agreements at fair value with changes in fair value recorded as
a component of Mortgage Banking Income.
Transfers
of Financial Assets
Transfers of financial assets, typically residential mortgages
are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the
Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and
(3) the Company does not maintain effective control over
the transferred assets through an agreement to repurchase them
before their maturity.
Retirement
Plans
At the measurement date, plan assets are determined based on
fair value, generally representing observable market prices. The
actuarial cost method used to compute the pension liabilities
and related expense is the projected unit credit method. The
projected benefit obligation is principally determined based on
the present value of the projected benefit distributions at an
assumed discount rate. The discount rate which is utilized is
based on the investment yield of high quality corporate bonds
available in the market place with maturities equal to projected
cash flows of future benefit payments as of the measurement
date. Periodic pension expense (or income) includes service
costs, interest costs based on the assumed discount rate, the
expected return on plan assets, if applicable, based on an
actuarially derived market-related value and amortization of
actuarial gains and losses. The overfunded or underfunded status
of the plans is recorded as an asset or liability on the balance
sheet, with changes in that status recognized through other
comprehensive income, net of related taxes.
In the case of multiemployer plans, the pension expense is equal
to the contributions made by the Company during the plan year.
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock-Based
Compensation
The Company values share-based awards granted using the
Black-Scholes option-pricing model. The Company recognizes
compensation expense for its awards on a straight-line basis
over the requisite service period for the entire award
(straight-line attribution method), ensuring that the amount of
compensation cost recognized at any date at least equals the
portion of the grant-date fair value of the award that is vested
at that time.
Income
Taxes
Deferred income tax assets and liabilities are determined using
the asset and liability (or balance sheet) method of accounting
for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. If current available information raises
doubt as to the realization of the deferred tax assets, a
valuation allowance is established. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date. Income taxes are allocated to each entity in the
consolidated group based on its share of taxable income.
Management exercises significant judgment in evaluating the
amount and timing of recognition of the resulting tax
liabilities and assets, including projections of future taxable
income. Additionally, a liability for unrecognized tax benefits
is recorded for uncertain tax positions taken by the Company on
its tax returns for which there is less than a 50% likelihood of
being recognized upon a tax examination.
Tax credits generated from the New Markets Tax Credit program
are reflected in earnings when realized for federal income tax
purposes.
Assets
Under Administration
Assets held in a fiduciary or agency capacity for customers are
not included in the accompanying consolidated balance sheet, as
such assets are not assets of the Company. Revenue from
administrative and management activities associated with these
assets is recorded on an accrual basis.
Earnings
Per Share
Basic earnings per share is calculated by dividing net income
available to common shareholders by the weighted average number
of common shares outstanding. Unvested restricted shares are
considered outstanding in the computation of basic earnings per
share as holders of unvested restricted stock awards participate
fully in the awards of stock ownership of the Company, including
voting and dividend rights. Diluted earnings per share have been
calculated in a manner similar to that of basic earnings per
share except that the weighted average number of common shares
outstanding is increased to include the number of additional
common shares that would have been outstanding if all
potentially dilutive common shares (such as those resulting from
the exercise of stock options) were issued during the period,
computed using the treasury stock method.
Comprehensive
Income
Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes
unrealized gains and losses on securities available for sale,
unrealized losses related to factors other than credit on debt
securities, unrealized gains and losses on cash flow hedges, and
changes in the funded status of the pension plan, which are also
recognized as separate components of equity.
Fair
Value of Financial Instruments
Fair values of financial instruments are estimated using
relevant market information and other assumptions, as more fully
disclosed in Note 16,
“Fair Value
Measurements” within Notes to the Consolidated Financial
Statements included in Item 8
hereto. Fair
value estimates involve uncertainties and matters of significant
judgment. Changes in assumptions or in market conditions could
significantly affect the estimates.
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Recent
Accounting Standards
FASB ASC Topic No. 310, “Deferral of the Effective
Date of Disclosures about Troubled Debt Restructurings”
Update
No. 2010-20.
Update
2011-01
temporarily delays the effective date of the disclosures about
troubled debt restructurings in FASB ASC Topic No. 310,
“Receivables” update
2010-20.
The
delay is intended to allow the FASB time to complete its
deliberations on what constitutes a troubled debt restructuring.
The effective date of the new disclosures about troubled debt
restructurings for public entities and the guidance for
determining what constitutes a troubled debt restructuring will
then be coordinated. Currently, that guidance is anticipated to
be effective for interim and annual periods ending after
June 15, 2011. The adoption of this standard is not
expected to have a material impact on the Company’s
consolidated financial position or results of operations.
FASB ASC Topic No. 310, “Receivables” Update
2010-20,
provides
amendments to Topic 310 to improve the disclosures that an
entity provides about the credit quality of its loan portfolio
and its allowance for loan losses. The amendments enhance a
Company’s disclosure on the nature of credit risk inherent
in the entity’s loan portfolio, how the Company analyzes
and assesses that risk in their allowance for loan losses, any
changes that are made to the allowance for loan losses and the
reasoning behind those changes. In addition, a Company must now
also disclose credit quality indicators, past due loan
information, and modifications of loans that are included in the
Company’s loan portfolio. The amendments also require
enhancements to existing disclosures that will now allow for a
greater level of disaggregated information. The disclosures as
of the end of the reporting period are effective for interim and
annual reporting periods ending on or after December 15,
2010. The disclosures about activity that occurs during a
reporting period are effective for interim and annual reporting
periods beginning on and after December 15, 2010. The
adoption of this standard did not have a material impact on the
Company’s consolidated financial position or results of
operations.
FASB ASC Topic No. 310, “Receivables” Update
2010-18,
provides
amendments to Subtopic
No. 310-30
“Loans and Debt securities Acquired with Deteriorated
Credit Quality” which clarifies that modifications to
loans, which are accounted for within a pool of loans under this
subtopic, are not removed from the pool even though they would
otherwise be considered a trouble debt restructuring. When loans
are accounted for as a pool, the purchase discount is not
allocated to individual loans, thus all loans in the pool
accrete at a single pool rate. The Company would be required to
consider whether the pool of assets in which the loan is
included is impaired if expected cash flows from the pool
change. The amendment does not affect the accounting for loans
under the scope of Subtopic
310-30
which
are not accounted for within a pool. This statement was
effective for the first interim reporting period ending after
July 15, 2010, with early application permitted. The
adoption of this standard did not have a material impact on the
Company’s consolidated financial position or results of
operations.
FASB ASC Topic No. 820, “Fair Value Measurement and
Disclosures” Update
2010-06,
provides
amendments to Subtopic
No. 820-10
that require entities to disclose additional information
regarding assets and liabilities that are transferred between
levels of the fair value hierarchy. Entities are also required
to disclose information in the Level 3 roll forward about
purchases, sales, issuances and settlements on a gross basis. In
addition to these new disclosure requirements, this Topic
clarified existing guidance pertaining to the level of
disaggregation at which fair value disclosures should be made
and the requirements to disclose information about the valuation
techniques and inputs used in estimating Level 2 and
Level 3 fair value measurements. This update is effective
for interim and annual reporting periods beginning after
December 15, 2009, except for the requirement to separately
disclose purchases, sales, issuances and settlements in the
Level 3 roll forward which becomes effective for fiscal
years beginning after December 15, 2010. The adoption of
this standard did not have a material impact to the
Company’s consolidated financial position or results of
operations.
| (2) | Acquisitions |
Benjamin
Franklin Bancorp. Inc.
On April 10, 2009 the Company completed its acquisition of
Benjamin Franklin Bancorp., Inc.
(“Ben Franklin”), the parent of Benjamin Franklin
Bank. The transaction qualified as a tax-free reorganization for
federal income tax purposes, and former Ben Franklin
shareholders received 0.59 shares of the Company’s
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
common stock for each share of Ben Franklin common stock which
they owned. Under the terms of the merger, cash was issued in
lieu of fractional shares. Based upon the Company’s $18.27
per share closing price on April 9, 2009, the transaction
was valued at $10.7793 per share of Ben Franklin common stock or
approximately $84.5 million in the aggregate. As a result
of the acquisition, the Company’s outstanding shares
increased by 4,624,948 shares.
The Company accounted for the acquisition using the acquisition
method pursuant to the Business Combinations Topic of the FASB
ASC. Accordingly, the Company recorded merger and acquisition
expenses of $12.4 million during the year ended
December 31, 2009. Additionally, the acquisition method
requires an acquirer to recognize the assets acquired and the
liabilities assumed at their fair values as of the acquisition
date. The following table summarizes the estimated fair value of
the assets acquired and liabilities assumed as of the date of
the acquisition.
| Net Assets Acquired | ||||
| (Dollars in thousands) | ||||
|
Assets:
|
||||
|
Cash
|
$ | 98,089 | ||
|
Investments
|
147,548 | |||
|
Loans, net
|
687,444 | |||
|
Premises and Equipment
|
5,919 | |||
|
Goodwill
|
12,193 | |||
|
Core Deposit & Other Intangible
|
7,616 | |||
|
Other Assets
|
47,639 | |||
|
Total Assets Acquired
|
1,006,448 | |||
|
Liabilities:
|
||||
|
Deposits
|
701,407 | |||
|
Borrowings
|
196,105 | |||
|
Other Liabilities
|
24,433 | |||
|
Total Liabilities Assumed
|
921,945 | |||
|
Purchase Price
|
$ | 84,503 | ||
As noted above, the Company acquired loans at fair value of
$687.4 million. Included in this amount was
$3.9 million of loans with evidence of deterioration of
credit quality since origination for which it was probable, at
the time of the acquisition, that the Company would be unable to
collect all contractually required payments receivable. The
Company’s evaluation of loans with evidence of loan
deterioration as of the acquisition date resulted in a
nonaccretable difference of $806,000, which is defined as the
loan’s contractually required payments receivable in excess
of the amount of its cash flows expected to be collected. The
Company considered factors such as payment history, collateral
values, and accrual status when determining whether there was
evidence of deterioration of loan’s credit quality at the
acquisition date. As of December 31, 2009 the carrying
amount of these loans with evidence of loan deterioration was
$1.8 million and there was a nonaccretable difference of
$14,000 at December 31, 2009. The majority of the decrease
in the nonaccretable difference during 2009 was due to loan
charge-offs, with the remainder of the decrease being amortized
into interest income.
A core deposit intangible of $6.6 million was recorded with
an expected life of ten years. There was an additional $650,000
of other intangibles recorded related to non-compete agreements
with a life of one year, and other various intangibles of
$340,000.
78
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following summarizes the unaudited pro forma results of
operations as if the Company acquired Ben Franklin on
January 1, 2009 (2008 amounts represent combined results
for the Company and Ben Franklin).
| Year Ended December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Net Interest Income after Provision for Loan Losses
|
$ | 137,369 | $ | 130,301 | ||||
|
Net Income
|
33,953 | 27,633 | ||||||
|
Earnings Per Share- Basic
|
$ | 1.66 | $ | 1.37 | ||||
|
Earnings Per Share- Diluted
|
$ | 1.65 | $ | 1.38 | ||||
Excluded from the pro forma results of operations for the year
ended December 31, 2009 are merger costs, net of tax, of
$9.3 million, or $0.47 per diluted share, respectively,
primarily made up of the acceleration of certain compensation
and benefit costs arising due to the change in control and other
merger expenses.
Slade’s
Ferry Bancorp.
Effective March 1, 2008, the Company acquired Slade’s
Ferry Bancorp. (“Slades”), parent of Slade’s
Ferry Trust Company, doing business as Slades Bank. In
accordance with SFAS No. 141 “Business
Combinations”, the acquisition was accounted for under the
purchase method of accounting and, as such, was included in the
Company’s results of operations from the date of
acquisition. The terms of the agreement called for 75% of the
outstanding common shares of Slades stock to be converted to
0.818 shares of Independent Bank Corp. and for the
remaining 25% to be purchased for $25.50 in cash. The Company
issued 2,492,195 shares of common stock valued at
$76.2 million, or $30.59 per share. The $30.59 was
determined based on the average of the closing prices of the
Company’s shares over a five day trading period beginning
two trading days prior to the date of the announcement of the
acquisition and ending two trading days following the date of
the announcement of the acquisition. The cash payment totaled
$25.9 million equating to a total purchase price of
$102.2 million. The acquisition of Slades allowed the
Company to expand its geographical footprint. The following
table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition.
| Net Assets Acquired | ||||
| (Dollars in thousands) | ||||
|
Assets:
|
||||
|
Cash Acquired
|
$ | 12,455 | ||
|
Investments
|
106,700 | |||
|
Loans, net
|
465,720 | |||
|
Premises and Equipment
|
11,502 | |||
|
Goodwill
|
58,123 | |||
|
Core Deposit & Other Intangible
|
8,961 | |||
|
Other Assets
|
25,109 | |||
|
Total Assets Acquired
|
$ | 688,570 | ||
|
Liabilities:
|
||||
|
Deposits
|
$ | 410,769 | ||
|
Borrowings
|
161,974 | |||
|
Other Liabilities
|
13,676 | |||
|
Total Liabilities Assumed
|
$ | 586,419 | ||
|
Purchase Price
|
$ | 102,151 | ||
A core deposit intangible of $8.8 million was recorded with
an expected life of ten years. There was an additional $200,000
of other intangibles recorded related to non-compete agreements
with a life of one year.
79
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following summarizes the unaudited pro forma results of
operations as if the Company acquired Slades on January 1,
2008:
|
Year Ended
|
||||
|
December 31,
|
||||
| 2008 | ||||
|
Net Interest Income after Provision for Loan Losses
|
$ | 120,507 | ||
|
Net Income
|
23,041 | |||
|
Earnings Per Share- Basic
|
$ | 1.42 | ||
|
Earnings Per Share- Diluted
|
$ | 1.41 | ||
Excluded from the pro forma results of operations for the year
ended December 31, 2008 are merger costs net of tax
$641,000 or $0.04 per diluted share, respectively, primarily
made up of the acceleration of certain compensation and benefit
costs arising due to the change in control and other merger
expenses.
| (3) | Securities |
Trading assets, at fair value, consist of the following:
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| Fair Value | ||||||||
| (Dollars in thousands) | ||||||||
|
Cash Equivalents
|
$ | 111 | $ | 71 | ||||
|
Fixed Income Securities
|
1,584 | 1,229 | ||||||
|
Marketable Equity Securities
|
5,902 | 4,871 | ||||||
|
Total
|
$ | 7,597 | $ | 6,171 | ||||
The majority of trading assets are held solely for the purpose
of funding certain executive non-qualified retirement
obligations (see
Note 14 “Employee Benefit
Plans”).
The remainder of the portfolio is comprised of
equity securities, which consists of a fund whose investment
objective is to invest in geographically specific private
placement debt securities designed to support underlining
economic activities such as community development and affordable
housing. The Company realized a gain on trading activities of
$150,000 in 2010, a loss of $215,000 in 2009, and a gain of
$1,000 in 2008, which have been included in other income.
80
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 at December 31 were as
follows:
| 2010 | 2009 | |||||||||||||||||||||||||||||||||||||||
|
Gross Unrealized
|
Gross Unrealized
|
|||||||||||||||||||||||||||||||||||||||
| Losses | Losses | |||||||||||||||||||||||||||||||||||||||
|
Gross
|
Other-Than-
|
Gross
|
Other-Than-
|
|||||||||||||||||||||||||||||||||||||
|
Amortized
|
Unrealized
|
Temporary
|
Fair
|
Amortized
|
Unrealized
|
Temporary
|
Fair
|
|||||||||||||||||||||||||||||||||
| Cost | Gains | Other | Impairment | Value | Cost | Gains | Other | Impairment | Value | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
|
U.S. Treasury Securities
|
$ | 715 | $ | 2 | $ | — | $ | — | $ | 717 | $ | 744 | — | — | $ | — | $ | 744 | ||||||||||||||||||||||
|
Agency Mortgage-Backed Securities
|
296,821 | 16,481 | — | — | 313,302 | 435,929 | 16,450 | (470 | ) | — | 451,909 | |||||||||||||||||||||||||||||
|
Agency Collateralized Mortgage Obligations
|
45,426 | 779 | (70 | ) | — | 46,135 | 31,323 | 774 | (75 | ) | — | 32,022 | ||||||||||||||||||||||||||||
|
Private Mortgage-Backed Securities(1)
|
10,408 | — | — | (154 | ) | 10,254 | 15,640 | — | (681 | ) | (670 | ) | 14,289 | |||||||||||||||||||||||||||
|
State, County, and Municipal Securities
|
— | — | — | — | — | 4,000 | 81 | — | — | 4,081 | ||||||||||||||||||||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks
|
5,000 | — | (779 | ) | — | 4,221 | 5,000 | — | (1,990 | ) | — | 3,010 | ||||||||||||||||||||||||||||
|
Pooled Trust Preferred Securities Issued by Banks and
Insurers(1)
|
8,550 | — | (2,309 | ) | (3,413 | ) | 2,828 | 8,705 | — | (2,382 | ) | (3,728 | ) | 2,595 | ||||||||||||||||||||||||||
|
Total
|
$ | 366,920 | $ | 17,262 | $ | (3,158 | ) | $ | (3,567 | ) | $ | 377,457 | $ | 501,341 | $ | 17,305 | $ | (5,598 | ) | $ | (4,398 | ) | $ | 508,650 | ||||||||||||||||
| (1) | During the years ended December 31, 2010 and 2009, the Company recorded credit related OTTI of $334,000 and $9.0 million, respectively, included in these amounts were $831,000 and $1.6 million, respectively, which the Company had previously recorded in OCI, as it was considered to be non-credit related. |
The amortized cost, gross unrealized holding gains and losses,
other-than-temporary
impairment recorded in other comprehensive income, and fair
value of securities held to maturity at December 31 were as
follows:
| 2010 | 2009 | |||||||||||||||||||||||||||||||||||||||
|
Gross Unrealized
|
Gross Unrealized
|
|||||||||||||||||||||||||||||||||||||||
| Losses | Losses | |||||||||||||||||||||||||||||||||||||||
|
Gross
|
Other-Than-
|
Gross
|
Other-Than-
|
|||||||||||||||||||||||||||||||||||||
|
Amortized
|
Unrealized
|
Temporary
|
Fair
|
Amortized
|
Unrealized
|
Temporary
|
Fair
|
|||||||||||||||||||||||||||||||||
| Cost | Gains | Other | Impairment | Value | Cost | Gains | Other | Impairment | Value | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
|
Agency Mortgage-Backed Securities
|
$ | 95,697 | $ | 1,348 | $ | (1,778 | ) | $ | — | $ | 95,267 | $ | 54,064 | $ | 503 | $ | (283 | ) | $ | — | $ | 54,284 | ||||||||||||||||||
|
Agency Collateralized Mortgage Obligations
|
89,823 | 600 | (1,691 | ) | — | 88,732 | 14,321 | 85 | — | — | 14,406 | |||||||||||||||||||||||||||||
|
State, County, and Municipal Securities
|
10,562 | 167 | — | — | 10,729 | 15,252 | 384 | — | — | 15,636 | ||||||||||||||||||||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks
|
6,650 | 19 | (163 | ) | — | 6,506 | 9,773 | — | (661 | ) | — | 9,112 | ||||||||||||||||||||||||||||
|
Total
|
$ | 202,732 | $ | 2,134 | $ | (3,632 | ) | $ | — | $ | 201,234 | $ | 93,410 | $ | 972 | $ | (944 | ) | $ | — | $ | 93,438 | ||||||||||||||||||
The Company recorded gross gains on the sale of available for
sale securities of $458,000, $1.4 million, and $756,000 for
the years ended December 31, 2010, 2009, and 2008,
respectively. The Bank realized no gross losses on the sale of
securities in 2010 and $25,000 and $1.4 million in gross
losses on the sale of securities in 2009 and 2008, respectively.
When securities are sold, the adjusted cost of the specific
security sold is used to compute the gain or loss on the sale.
In 2009 the majority of the acquired Ben Franklin portfolio was
sold resulting in a gross loss of $25,000. In 2008 the Company
sold a majority of the Slades’ investment securities
portfolio, which comprised the majority of the $1.4 million
in gross losses during 2008.
81
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A schedule of the contractual maturities of securities held to
maturity and securities available for sale as of
December 31, 2010 is presented below.
| Held to Maturity | Available for Sale | |||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
|
Due in one year or less
|
$ | 1,483 | $ | 1,510 | $ | 715 | $ | 717 | ||||||||
|
Due from one year to five years
|
5,008 | 5,091 | 23,390 | 24,204 | ||||||||||||
|
Due from five to ten years
|
4,824 | 5,003 | 85,231 | 89,767 | ||||||||||||
|
Due after ten years
|
191,417 | 189,630 | 257,584 | 262,769 | ||||||||||||
|
Total
|
$ | 202,732 | $ | 201,234 | $ | 366,920 | $ | 377,457 | ||||||||
The actual maturities of agency mortgage-backed securities,
collateralized mortgage obligations, private mortgage-backed
securities, and corporate debt securities will differ from the
contractual maturities, due to the ability of the issuers to
prepay underlying obligations. At December 31, 2010 and
2009, the Bank has $24.3 million and $31.7 million,
respectively, of callable securities in its investment portfolio.
On December 31, 2010 and December 31, 2009 investment
securities carried at $350.3 million and
$297.2 million, respectively, were pledged to secure public
deposits, assets sold under repurchase agreements, treasury tax
and loan notes, letters of credit, and for other purposes as
required by law. During 2009 the FHLBB changed the requirements
for pledging securities as collateral by requiring that the
securities be held in a safekeeping account at the FHLBB. The
Bank currently is not safekeeping securities with the FHLBB and
therefore the securities are not eligible to be pledged as
collateral at this time. Management will continue to review the
cost/benefit and its liquidity needs as it relates to
safekeeping and pledging investment securities at the FHLBB. At
December 31, 2010 and 2009 there were no securities pledged
to the FHLBB to secure advances. The unpledged securities amount
to $176.2 million at December 31, 2010.
At year-end December 31, 2010 and 2009, the Company had no
investments in obligations of individual states, counties, or
municipalities, which exceed 10% of stockholders’ equity.
Other-Than-Temporary
Impairment
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:
82
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| At December 31, 2010 | ||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||
|
# of
|
Unrealized
|
Fair
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||||
|
Description of Securities
|
Holdings | Fair Value | Losses | Value | Losses | Fair Value | Losses | |||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
|
Agency Mortgage-Backed Securities
|
4 | $ | 48,956 | $ | (1,778 | ) | $ | — | $ | — | $ | 48,956 | $ | (1,778 | ) | |||||||||||||
|
Agency Collateralized Mortgage Obligations
|
6 | 72,631 | (1,761 | ) | — | — | 72,631 | (1,761 | ) | |||||||||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks
and Insurers
|
2 | 4,950 | (163 | ) | 4,221 | (779 | ) | 9,171 | (942 | ) | ||||||||||||||||||
|
Pooled Trust Preferred Securities Issued by Banks and
Insurers
|
2 | — | — | 2,364 | (2,309 | ) | 2,364 | (2,309 | ) | |||||||||||||||||||
|
Total Temporarily Impaired Securities
|
14 | $ | 126,537 | $ | (3,702 | ) | $ | 6,585 | $ | (3,088 | ) | $ | 133,122 | $ | (6,790 | ) | ||||||||||||
| At December 31, 2009 | ||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||
|
# of
|
Unrealized
|
Unrealized
|
Unrealized
|
|||||||||||||||||||||||||
|
Description of Securities
|
Holdings | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
|
Agency Mortgage-Backed Securities
|
8 | $ | 62,716 | $ | (753 | ) | $ | — | $ | — | $ | 62,716 | $ | (753 | ) | |||||||||||||
|
Agency Collateralized Mortgage Obligations
|
5 | 3,557 | (75 | ) | — | — | 3,557 | (75 | ) | |||||||||||||||||||
|
Private Mortgage-Backed Securities
|
1 | — | — | 8,653 | (681 | ) | 8,653 | (681 | ) | |||||||||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks
and Insurers
|
4 | — | — | 12,122 | (2,651 | ) | 12,122 | (2,651 | ) | |||||||||||||||||||
|
Pooled Trust Preferred Securities Issued by Banks and
Insurers
|
2 | — | — | 2,334 | (2,382 | ) | 2,334 | (2,382 | ) | |||||||||||||||||||
|
Total Temporarily Impaired Securities
|
20 | $ | 66,273 | $ | (828 | ) | $ | 23,109 | $ | (5,714 | ) | $ | 89,382 | $ | (6,542 | ) | ||||||||||||
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 was able to determine this by reviewing
various qualitative and quantitative factors regarding each
investment category, information 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:
Agency Mortgage-Backed Securities and Collateralized Mortgage
Obligations:
The unrealized loss on the
Company’s investment in these securities is attributable to
changes in interest rates and not due to credit deterioration,
as these securities are implicitly guaranteed by the
U.S. Government or one of its agencies.
Single Issuer Trust Preferred
Securities:
This portfolio consists of two
securities, both of which are 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 each of the issuers, including capitalization rates.
83
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Pooled Trust Preferred Securities:
This
portfolio consists of two below investment grade securities of
which one is performing while the other is deferring payments as
contractually allowed. The unrealized loss on these securities
is attributable to the illiquid nature of the trust preferred
market and the significant risk premiums required in the current
economic environment. Management evaluates collateral credit and
instrument structure, including current and expected deferral
and default rates and timing. In addition, discount rates are
determined by evaluating comparable spreads observed currently
in the market for similar instruments.
Management monitors the following issuances closely for
impairment due to the history of OTTI losses recorded within
these classes of securities. Management has determined that the
securities possess characteristics which in this economic
environment could lead to further OTTI charges. The following
tables summarize pertinent information that was considered by
management in determining if OTTI existed.
| December 31, 2010 | ||||||||||||||||||||||||
|
Total Cumulative
|
||||||||||||||||||||||||
|
Non-Credit
|
Other-Than-
|
|||||||||||||||||||||||
|
Gross
|
Related Other-
|
Temporary
|
||||||||||||||||||||||
|
Amortized
|
Unrealized
|
Than-Temporary
|
Fair
|
Lowest Credit
|
Impairment
|
|||||||||||||||||||
| Class | Cost | Gain/(Loss) | Impairment | Value | Ratings to Date | to Date | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Pooled Trust Preferred Securities
|
||||||||||||||||||||||||
|
Pooled Trust Preferred Security A
|
C1 | $ | 1,283 | $ | — | $ | (1,164 | ) | $ | 119 | C (Fitch); Ca (Moody’s) | $ | (4,840 | ) | ||||||||||
|
Pooled Trust Preferred Security B
|
D | — | — | — | — | C (Fitch) | (3,481 | ) | ||||||||||||||||
|
Pooled Trust Preferred Security C
|
C1 | 513 | — | (458 | ) | 55 | C (Fitch); C (Moody’s) | (932 | ) | |||||||||||||||
|
Pooled Trust Preferred Security D
|
D | — | — | — | — | C (Fitch) | (990 | ) | ||||||||||||||||
|
Pooled Trust Preferred Security E
|
C1 | 2,081 | — | (1,791 | ) | 290 | C (Fitch); C (Moody’s) | (3,159 | ) | |||||||||||||||
|
Pooled Trust Preferred Security F
|
B | 1,889 | (1,302 | ) | — | 587 | CC (Fitch); Ca (Moody’s) | — | ||||||||||||||||
|
Pooled Trust Preferred Security G
|
A1 | 2,784 | (1,007 | ) | — | 1,777 | CCC+ (S&P); BB (Fitch); Baa3 (Moody’s) | — | ||||||||||||||||
|
TOTAL POOLED TRUST PREFERRED SECURITIES
|
$ | 8,550 | $ | (2,309 | ) | $ | (3,413 | ) | $ | 2,828 | $ | (13,402 | ) | |||||||||||
|
Private Mortgage-Backed Securities
|
||||||||||||||||||||||||
|
Private Mortgage-Backed Securities — One
|
2A1 | $ | 4,535 | $ | — | $ | (154 | ) | $ | 4,381 | C (Fitch) | $ | (608 | ) | ||||||||||
|
Private Mortgage-Backed Securities — Two
|
A19 | 5,873 | — | — | 5,873 | B3 (Moody’s) | (85 | ) | ||||||||||||||||
|
TOTAL PRIVATE MORTGAGE-BACKED SECURITIES
|
$ | 10,408 | $ | — | $ | (154 | ) | $ | 10,254 | $ | (693 | ) | ||||||||||||
|
Number of
|
||||||||||||||||
|
Performing Banks
|
Current
|
Total Projected
|
Excess Subordination (After
|
|||||||||||||
|
and Insurance Cos.
|
Deferrals/Defaults/Losses
|
Defaults/Losses (as a
|
Taking into Account Best
|
|||||||||||||
|
in Issuances
|
(As a % of Original
|
% of Performing
|
Estimate of Future
|
|||||||||||||
| (Unique) | Collateral) | Collateral) | Deferrals/Defaults/Losses)(1) | |||||||||||||
|
Pooled Trust Preferred Securities
|
||||||||||||||||
|
Trust Preferred Security A
|
58 | 37.58 | % | 27.31 | % | 0.00 | % | |||||||||
|
Trust Preferred Security B
|
58 | 37.58 | % | 27.31 | % | 0.00 | % | |||||||||
|
Trust Preferred Security C
|
49 | 35.86 | % | 25.31 | % | 0.00 | % | |||||||||
|
Trust Preferred Security D
|
49 | 35.86 | % | 25.31 | % | 0.00 | % | |||||||||
|
Trust Preferred Security E
|
51 | 29.20 | % | 20.13 | % | 0.00 | % | |||||||||
|
Trust Preferred Security F
|
34 | 27.07 | % | 25.86 | % | 23.61 | % | |||||||||
|
Trust Preferred Security G
|
34 | 27.07 | % | 25.86 | % | 46.62 | % | |||||||||
|
Private Mortgage- Backed Securities
|
||||||||||||||||
|
Private Mortgage-Backed Securities — One
|
N/A | 0.00 | % | 12.03 | % | 0.00 | % | |||||||||
|
Private Mortgage-Backed Securities — Two
|
N/A | 1.47 | % | 6.07 | % | 0.00 | % | |||||||||
| (1) | Excess subordination represents the additional default/losses in excess of both current and projected defaults/losses that the security can absorb before the security experiences any credit impairment. |
84
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Per review of the factors outlined above it was determined that
seven of the securities shown in the table above were deemed to
be OTTI. The remaining securities were not deemed to be OTTI as
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.
The Company recorded OTTI of $334,000 and $9.0 million
through earnings for the years ended December 31, 2010 and
2009, respectively, all of which was determined to be credit
related. For the year ended December 31, 2008 the Company
recorded OTTI on certain investment grade pooled trust preferred
securities, which resulted in a charge to non-interest income of
$7.2 million. In connection with the adoption of new
authoritative guidance, previously recorded impairment charges
which did not relate to credit loss were reclassified from
retained earnings to OCI as of January 1, 2009.
Accordingly, the Company recorded a cumulative effect adjustment
that increased retained earnings and decreased OCI by
$6.0 million, or $3.8 million, net of tax. The
remaining $1.2 million of the previously recorded
$7.2 million OTTI charge was deemed to be credit related.
The following table shows the credit related component of
other-than-temporary
impairment.
| For the Year Ended December 31, 2010 | ||||
|
Credit Related
|
||||
|
Component of
|
||||
|
Other-Than-
|
||||
|
Temporary
|
||||
| Impairment | ||||
| (Dollars in thousands) | ||||
|
Balance at January 1, 2010
|
$ | (10,194 | ) | |
|
Add:
|
||||
|
Incurred on Securities not Previously Impaired
|
(85 | ) | ||
|
Incurred on Securities Previously Impaired
|
(249 | ) | ||
|
Less:
|
||||
|
Realized Gain/Loss on Sale of Securities
|
— | |||
|
Reclassification Due to Changes in Company’s Intent
|
— | |||
|
Increases in Cash Flow Expected to be Collected
|
— | |||
|
Balance at December 31, 2010
|
$ | (10,528 | ) | |
85
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (4) | Loans, Allowance for Loan Losses and Credit Quality |
The following table summarizes changes in the allowance for loan
losses by loan category and bifurcates the amount of allowance
allocated to each loan category based on collective impairment
analysis and loans evaluated individually for impairment:
| As of December 31, | ||||||||||||||||||||||||||||||||
|
Commercial and
|
Commercial Real
|
Commercial
|
Small
|
Residential
|
Consumer
|
Consumer
|
||||||||||||||||||||||||||
|
2010
|
Industrial | Estate | Construction | Business | Real Estate | Home Equity | Other | Total | ||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
|
Allowance for Loan Losses:
|
||||||||||||||||||||||||||||||||
|
Beginning Balance
|
$ | 7,545 | $ | 19,451 | $ | 2,457 | $ | 3,372 | $ | 2,840 | $ | 3,945 | $ | 2,751 | $ | 42,361 | ||||||||||||||||
|
Charge- offs
|
5,170 | 3,448 | 1,716 | 2,279 | 557 | 939 | 2,078 | 16,187 | ||||||||||||||||||||||||
|
Recoveries
|
361 | 1 | — | 217 | 59 | 131 | 657 | 1,426 | ||||||||||||||||||||||||
|
Provision
|
7,687 | 5,935 | 1,404 | 2,430 | 573 | 232 | 394 | 18,655 | ||||||||||||||||||||||||
|
Ending Balance
|
$ | 10,423 | $ | 21,939 | $ | 2,145 | $ | 3,740 | $ | 2,915 | $ | 3,369 | $ | 1,724 | $ | 46,255 | ||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | 511 | $ | 411 | $ | 151 | $ | 221 | $ | 991 | $ | 17 | $ | 245 | $ | 2,547 | ||||||||||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 9,912 | $ | 21,528 | $ | 1,994 | $ | 3,519 | $ | 1,924 | $ | 3,352 | $ | 1,479 | $ | 43,708 | ||||||||||||||||
|
Financing Receivables:
|
||||||||||||||||||||||||||||||||
|
Ending balance: total loans by group
|
$ | 502,952 | $ | 1,717,118 | $ | 129,421 | $ | 80,026 | $ | 478,111 | $ | 579,278 | $ | 68,773 | $ | 3,555,679 | (1) | |||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | 3,823 | $ | 26,665 | $ | 1,999 | $ | 2,494 | $ | 9,963 | $ | 428 | $ | 2,014 | $ | 47,386 | ||||||||||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 499,129 | $ | 1,690,453 | $ | 127,422 | $ | 77,532 | $ | 468,148 | $ | 578,850 | $ | 66,759 | $ | 3,508,293 | ||||||||||||||||
|
Commercial and
|
Commercial Real
|
Commercial
|
Small
|
Residential
|
Consumer
|
Consumer
|
||||||||||||||||||||||||||
|
2009
|
Industrial | Estate | Construction | Business | Real Estate | Home Equity | Other | Total | ||||||||||||||||||||||||
|
Allowance for Loan Losses:
|
||||||||||||||||||||||||||||||||
|
Beginning Balance
|
$ | 5,532 | $ | 15,942 | $ | 4,20 3 | $ | 2,170 | $ | 2,447 | $ | 3,091 | $ | 3,664 | $ | 37,049 | ||||||||||||||||
|
Charge- offs
|
1,663 | 834 | 2,679 | 2,047 | 829 | 1,799 | 3,404 | 13,255 | ||||||||||||||||||||||||
|
Recoveries
|
27 | — | — | 204 | 105 | 41 | 855 | 1,232 | ||||||||||||||||||||||||
|
Provision
|
3,649 | 4,34 3 | 933 | 3,045 | 1,117 | 2,612 | 1,636 | 17,335 | ||||||||||||||||||||||||
|
Ending Balance
|
$ | 7,545 | $ | 19,451 | $ | 2,457 | $ | 3,372 | $ | 2,840 | $ | 3,945 | $ | 2,751 | $ | 42,361 | ||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | 403 | $ | 257 | $ | — | $ | 346 | $ | 584 | $ | 7 | $ | 175 | $ | 1,772 | ||||||||||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 7,142 | $ | 19,194 | $ | 2,457 | $ | 3,026 | $ | 2,256 | $ | 3,938 | $ | 2,576 | $ | 40,589 | ||||||||||||||||
|
Financing Receivables:
|
||||||||||||||||||||||||||||||||
|
Ending balance: total loans by group
|
$ | 373,531 | $ | 1,614,474 | $ | 175,312 | $ | 82,569 | $ | 566,042 | $ | 471,862 | $ | 111,725 | $ | 3,395,515 | (1) | |||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | 4,603 | $ | 17,505 | $ | 9,261 | $ | 1,482 | $ | 8,385 | $ | 170 | $ | 1,323 | $ | 42,729 | ||||||||||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 368,928 | $ | 1,596,969 | $ | 166,051 | $ | 81,087 | $ | 557,657 | $ | 471,692 | $ | 110,402 | $ | 3,352,786 | ||||||||||||||||
| (1) | The amount of deferred fees included in the ending balance was $2.8 million and $3.4 million at December 31, 2010 and 2009, respectively. |
86
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table is a roll forward of the allowance for loan
losses for the year ended December 31, 2008:
| 2008 | ||||
| (Dollars in thousands) | ||||
|
Allowance for Loan Losses, Beginning of Year
|
$ | 26,831 | ||
|
Loans Charged-Off
|
(7,138 | ) | ||
|
Recoveries on Loans Previously Charged-Off
|
944 | |||
|
Net Charge-Offs
|
(6,194 | ) | ||
|
Allowance Related to Business Combinations
|
5,524 | |||
|
Provision Charged to Expense
|
10,888 | |||
|
Allowance for Loan Losses, End of Year
|
$ | 37,049 | ||
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 possess 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 & 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 & equipment, or real
estate, if applicable. Repayment sources consist of: primarily,
operating cash flow, and secondarily, liquidation of assets. The
Bank’s policy is to obtain personal guaranties for payment
from individuals holding material ownership interests of the
borrowing entities.
Real Estate — Commercial
—
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. The Bank’s policy is to obtain personal guaranties
for payment from individuals holding material ownership
interests of the borrowing entities.
Commercial Real Estate —
Construction
— Loans in this category consist
of short-term construction loans, revolving and non-revolving
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, commercial/retail, office,
industrial, hotels, educational and healthcare facilities and
other specific use properties. Loans may be written with
non-amortizing
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 flow or
liquidation of other assets. The Bank’s policy is to obtain
personal guaranties for payment from individuals holding
material ownership interests of the borrowing entities.
Business Banking
— 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 & equipment, or real
estate, if applicable. Repayment sources consist of: primarily,
operating cash flow, and secondarily, liquidation of assets. The
Bank’s policy is to obtain personal guaranties for payment
from individuals holding material ownership interests of the
borrowing entities.
Real Estate — Residential
—
Residential mortgage loans held in the Bank’s portfolio are
made to borrowers who demonstrate 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
87
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the collateral. Collateral consists of mortgage liens on 1-4
family residential properties. The Company does not originate
sub-prime
or
other riskier types of residential loans.
Consumer — Home Equity
— Home
equity loans and lines are made to qualified individuals for
legitimate purposes secured by senior or junior mortgage liens
on owner-occupied 1-4 family homes, condominiums or vacation
homes or on non-owner occupied 1-4 family homes with more
restrictive loan to value requirements. Borrower qualifications
include favorable credit history combined with supportive income
requirements and combined loan to value ratios within
established policy guidelines.
Consumer — Other
— Other
consumer loan products including personal lines of credit and
amortizing loans made to qualified individuals for various
purposes such as education, auto loans, debt consolidation,
personal expenses or overdraft protection. Borrower
qualifications include favorable credit history combined with
supportive income and collateral requirements within established
policy guidelines. Consumer — Other loans may be
secured or unsecured. Auto loans collateral consists of liens on
motor vehicles.
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 TDR. The Company reviews numerous credit
quality indicators when assessing the risk in its loan portfolio.
For the commercial and industrial, commercial real estate,
commercial construction and small business portfolios, 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 national
companies with a very strong financial condition, and loans
fully secured by cash collateral, through ‘Acceptable
Risk’, which indicated borrowers may exhibit declining
earnings, strained cash flow, increasing leverage
and/or
weakening market fundamentals that indicate above average or
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 Bank management’s close attention. If not checked
or corrected, these trends will weaken the Bank’s asset and
position. While potentially weak, these borrowers are currently
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.
88
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
9
Rating — Partial Loss Probable
Borrowers exhibit well defined weaknesses that jeopardize the
orderly liquidation of debt with the added provision that the
weaknesses make collection of the debt in full, on the basis of
currently existing facts, conditions, and values, highly
questionable and improbable. Serious problems exist to the point
where partial loss of principal is likely.
10
Rating — Definite Loss
Borrowers deemed incapable of repayment. Loans to such borrowers
are considered uncollectible and of such little value that
continuation as active assets of the Bank 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.
In addition to the extensive quantitative approach for
monitoring credit quality, the commercial loan officers endeavor
to maintain strong, interactive relationships with each
customer. These close relationships facilitate the early
identification of potential weakness within the loan portfolio.
The loan officers proactively work with troubled borrowers to
alleviate potential problems and avoid further credit quality
deterioration. Adversely-rated credits that demonstrate
significant deterioration in credit quality are transferred to a
specialized group of seasoned workout officers for individual
attention.
The following table details the internal risk grading categories
for the Company’s commercial and industrial, commercial
real estate, commercial construction and small business
portfolios:
| As of December 31, | ||||||||||||||||||||||||||||||||||
|
Risk
|
Commercial and Industrial | Commercial Real Estate | Commercial | Small Business | ||||||||||||||||||||||||||||||
|
Category
|
Rating | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
|
Pass
|
1 - 6 | $ | 445,116 | $ | 330,080 | $ | 1,496,822 | $ | 1,396,229 | $ | 110,549 | $ | 138,848 | $ | 70,987 | $ | 75,684 | |||||||||||||||||
|
Potential Weakness
|
7 | 30,250 | 23,557 | 99,400 | 129,425 | 6,311 | 17,157 | 5,252 | 4,527 | |||||||||||||||||||||||||
|
Definite Weakness — Loss Unlikely
|
8 | 25,864 | 19,784 | 117,850 | 88,463 | 12,561 | 19,307 | 3,533 | 2,178 | |||||||||||||||||||||||||
|
Partial Loss Probable
|
9 | 1,722 | 110 | 3,046 | 357 | — | — | 254 | 180 | |||||||||||||||||||||||||
|
Definitive Loss
|
10 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
|
Total
|
$ | 502,952 | $ | 373,531 | $ | 1,717,118 | $ | 1,614,474 | $ | 129,421 | $ | 175,312 | $ | 80,026 | $ | 82,569 | ||||||||||||||||||
For the Company’s residential real estate, residential
construction, home equity and other consumer portfolios, the
quality of the loan is best indicated by the repayment
performance of an individual borrower. However, the Company does
supplement performance data with current FICO and Loan to Value
(“LTV”) estimates. Current FICO data is purchased and
appended to all consumer loans on a quarterly basis. In
addition, automated valuation services and broker opinions of
value are used to supplement original value data for the
residential and home equity portfolios, periodically, typically
twice per annum. Delinquency status is determined using payment
performance, while accrual status may be determined using a
combination of payment performance, expected borrower viability
and collateral value. Nonaccrual consumer loans that have been
restructured must perform for a period of 6 months before
being removed from nonaccrual status. Delinquent consumer loans
are managed by a team of seasoned collection specialists.
89
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Bank’s philosophy toward managing its loan portfolios
is predicated upon careful monitoring, which stresses early
detection and response to delinquent and default situations. The
Bank seeks to make arrangements to resolve any delinquent or
default situation over the shortest possible time frame. As a
general rule, loans more than 90 days past due with respect
to principal or interest are classified as a nonaccrual loan. As
permitted by banking regulations, certain consumer loans past
due 90 days or more may continue to accrue interest. The
Company also may use discretion regarding other loans over
90 days delinquent if the loan is well secured and in
process of collection.
The Company considers all nonaccrual loans and any loans over
90 days delinquent to be nonperforming. Set forth is
information regarding the Company’s nonperforming loans at
the period shown.
The following table shows nonaccrual loans at the dates
indicated:
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Loans accounted for on a nonaccrual basis(1)
|
||||||||
|
Commercial and Industrial
|
$ | 3,123 | $ | 4,205 | ||||
|
Commercial Real Estate(2)
|
9,836 | 18,525 | ||||||
|
Small Business
|
887 | 793 | ||||||
|
Residential Real Estate
|
6,728 | 10,829 | ||||||
|
Home Equity
|
1,752 | 1,166 | ||||||
|
Consumer — Other
|
505 | 373 | ||||||
|
Total nonaccrual loans
|
$ | 22,831 | $ | 35,891 | ||||
| (1) | There were $4.0 million and $3.5 million nonaccruing TDRs at December 31, 2010 and 2009, respectively. | |
| (2) | Commercial real estate includes commercial construction. |
The following table shows the age analysis of past due financing
receivables as of the dates indicated:
| December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||||||
|
Recorded
|
||||||||||||||||||||||||||||||||||||||||||||
| 30-59 days | 60-89 days | 90 days or more | Total Past Due |
Total
|
Investment
|
|||||||||||||||||||||||||||||||||||||||
|
Number
|
Principal
|
Number
|
Principal
|
Number
|
Principal
|
Number
|
Principal
|
Financing
|
>90 Days
|
|||||||||||||||||||||||||||||||||||
| of Loans | Balance | of Loans | Balance | of Loans | Balance | of Loans | Balance | Current | Receivables | and Accruing | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
|
Commercial and Industrial
|
16 | $ | 1,383 | 8 | $ | 910 | 18 | $ | 2,207 | 42 | $ | 4,500 | $ | 498,452 | $ | 502,952 | $ | — | ||||||||||||||||||||||||||
|
Commercial Real Estate
|
13 | 2,809 | 7 | 4,820 | 29 | 6,260 | 49 | 13,889 | 1,703,229 | 1,717,118 | — | |||||||||||||||||||||||||||||||||
|
Commercial Construction
|
— | — | — | — | 9 | 1,999 | 9 | 1,999 | 127,422 | 129,421 | — | |||||||||||||||||||||||||||||||||
|
Small Business
|
23 | 1,071 | 11 | 302 | 19 | 420 | 53 | 1,793 | 78,233 | 80,026 | — | |||||||||||||||||||||||||||||||||
|
Residential Real Estate
|
14 | 4,793 | 6 | 865 | 21 | 4,050 | 41 | 9,708 | 464,228 | 473,936 | — | |||||||||||||||||||||||||||||||||
|
Residential Construction
|
— | — | — | — | — | — | — | — | 4,175 | 4,175 | — | |||||||||||||||||||||||||||||||||
|
Home Equity
|
31 | 1,737 | 8 | 878 | 12 | 1,095 | 51 | 3,710 | 575,568 | 579,278 | 4 | |||||||||||||||||||||||||||||||||
|
Consumer — Other
|
402 | 2,986 | 89 | 478 | 85 | 564 | 576 | 4,028 | 64,745 | 68,773 | 273 | |||||||||||||||||||||||||||||||||
|
Total
|
499 | $ | 14,779 | 129 | $ | 8,253 | 193 | $ | 16,595 | 821 | $ | 39,627 | $ | 3,516,052 | $ | 3,555,679 | $ | 277 | ||||||||||||||||||||||||||
90
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| December 31, 2009 | ||||||||||||||||||||||||||||||||||||||||||||
|
Recorded
|
||||||||||||||||||||||||||||||||||||||||||||
| 30-59 days | 60-89 days | 90 days or more | Total Past Due |
Total
|
Investment
|
|||||||||||||||||||||||||||||||||||||||
|
Number
|
Principal
|
Number
|
Principal
|
Number
|
Principal
|
Number
|
Principal
|
Financing
|
>90 Days
|
|||||||||||||||||||||||||||||||||||
| of Loans | Balance | of Loans | Balance | of Loans | Balance | of Loans | Balance | Current | Receivables | and Accruing | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
|
Commercial and Industrial
|
22 | $ | 3,519 | 8 | $ | 2,182 | 18 | $ | 3,972 | 48 | $ | 9,673 | $ | 363,858 | $ | 373,531 | $ | — | ||||||||||||||||||||||||||
|
Commercial Real Estate
|
22 | 5,803 | 8 | 6,163 | 43 | 16,875 | 73 | 28,841 | 1,585,633 | 1,614,474 | — | |||||||||||||||||||||||||||||||||
|
Commercial Construction
|
— | — | — | — | — | — | — | — | 175,312 | 175,312 | — | |||||||||||||||||||||||||||||||||
|
Small Business
|
34 | 945 | 13 | 163 | 21 | 419 | 68 | 1,527 | 81,042 | 82,569 | — | |||||||||||||||||||||||||||||||||
|
Residential Real Estate
|
11 | 2,815 | 12 | 2,431 | 22 | 5,130 | 45 | 10,376 | 544,930 | 555,306 | — | |||||||||||||||||||||||||||||||||
|
Residential Construction
|
— | — | — | — | — | — | — | — | 10,736 | 10,736 | — | |||||||||||||||||||||||||||||||||
|
Home Equity
|
26 | 1,956 | 7 | 303 | 14 | 876 | 47 | 3,135 | 468,727 | 471,862 | — | |||||||||||||||||||||||||||||||||
|
Consumer — Other
|
480 | 3,899 | 46 | 759 | 47 | 509 | 573 | 5,167 | 106,558 | 111,725 | 292 | |||||||||||||||||||||||||||||||||
|
Total
|
595 | $ | 18,937 | 94 | $ | 12,001 | 165 | $ | 27,781 | 854 | $ | 58,719 | $ | 3,336,796 | $ | 3,395,515 | $ | 292 | ||||||||||||||||||||||||||
In the course of resolving nonperforming loans, the Bank may
choose to restructure the contractual terms of certain loans.
The Bank attempts to work-out an alternative payment schedule
with the borrower in order to avoid foreclosure actions. Any
loans that are modified are reviewed by the Bank to identify if
a TDR has occurred, which is when, for economic or legal reasons
related to a borrower’s financial difficulties, the Bank
grants a concession to the borrower that it would not otherwise
consider. Terms may be modified to fit the ability of the
borrower to repay in line with its current financial status and
the restructuring of the loan may include the transfer of assets
from the borrower to satisfy the debt, a modification of loan
terms, or a combination of the two.
The Bank’s policy is to have any restructured loans which
are on nonaccrual status prior to being modified remain on
nonaccrual status for approximately six months, subsequent to
being modified, before management considers its return to
accrual status. If the restructured loan is on accrual status
prior to being modified, it is reviewed to determine if the
modified loan should remain on accrual status.
The following table shows the TDR loans on accrual and
nonaccrual status as of the dates indicated:
| December 31, 2010 | ||||||||||||||||||||||||
| TDRs on Accrual Status | TDRs on Nonaccrual Status | Total TDRs | ||||||||||||||||||||||
|
Number of
|
Balance of
|
Number of
|
Balance of
|
Number of
|
Balance of
|
|||||||||||||||||||
| Loans | Loans | Loans | Loans | Loans | Loans | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Commercial and Industrial
|
10 | $ | 443 | 1 | $ | 555 | 11 | $ | 998 | |||||||||||||||
|
Commercial Real Estate
|
14 | 13,679 | 4 | 1,468 | 18 | 15,147 | ||||||||||||||||||
|
Small Business
|
49 | 1,523 | — | — | 49 | 1,523 | ||||||||||||||||||
|
Residential Real Estate
|
25 | 8,329 | 6 | 1,634 | 31 | 9,963 | ||||||||||||||||||
|
Home Equity
|
4 | 242 | 2 | 186 | 6 | 428 | ||||||||||||||||||
|
Consumer — Other
|
138 | 1,875 | 4 | 139 | 142 | 2,014 | ||||||||||||||||||
|
TOTAL TDRs
|
240 | $ | 26,091 | 17 | $ | 3,982 | 257 | $ | 30,073 | |||||||||||||||
91
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| December 31, 2009 | ||||||||||||||||||||||||
| TDRs on Accrual Status | TDRs on Nonaccrual Status | Total TDRs | ||||||||||||||||||||||
|
Number of
|
Balance of
|
Number of
|
Balance of
|
Number of
|
Balance of
|
|||||||||||||||||||
| Loans | Loans | Loans | Loans | Loans | Loans | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Commercial Real Estate
|
4 | $ | 3,414 | — | $ | — | 4 | $ | 3,414 | |||||||||||||||
|
Small Business
|
9 | 690 | — | — | 9 | 690 | ||||||||||||||||||
|
Residential Real Estate
|
16 | 5,009 | 10 | 3,376 | 26 | 8,385 | ||||||||||||||||||
|
Home Equity
|
1 | 48 | 1 | 122 | 2 | 170 | ||||||||||||||||||
|
Consumer — Other
|
67 | 1,323 | — | — | 67 | 1,323 | ||||||||||||||||||
|
TOTAL TDRs
|
97 | $ | 10,484 | 11 | $ | 3,498 | 108 | $ | 13,982 | |||||||||||||||
The amount of the specific reserve associated with the TDRs was
$1.6 million and $1.0 million at December 31,
2010 and 2009, respectively. At December 31, 2010, the
amount of additional commitments to lend funds to borrowers who
have been a party to a TDR was $1.2 million. In 2010
$21.8 million loans were new to TDR and $1.2 million
of TDRs moved from nonaccrual to accrual in 2010.
The table below sets forth information regarding the
Company’s impaired loans as of the dates indicated:
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | ||||||||||||||||||||
|
Unpaid
|
Average
|
Interest
|
||||||||||||||||||
|
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
With no Related Allowance Recorded:
|
||||||||||||||||||||
|
Commercial & Industrial
|
$ | 2,451 | $ | 2,917 | $ | — | $ | 2,539 | $ | 171 | ||||||||||
|
Commercial Real Estate
|
19,538 | 20,280 | — | 20,223 | 1,394 | |||||||||||||||
|
Commercial Construction
|
230 | 230 | — | 248 | 13 | |||||||||||||||
|
Small Business
|
1,541 | 1,656 | — | 1,689 | 122 | |||||||||||||||
|
Residential Real Estate(1)
|
205 | 205 | — | 205 | 10 | |||||||||||||||
|
Consumer — Home Equity
|
— | — | — | — | — | |||||||||||||||
|
Consumer — Other
|
10 | 10 | — | 7 | — | |||||||||||||||
|
Subtotal
|
23,975 | 25,298 | — | 24,911 | 1,710 | |||||||||||||||
|
With an Allowance Recorded:
|
||||||||||||||||||||
|
Commercial & Industrial
|
$ | 1,372 | $ | 1,373 | $ | 511 | $ | 1,384 | $ | 94 | ||||||||||
|
Commercial Real Estate
|
7,127 | 7,379 | 411 | 7,346 | 438 | |||||||||||||||
|
Commercial Construction
|
1,769 | 1,769 | 151 | 1,762 | 76 | |||||||||||||||
|
Small Business
|
953 | 954 | 221 | 956 | 63 | |||||||||||||||
|
Residential Real Estate(1)
|
9,758 | 10,146 | 991 | 9,836 | 396 | |||||||||||||||
|
Consumer — Home Equity
|
428 | 435 | 17 | 432 | 21 | |||||||||||||||
|
Consumer — Other
|
2,004 | 2,035 | 245 | 1,364 | 58 | |||||||||||||||
|
Subtotal
|
23,411 | 24,091 | 2,547 | 23,080 | 1,146 | |||||||||||||||
|
Total
|
$ | 47,386 | $ | 49,389 | $ | 2,547 | $ | 47,991 | $ | 2,856 | ||||||||||
92
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 2009 | ||||||||||||||||||||
|
Unpaid
|
Average
|
Interest
|
||||||||||||||||||
|
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
With no Related Allowance Recorded:
|
||||||||||||||||||||
|
Commercial & Industrial
|
$ | 2,927 | $ | 3,086 | $ | — | $ | 3,382 | $ | 216 | ||||||||||
|
Commercial Real Estate
|
13,058 | 13,228 | — | 13,126 | 936 | |||||||||||||||
|
Commercial Construction
|
9,261 | 10,626 | — | 9,899 | 611 | |||||||||||||||
|
Small Business
|
629 | 716 | — | 712 | 30 | |||||||||||||||
|
Residential Real Estate(1)
|
3,376 | 3,376 | — | 3,298 | 172 | |||||||||||||||
|
Consumer — Home Equity
|
122 | 122 | — | 124 | 5 | |||||||||||||||
|
Consumer — Other
|
— | — | — | — | — | |||||||||||||||
|
Subtotal
|
29,373 | 31,154 | — | 30,541 | 1,970 | |||||||||||||||
|
With an Allowance Recorded:
|
||||||||||||||||||||
|
Commercial & Industrial
|
$ | 1,676 | $ | 1,676 | $ | 403 | $ | 1,119 | $ | 134 | ||||||||||
|
Commercial Real Estate
|
4,447 | 4,458 | 257 | 4,550 | 175 | |||||||||||||||
|
Commercial Construction
|
— | — | — | — | — | |||||||||||||||
|
Small Business
|
853 | 914 | 346 | 749 | 36 | |||||||||||||||
|
Residential Real Estate(1)
|
5,009 | 5,009 | 584 | 4,131 | 246 | |||||||||||||||
|
Consumer — Home Equity
|
48 | 48 | 7 | 48 | 3 | |||||||||||||||
|
Consumer — Other
|
1,323 | 1,338 | 175 | 1,049 | 50 | |||||||||||||||
|
Subtotal
|
13,356 | 13,443 | 1,772 | 11,646 | 644 | |||||||||||||||
|
Total
|
$ | 42,729 | $ | 44,597 | $ | 1,772 | $ | 42,187 | $ | 2,614 | ||||||||||
| (1) | Includes residential construction loans. |
Loans
to Insiders
The Bank has granted loans to principal officers, directors (and
their affiliates) and principal security holders. All such loans
were made in the ordinary course of business on substantially
the same terms, including interest rate and collateral, as those
prevailing at the time for comparable transactions with other
persons, and do not involve more than the normal risk of
collectability or present other unfavorable features. Annual
activity consists of the following:
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Net Principal Balance of Loans Outstanding as of
January 1,
|
$ | 31,503 | $ | 35,143 | ||||
|
Loan Advances
|
50,197 | 49,889 | ||||||
|
Loan Payments/Payoffs
|
(51,714 | ) | (53,529 | ) | ||||
|
Net Principal Balance of Loans Outstanding as of
December 31,
|
$ | 29,986 | $ | 31,503 | ||||
93
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (5) | Bank Premises and Equipment |
Bank premises and equipment at December 31, were as follows:
|
Estimated
|
||||||||||||
| 2010 | 2009 | Useful Life | ||||||||||
| (Dollars in thousands) | (In Years) | |||||||||||
|
Cost:
|
||||||||||||
|
Land
|
$ | 11,873 | $ | 11,873 | N/A | |||||||
|
Bank Premises
|
21,698 | 20,058 | 5-39 | |||||||||
|
Leasehold Improvements
|
16,650 | 15,374 | 1-15 | |||||||||
|
Furniture and Equipment
|
44,914 | 42,732 | 3-10 | |||||||||
|
Total Cost
|
95,135 | 90,037 | ||||||||||
|
Accumulated Depreciation
|
(49,423 | ) | (45,802 | ) | ||||||||
|
Net Bank Premises and Equipment
|
$ | 45,712 | $ | 44,235 | ||||||||
Depreciation expense related to bank premises and equipment was
$5.2 million in 2010, $4.6 million in 2009, and
$4.1 million in 2008, which is included in occupancy and
equipment expense and computer software expense.
| (6) | Goodwill and Identifiable Intangible Assets |
Goodwill and identifiable intangible assets as of
December 31, 2010 and December 31, 2009 were
$142.0 million and $143.7 million, respectively.
During the second quarter of 2009 the Company acquired Ben
Franklin resulting in additional goodwill of $12.2 million
and core deposit and other identifiable intangible assets of
$7.6 million. During 2008 the Company completed the
acquisition of Slade’s Ferry Bancorp., which resulted in
additional goodwill of $58.0 million and other identifiable
intangible assets of $9.0 million. Additionally, the
Company recorded additional goodwill of approximately $269,000,
$718,000, and $200,000 in 2010, 2009, and 2008, respectively
relating to earn out payments from prior acquisitions.
The Company has $129.6 million of goodwill recorded as of
December 31, 2010, of which approximately
$39.5 million is expected to be deductible for tax purposes.
The changes in goodwill and identifiable intangible assets for
the years ended December 31, 2010, 2009, and 2008 are shown
in the table below:
| Carrying Amount of Goodwill and Intangibles | ||||||||||||||||
|
Core Deposit
|
Other Identifiable
|
|||||||||||||||
| Goodwill | Intangibles | Intangible Assets | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Balance at December 31, 2007
|
$ | 58,296 | $ | 1,134 | $ | 981 | $ | 60,411 | ||||||||
|
Recorded during the year
|
58,141 | 8,761 | 200 | 67,102 | ||||||||||||
|
Amortization Expense
|
— | (1,528 | ) | (275 | ) | (1,803 | ) | |||||||||
|
Balance at December 31, 2008
|
$ | 116,437 | $ | 8,367 | $ | 906 | $ | 125,710 | ||||||||
|
Recorded during the year
|
12,911 | 6,626 | 990 | 20,527 | ||||||||||||
|
Amortization Expense
|
— | (1,929 | ) | (578 | ) | (2,507 | ) | |||||||||
|
Balance at December 31, 2009
|
$ | 129,348 | $ | 13,064 | $ | 1,318 | $ | 143,730 | ||||||||
|
Recorded during the year
|
269 | — | — | 269 | ||||||||||||
|
Amortization Expense
|
— | (1,789 | ) | (254 | ) | (2,043 | ) | |||||||||
|
Balance at December 31, 2010
|
$ | 129,617 | $ | 11,275 | $ | 1,064 | $ | 141,956 | ||||||||
94
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table sets forth the estimated annual amortization
expense of the identifiable intangible assets:
| 2011 | 2012 | 2013 | 2014 | 2015 | 2016 -2038 | Total | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
|
Core Deposit Intangibles
|
$ | 1,615 | $ | 1,449 | $ | 1,449 | $ | 1,449 | $ | 1,449 | $ | 3,864 | $ | 11,275 | ||||||||||||||
|
Other Intangible Assets
|
77 | 156 | 158 | 147 | 137 | 389 | 1,064 | |||||||||||||||||||||
|
Total Identifiable Intangible Assets
|
$ | 1,692 | $ | 1,605 | $ | 1,607 | $ | 1,596 | $ | 1,586 | $ | 4,253 | $ | 12,339 | ||||||||||||||
The weighted average amortization period for core deposit
intangibles is 9.62 years.
| (7) | Deposits |
The following is a summary of the scheduled maturities of time
deposits as of December 31:
| 2010 | 2009 | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
1 year or less
|
$ | 587,780 | 84.79 | % | $ | 779,449 | 84.93 | % | ||||||||
|
Over 1 year to 2 years
|
62,389 | 9.00 | % | 107,271 | 11.69 | % | ||||||||||
|
Over 2 years to 3 years
|
32,545 | 4.70 | % | 22,942 | 2.50 | % | ||||||||||
|
Over 3 years to 4 years
|
10,046 | 1.45 | % | 7,067 | 0.77 | % | ||||||||||
|
Over 4 years to 5 years
|
416 | 0.06 | % | 1,052 | 0.11 | % | ||||||||||
|
Over 5 years
|
— | 0.00 | % | — | 0.00 | % | ||||||||||
|
Total
|
$ | 693,176 | 100.00 | % | $ | 917,781 | 100.00 | % | ||||||||
As of December 31, 2010 and 2009 the amount of overdraft
deposits that were reclassified to the loan category was
$1.2 million and $863,000, respectively.
| (8) | Borrowings |
Short-term borrowings consist of federal funds purchased, assets
sold under repurchase agreements, FHLB borrowings, and treasury
tax and loan notes that are contractually due within a year from
the maturity date. Information on the amounts outstanding and
interest rates of short-term borrowings for each of the three
years ended December 31 are as follows:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Balance outstanding at end of year
|
$ | 316,163 | $ | 352,604 | $ | 329,826 | ||||||
|
Average daily balance outstanding
|
341,447 | 329,712 | 207,614 | |||||||||
|
Maximum balance outstanding at any month end
|
361,060 | 352,604 | 329,826 | |||||||||
|
Weighted average interest rate for the year
|
1.54 | % | 0.83 | % | 2.49 | % | ||||||
|
Weighted average interest rate at end of year
|
0.84 | % | 1.17 | % | 0.93 | % | ||||||
At December 31, 2010 and 2009, the Bank had
$2.2 billion and $2.4 billion, respectively, of assets
pledged as collateral against borrowings. The assets are pledged
to the FHLBB and the Federal Reserve Bank of Boston. The Bank
has a $630.8 million available borrowing capacity with the
Federal Reserve Bank of Boston. At December 31, 2010, the
Company had no outstanding borrowings with the Federal Reserve
Bank of Boston.
The Bank has repurchase agreements with major brokerage firms.
Borrowings under these agreements are classified as assets sold
under repurchase agreements. Both wholesale and retail
repurchase agreements are collateralized by securities issued or
guaranteed by government sponsored enterprises. At
December 31, 2010 and 2009, the Company had
$50.0 million of securities repurchase agreements
outstanding with third party brokers. In addition to these
agreements, the Bank has entered into repurchase agreements with
certain customers. At
95
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
December 31, 2010 and 2009, the Bank had
$118.1 million and $140.5 million, respectively, of
customer repurchase agreements outstanding. The related
securities are included in securities available for sale.
FHLB borrowings are collateralized by a blanket pledge agreement
on the Bank’s FHLB stock, certain qualified investment
securities, deposits at the Federal Home Loan Bank, residential
mortgages held in the Bank’s portfolio, and certain
commercial real estate loans. The Bank’s available
borrowing capacity at the Federal Home Loan Bank was
approximately $370.4 million and $356.0 million at
December 31, 2010 and 2009, respectively. In addition, the
Bank has a $5.0 million line of credit with the FHLB, none
of which was outstanding at December 31, 2010 or 2009.
The Company makes extensive use of interest rate swaps as a
component of managing interest rate risk, an example of this is
swapping short-term FHLBB advances to a fixed rate. The
following table shows the effective maturities of FHLBB advances
inclusive of the interest rate swaps:
| 2010 | 2009 | |||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Due in one year or less
|
$ | 70,522 | 1.82 | % | $ | 110,003 | 3.02 | % | ||||||||
|
Due in greater than one year to five years
|
176,725 | 2.70 | % | 194,078 | 2.92 | % | ||||||||||
|
Due in greater than five years
|
55,167 | 3.42 | % | 58,855 | 3.47 | % | ||||||||||
|
Total
|
$ | 302,414 | 2.63 | % | $ | 362,936 | 3.04 | % | ||||||||
Of the $302.4 million outstanding at year-end,
$125.0 million of these borrowings are hedged by interest
rate swaps to fix the rate of interest at an average rate of
2.85% through December 10, 2018.
Included as long-term borrowings on the Company’s balance
sheet are junior subordinated debentures, which quality as a
form of regulatory capital, payable to the Company’s
unconsolidated VIEs, Trust V and Slade Ferry Trust I,
which issued trust preferred securities. At December 31,
2010 the Company has $61.8 million of junior subordinated
debentures, of which $51.5 million were issued to an
unconsolidated subsidiary, Trust V, in connection with the
issuance of variable rate (LIBOR plus 1.48%) capital
securities due in 2037, which is callable March 2012. The
Company has locked in a fixed rate of interest of 6.52%, for
10 years, through an interest rate swap. The Company also
has $10.3 million of outstanding junior subordinated
debentures issued to an unconsolidated subsidiary, Slade’s
Ferry Trust I, in connection with the issuance of variable
rate (LIBOR plus 2.79%) capital securities due in 2034 which is
callable quarterly until maturity. The Company unconditionally
guarantees all Trust V and Slade’s Ferry Statutory
Trust obligations under the trust preferred securities.
In August 2008, Rockland Trust Company issued
$30.0 million of subordinated debt to USB Capital Resources
Inc., a wholly-owned subsidiary of U.S. Bank National
Association. The subordinated debt, which qualifies as
Tier 2 capital under Federal Deposit Insurance Corporation
rules and regulations, was issued and sold through a private
placement pursuant to a subordinated debt purchase agreement
which includes customary representations, warranties, covenants,
and events of default. The subordinated debt matures on
August 27, 2018. The Bank may, with regulatory approval,
redeem the subordinated debt without penalty at any time on or
after August 27, 2013. The interest rate for the
subordinated debt is fixed at 7.02% until August 27, 2013.
After that point the subordinated debt, if not redeemed, will
have a floating interest rate determined, at the option of the
Bank, at either the then current: LIBOR plus 3.00%; or, the
U.S. Bank base rate plus 1.25%.
Unamortized debt issuance costs are included in other assets.
Unamortized issuance costs were $447,000 and $490,000 at
December 31, 2010 and 2009, respectively.
Interest expense on the junior subordinated debentures and
subordinated debt, reported as interest on borrowings, which
includes the amortization of the issuance cost, was
$5.8 million in 2010, $5.9 million in 2009, and
$4.6 million in 2008.
96
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (9) | Earnings Per Share |
Earnings per share consisted of the following components for the
years ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Net Income
|
$ | 40,240 | $ | 22,989 | $ | 23,964 | ||||||
|
Less: Preferred Stock Dividends
|
— | 5,698 | — | |||||||||
|
Net Income Available to Common Shareholders
|
$ | 40,240 | $ | 17,291 | $ | 23,964 | ||||||
| Weighted Average Shares | ||||||||||||
| (Shares in thousands) | ||||||||||||
|
Basic Shares(1)
|
21,178 | 19,643 | 15,695 | |||||||||
|
Effect of dilutive securities
|
26 | 30 | 64 | |||||||||
|
Diluted Shares
|
21,204 | 19,673 | 15,759 | |||||||||
|
Net Income Available to Common Shareholders per Share
|
||||||||||||
|
Basic EPS
|
$ | 1.90 | $ | 0.88 | $ | 1.53 | ||||||
|
Effect of dilutive securities
|
— | — | (0.01 | ) | ||||||||
|
Diluted EPS
|
$ | 1.90 | $ | 0.88 | $ | 1.52 | ||||||
| (1) | Unvested restricted stock awards were not considered outstanding in the computation of basic earnings per share due to the immaterial balance for the years ended December 31, 2009 and 2008. |
The following table illustrates the options to purchase common
stock that were excluded from the calculation of diluted
earnings per share because they were anti-dilutive:
| As of December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Stock Options
|
790,140 | 1,024,831 | 772,037 | |||||||||
| (10) | Stock Based Compensation |
The Company has the following stock-based plans, all of which
have been approved by the Company’s Board of Directors and
shareholders:
| • | 1996 Non-Employee Directors’ Stock Option Plan (“the 1996 Plan”) | |
| • | 1997 Employee Stock Option Plan (“the 1997 Plan”) | |
| • | 2005 Employee Stock Plan (“the 2005 Plan”) | |
| • | 2006 Non-Employee Director Stock Plan (“the 2006 Plan”) | |
| • | 2010 Non-Employee Director Stock Plan (“the 2010 Plan”) |
In addition, in connection with the Ben Franklin acquisition the
Company agreed to convert, for a two-year period, the options
granted to certain Ben Franklin employees prior to the
acquisition to acquire Ben Franklin stock into options to
acquire the Company’s stock (“the Ben Franklin
Plan”).
97
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table presents the amount of cumulatively granted
stock options and restricted stock awards, net of forfeitures,
through December 31, 2010:
|
Cumulative Granted, Net of
|
||||||||||||||||||||||||
|
Authorized
|
Authorized
|
Forfeitures | ||||||||||||||||||||||
|
Stock
|
Restricted
|
Stock
|
Restricted
|
|||||||||||||||||||||
| Option Awards | Stock Awards | Total | Option Awards | Stock Awards | Total | |||||||||||||||||||
|
1996 Plan
|
300,000 | N/A | 300,000 | 203,000 | N/A | 203,000 | ||||||||||||||||||
|
1997 Plan
|
1,100,000 | N/A | 1,100,000 | 1,019,896 | N/A | 1,019,896 | ||||||||||||||||||
|
2005 Plan
|
(1 | ) | (1 | ) | 800,000 | 420,300 | 217,835 | 638,135 | ||||||||||||||||
|
2006 Plan
|
(2 | ) | (2 | ) | 50,000 | 15,000 | 20,400 | 35,400 | ||||||||||||||||
|
2010 Plan
|
(3 | ) | (3 | ) | 300,000 | 15,000 | 16,800 | 31,800 | ||||||||||||||||
|
Ben Franklin Plan
|
210,286 | N/A | 210,286 | 202,716 | N/A | 202,716 | ||||||||||||||||||
| (1) | The Company may award up to a total of 800,000 shares as stock options or restricted stock awards. | |
| (2) | The Company may award up to a total of 50,000 shares as stock options or restricted stock awards. During 2010, the remaining 14,600 shares were transferred and available for issue under the 2010 Plan. | |
| (3) | The Company may award up to a total of 300,000 shares as stock options or restricted stock awards, in addition to the remaining 14,600 shares that were transferred from the 2006 Plan. |
At December 31, 2010, there were no shares available for
grant under the 1996 Plan and the 1997 Plan due to their
expirations. The remaining shares available for grant under the
2006 Plan were transferred to the 2010 Plan and are available
for grant under this new plan. Additionally, no additional
options under the Ben Franklin Plan will be issued. Under all of
the Company’s stock based plans the option exercise price
is derived from trading value on the date of grant. Options and
restricted stock awards granted to date under all plans expire
through 2020. The following table provides vesting period and
contractual term information for stock option awards:
|
Vesting Period From
|
Contractual
|
|||||||||||
|
Date of Grant
|
Plan | Date of Grant | Term | |||||||||
|
Prior to 12/15/2005
|
1997 and 1996 | 6 to 24 months | 10 years | |||||||||
|
On 12/15/2005
|
1997 and 2005 | Immediate | 7 years | |||||||||
|
During 2006
|
2005 | 28 months | 7 years | |||||||||
|
During 2006
|
2006 | 21 months | 7 years | |||||||||
|
During 2007
|
2005 | 5 years | 10 years | |||||||||
|
During 2008
|
2005 | 5 years | 10 years | |||||||||
|
During 2009
|
2005 | 5 years | 10 years | |||||||||
|
During 2009
|
2006 | 22 months | 7 years | |||||||||
|
During 2009
|
Ben Franklin | Immediate | 2 years | |||||||||
|
During 2010
|
2010 | 20 months | 10 years | |||||||||
The Company issues shares for stock option exercises and
restricted stock awards from its pool of authorized but unissued
shares.
On May 25, 2010 and May 27, 2009, the Company granted
16,800 and 5,600 restricted stock awards, respectively, to
non-employee directors from the 2010 Plan and 2006 Plan,
respectively. These awards vest at the end of a five-year
period, or earlier if the director ceases to be a director for
any reason other than cause such as, for example, by retirement.
If a non-employee director is removed from the Board for cause,
the Company has ninety (90) days within which to exercise a
right to repurchase any unvested portion of any restricted stock
award from the non-employee director for the aggregate price of
One Dollar ($1.00). The holders of these awards participate
fully in the rewards of stock ownership of the Company,
including voting and dividend rights. The directors are not
required to pay any consideration to the Company for the
restricted stock awards. The Company measured the fair
98
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
value of the awards based on the average of the high price and
low price at which the Company’s common stock traded on the
date of the grant.
On February 25, 2010, the Company granted 54,500 restricted
stock awards to executive officers of the Company
and/or
Bank
and on February 11, 2010, the Company granted 37,000
restricted stock awards to certain non-executive officers of the
Company
and/or
Bank,
from the 2005 Employee Stock Plan. The restricted stock awards
have been determined to have a fair value per share of $25.12
and $23.39, respectively. On May 21, 2009 the Company
granted 93,000 restricted stock awards to certain executive
officers of the Company
and/or
Bank
from the 2005 Employee Stock Plan. These restricted stock awards
have been determined to have a fair value of $19.48. The fair
values are based on the average of the high and low price at
which the Company’s common stock traded on the date of
grant. The holders of these awards participate fully in the
rewards of stock ownership of the Company, including voting and
dividend rights. The restricted stock awards vest over a
three-year period.
On May 25, 2010, the Company awarded options to purchase
15,000 shares of common stock from the 2010 Non-Employee
Director Plan to three non-employee directors of the Company
and/or
Bank.
The options have been determined to have a fair value of $6.31
per share. The options vest over a three-year period and have a
contractual life of ten years from date of grant.
On April 20, 2009, the Company awarded options to purchase
5,000 shares of common stock from the 2005 Employee Stock
Plan to a certain officer of the Bank. The options have been
determined to have a fair value of $5.25 per share. The options
vest over a five-year period and have a contractual life of ten
years from the date of the grant.
On March 2, 2009, the Company awarded options to purchase
5,000 shares of common stock from the 2006 Non-Employee
Director Stock Plan to a director of the Company
and/or
Bank.
The options have been determined to have a fair value of $3.32
per share. The options vest over a five-year period and have a
contractual life of ten years from the date of the grant.
The total stock-based compensation expense before tax recognized
in earnings by the Company is shown in the following table:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Compensation Expense:
|
||||||||||||
|
Stock Option Awards
|
$ | 499 | $ | 405 | $ | 422 | ||||||
|
Restricted Stock Awards
|
1,167 | 369 | 104 | |||||||||
|
Total Compensation Expense
|
$ | 1,666 | $ | 774 | $ | 526 | ||||||
Amounts recognized related to awards issued to directors are
recognized as directors’ fees within other non-interest
expense.
Cash received from stock option exercises for the years ended
December 31, 2010, 2009, and 2008 was approximately
$743,000, $307,000, and $695,000, respectively. The actual tax
benefit realized for the tax deductions from option exercises
under all plans totaled $5,000, $20,000, and $100,000 for the
years ended December 31, 2010, 2009, and 2008,
respectively. No cash was used by the Company to settle equity
instruments granted under share-based compensation arrangements
during the years ended December 31, 2010, 2009, and 2008.
The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes option-pricing model with the
following assumptions used for grants under the identified plans:
| • | Expected volatility is based on the standard deviation of the historical volatility of the weekly adjusted closing price of the Company’s shares for a period equivalent to the expected life of the option. | |
| • | Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term, historical exercise/forfeiture behavior, and the vesting period, if any. For all options |
99
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| granted on December 15, 2005 and later, the Company takes into effect historical experience when determining the expected life of the option. |
| • | Expected dividend yield is an annualized rate calculated using the most recent dividend payment at time of grant and the Company’s average trailing twelve-month daily closing stock price. | |
| • | The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option. | |
| • | The stock-based compensation expense recognized in earnings should be based on the amount of awards ultimately expected to vest, therefore a forfeiture assumption is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized in 2010, 2009, and 2008 has been reduced for annualized estimated forfeitures of 5% for both restricted stock and stock option awards. Forfeitures were estimated based on historical experience. |
| 2010 Plan | 2006 Plan | 2005 Plan | Ben Franklin Plan | 1997 Plan | 1996 Plan | |||||||||||||||||||||||
|
Expected Volatility
|
Fiscal Year 2010 | 39% | (1) | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||
| Fiscal Year 2009 | N/A | 33% | (2) | 38% | (3) | 34% | (4) | N/A | N/A | |||||||||||||||||||
| Fiscal Year 2008 | N/A | N/A | 25% | (5) | N/A | N/A | N/A | |||||||||||||||||||||
|
Expected Lives
|
Fiscal Year 2010 | 5 years | (1) | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||
| Fiscal Year 2009 | N/A | 5 years | (2) | 5 years | (3) | 2 years | (4) | N/A | N/A | |||||||||||||||||||
| Fiscal Year 2008 | N/A | N/A | 5 years | (5) | N/A | N/A | N/A | |||||||||||||||||||||
|
Expected Dividend Yields
|
Fiscal Year 2010 | 3.18% | (1) | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||
| Fiscal Year 2009 | N/A | 2.78% | (2) | 2.99% | (3) | 2.96% | (4) | N/A | N/A | |||||||||||||||||||
| Fiscal Year 2008 | N/A | N/A | 2.44% | (5) | N/A | N/A | N/A | |||||||||||||||||||||
|
Risk Free Interest Rate
|
Fiscal Year 2010 | 2.01% | (1) | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||
| Fiscal Year 2009 | N/A | 1.82% | (2) | 1.80% | (3) | 0.95% | (4) | N/A | N/A | |||||||||||||||||||
| Fiscal Year 2008 | N/A | N/A | 2.79% | (5) | N/A | N/A | N/A | |||||||||||||||||||||
| (1) | On May 25, 2010, 15,000 options were granted from the 2010 Plan to certain members of the Company’s Board of Directors. The risk free rate, expected dividend yield, expected life and expected volatility for this grant were determined on May 25,2010. | |
| (2) | On March 2, 2009, 5,000 options were granted from the 2006 Plan to a member of the Company’s Board of Directors. The risk free rate, expected dividend yield, expected life and expected volatility for this grant were determined on March 2, 2009. | |
| (3) | On April 20, 2009, 5,000 options were granted from the 2005 Plan to a certain officer of the Bank. The risk free rate, expected dividend yield, expected life and expected volatility for this grant were determined on April 20, 2009. | |
| (4) | On April 10, 2009, 202,716 options were granted from the Ben Franklin Plan to former employees and members of Ben Franklin’s Board of Directors. The risk free rate, expected dividend yield, expected life and expected volatility for this grant were determined on April 10, 2009. | |
| (5) | On February 14, 2008, 201,000 options were granted from the 2005 Plan to certain officers of the Company and/or Bank. The risk free rate, expected dividend yield, expected life and expected volatility for this grant were determined on February 14, 2008. |
100
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of the status of all the Company’s Plans for the
year ended December 31, 2010 is presented in the table
below:
|
Summary Status of All Plans
|
||||||||||||||||||||||||
| Year Ended December 31, 2010 | ||||||||||||||||||||||||
|
Weighted
|
||||||||||||||||||||||||
|
Weighted
|
Average
|
Aggregate
|
Weighted
|
|||||||||||||||||||||
|
Average
|
Remaining
|
Intrinsic
|
Restricted
|
Average
|
||||||||||||||||||||
|
Exercise
|
Contractual
|
Value
|
Stock
|
Grant
|
||||||||||||||||||||
| Stock Options | Price ($) | Term (years) | ($000) | Awards | Price ($) | |||||||||||||||||||
|
Balance at January 1, 2010
|
1,160,507 | $ | 27.47 | 136,775 | $ | 19.82 | ||||||||||||||||||
|
Granted
|
15,000 | 23.07 | 108,300 | 24.21 | ||||||||||||||||||||
|
Exercised
|
(48,747 | ) | 17.35 | n/a | n/a | |||||||||||||||||||
|
Released
|
n/a | n/a | (25,150 | ) | 19.21 | |||||||||||||||||||
|
Forfeited
|
— | — | (25 | ) | 28.90 | |||||||||||||||||||
|
Expired
|
(7,000 | ) | 27.91 | — | — | |||||||||||||||||||
|
Balance at December 31, 2010
|
1,119,760 | $ | 27.85 | 3.47 | $ | 1,864 | 219,900 | $ | 22.05 | |||||||||||||||
|
Options Exercisable at December 31, 2010
|
947,475 | $ | 27.67 | 2.83 | $ | 1,766 | n/a | n/a | ||||||||||||||||
| Year Ended December 31, | ||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||
|
Weighted average grant date fair value of options granted
($ per share)
|
$ | 6.31 | $ | 4.28 | $ | 5.63 | ||||||||||
|
Total intrinsic value of share awards vested
|
$ | 632,000 | $ | 85,000 | $ | 280,000 | ||||||||||
The aggregate intrinsic value in the preceding tables represents
the total pre-tax intrinsic value, based on the average of the
high price and low price at which the Company’s common
stock traded on December 31, 2010 of $27.50 which would
have been received by the option holders had they all exercised
their options as of that date.
A summary of the status of the Non-Employee Director Plans as of
December 31, 2010 and changes during the year then ended is
presented in the table below:
| Non-Employee Director Plans | ||||||||||||||||||||||||
| Year Ended December 31, 2010 | ||||||||||||||||||||||||
| 2010 Plan | 2006 Plan | 1996 Plan | ||||||||||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||||||||||
|
Stock
|
Average
|
Stock
|
Average
|
Weighted
|
||||||||||||||||||||
|
Options
|
Exercise Price/
|
Options
|
Exercise Price/
|
Average
|
||||||||||||||||||||
|
and
|
Grant Date
|
and
|
Grant Date
|
Stock
|
Exercise
|
|||||||||||||||||||
| Awards | Fair Value | Awards | Fair Value | Options | Price | |||||||||||||||||||
|
Balance at January 1, 2010
|
— | $ | — | 33,000 | $ | 26.95 | 44,000 | $ | 25.13 | |||||||||||||||
|
Granted
|
||||||||||||||||||||||||
|
Options
|
15,000 | 23.07 | — | — | — | — | ||||||||||||||||||
|
Restricted Stock Awards
|
16,800 | 23.07 | — | — | n/a | n/a | ||||||||||||||||||
|
Exercised
|
— | — | — | — | (1,000 | ) | 11.50 | |||||||||||||||||
|
Released
|
— | — | — | — | n/a | n/a | ||||||||||||||||||
|
Forfeited
|
— | — | — | — | — | — | ||||||||||||||||||
|
Expired
|
— | — | — | — | (6,000 | ) | 27.32 | |||||||||||||||||
|
Outstanding at December 31, 2010
|
31,800 | $ | 23.07 | 33,000 | $ | 26.95 | 37,000 | $ | 25.14 | |||||||||||||||
|
Options Exercisable at December 31, 2010
|
5,001 | $ | 23.07 | 13,334 | $ | 27.69 | 37,000 | $ | 25.14 | |||||||||||||||
101
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of the status of the Company’s nonvested awards
under all Plans as of December 31, 2010 and changes during
the year then ended, is presented in the table below:
| Nonvested Awards Issued Under All Plans | ||||||||||||||||||||||||
| Year Ended December 31, 2010 | ||||||||||||||||||||||||
| Stock Options | Restricted Stock Awards | |||||||||||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||||||||||
|
Average
|
Average
|
|||||||||||||||||||||||
|
Grant Date
|
Grant Date
|
|||||||||||||||||||||||
| Awards | Fair Value | Awards | Fair Value | |||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Nonvested at January 1, 2010
|
224,913 | $ | 7.06 | 136,775 | $ | 19.82 | ||||||||||||||||||
|
Granted
|
15,000 | 6.31 | 108,300 | 24.21 | ||||||||||||||||||||
|
Vested/Released
|
(67,628 | ) | 6.78 | (25,150 | ) | 19.21 | ||||||||||||||||||
|
Expired
|
— | — | ||||||||||||||||||||||
|
Forfeited
|
— | — | (25 | ) | 28.90 | |||||||||||||||||||
|
Nonvested at December 31, 2010
|
172,285 | $ | 6.57 | 219,900 | $ | 22.05 | ||||||||||||||||||
|
Unrecognized compensation cost, including forfeiture estimate
|
$ | 790 | $ | 3,096 | ||||||||||||||||||||
|
Weighted average remaining recognition period (years)
|
1.8 | 2.6 | ||||||||||||||||||||||
The total fair value of stock options that vested during the
years ended December 31, 2010, 2009, and 2008 was $460,000,
$2.7 million, and $253,000 respectively. The total fair
value of restricted stock awards that vested for the years ended
December 31, 2010 was $483,000 and $51,000 for both 2009
and 2008.
The Company has form agreements used for stock option and
restricted stock awards. The form agreements used for the Chief
Executive Officer and all other Executive Officers have
previously been disclosed in Securities Exchange Commission
filings and generally provide that: (1) any unvested
options or unvested restricted stock vest upon a Change of
Control; and, that (2) any stock options which vest
pursuant to a Change of Control which is an event described in
Section 280G of the Internal Revenue Code of 1986 will be
cashed out at the difference between the acquisition price and
the exercise price of the stock option.
| (11) | Capital Purchase Program |
On January 9, 2009, as part of the Capital Purchase Program
(“CPP”) established by the U.S. Department of
Treasury (“Treasury”) under the Emergency Economic
Stabilization Act of 2008, the Company entered into a Letter
Agreement with the Treasury pursuant to which the Company issued
and sold to the Treasury 78,158 shares of the
Company’s Fixed Rate Cumulative Perpetual Preferred Stock,
Series C, par value $0.01 per share, having a liquidation
preference of $1,000 per share and a ten-year warrant to
purchase up to 481,664 shares of the Company’s common
stock, par value $0.01 per share, at an initial exercise price
of $24.34 per share, for an aggregate purchase price of
$78,158,000 in cash. All of the proceeds from the sale of the
Series C Preferred Stock were treated as Tier 1
capital for regulatory purposes.
The preferred stock and stock warrants were recorded using the
relative fair value method and were valued at $73.6 million
and $4.6 million, respectively. The carrying value of the
preferred stock, as determined by the relative fair value method
was lower than the face value of the preferred stock issued.
Accordingly, the Company recorded a discount using a discount
rate of 14.0%, which was accreted using the effective yield
method. The accretion of the discount is presented as imputed
preferred dividends and reduces the net income available to the
common shareholders.
On April 22, 2009 the Company retired all
78,158 shares of its Preferred Stock, related to the CPP.
Additionally, the Company paid to the Treasury Department
accrued dividends of approximately $727,000. In connection with
the retirement of the preferred stock, the Company recorded
imputed dividends of $4.4 million.
102
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The preferred stock dividend reduces net income available to
common shareholders, which is used in calculating earnings per
share. The Company also repurchased common stock warrants issued
to the Treasury for $2.2 million, the cost of which has
been reflected as a reduction in additional paid in capital.
| (12) | Derivatives and Hedging Activities |
The Company’s derivative financial instruments are used to
manage differences in the amount, timing, and duration of the
Company’s known or expected cash receipts and its known or
expected cash payments principally to manage the Company’s
interest rate risk. Additionally, the Company enters into
interest rate derivatives and foreign exchange contracts to
accommodate the business requirements of its customers
(“customer related positions”). The Company minimizes
the market and liquidity risks of customer-related positions by
entering into similar offsetting positions with broker-dealers.
Derivative instruments are carried at fair value in the
Company’s financial statements. The accounting for changes
in the fair value of a derivative instrument is dependent upon
whether or not it has been designated and qualifies as part of a
hedging relationship, and further, by the type of hedging
relationship. As of December 31, 2010 and 2009, the Company
has entered into interest rate swap contracts as part of the
Company’s interest rate risk management program, which are
designated and qualify as cash flow hedges. In addition, the
Company has entered into interest rate swap contracts and
foreign exchange contracts with commercial banking customers,
which are not designated as hedging instruments.
Asset
Liability Management
The Bank currently utilizes interest rate swap agreements as
hedging instruments against interest rate risk associated with
the Company’s borrowings. An interest rate swap is an
agreement whereby one party agrees to pay a floating rate of
interest on a notional principal amount in exchange for
receiving a fixed rate of interest on the same notional amount,
for a predetermined period of time, from a second party. The
amounts relating to the notional principal amount are not
actually exchanged. The maximum length of time over which the
Company is currently hedging its exposure to the variability in
future cash flows for forecasted transactions related to the
payment of variable interest on existing financial instruments
is eight years. At December 31, 2010 and December 31,
2009, the Company had a total notional amount of
$175.0 million and $235.0 million, respectively, of
interest rate swaps.
The following table reflects the Company’s derivative
positions for the periods indicated below for those derivatives
designated as hedging:
Derivatives
Designated as Hedging:
Cash Flow Hedges
|
Derivative Positions
|
||||||||||||||||||||||||||||||||||
| As of December 31, 2010 | ||||||||||||||||||||||||||||||||||
|
Receive
|
Fair Value at
|
|||||||||||||||||||||||||||||||||
|
Notional
|
Trade
|
Effective
|
Maturity
|
(Variable)
|
Current Rate
|
Pay Fixed
|
December 31,
|
|||||||||||||||||||||||||||
| Amount | Date | Date | Date | Index | Received | Swap Rate | 2010 | |||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||
|
Interest Rate Swaps
|
||||||||||||||||||||||||||||||||||
| $ | 25,000 | 16-Feb-06 | 28-Dec-06 | 28-Dec-16 | 3 Month LIBOR | 0.30 | % | 5.04 | % | $ | (3,713 | ) | ||||||||||||||||||||||
| 25,000 | 16-Feb-06 | 28-Dec-06 | 28-Dec-16 | 3 Month LIBOR | 0.30 | % | 5.04 | % | (3,682 | ) | ||||||||||||||||||||||||
| 25,000 | 8-Dec-08 | 10-Dec-08 | 10-Dec-13 | 3 Month LIBOR | 0.30 | % | 2.65 | % | (1,044 | ) | ||||||||||||||||||||||||
| 25,000 | 9-Dec-08 | 10-Dec-08 | 10-Dec-13 | 3 Month LIBOR | 0.30 | % | 2.59 | % | (1,002 | ) | ||||||||||||||||||||||||
| 25,000 | 9-Dec-08 | 10-Dec-08 | 10-Dec-18 | 3 Month LIBOR | 0.30 | % | 2.94 | % | (109 | ) | ||||||||||||||||||||||||
| 50,000 | 17-Nov-09 | 20-Dec-10 | 20-Dec-14 | 3 Month LIBOR | 0.30 | % | 3.04 | % | (2,656 | ) | ||||||||||||||||||||||||
|
Total
|
$ | 175,000 | Total | $ | (12,206 | ) | ||||||||||||||||||||||||||||
103
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| As of December 31, 2009 | ||||||||||||||||||||||||||||||||||
|
Receive
|
Fair Value at
|
|||||||||||||||||||||||||||||||||
|
Notional
|
Trade
|
Effective
|
Maturity
|
(Variable)
|
Current Rate
|
Pay Fixed
|
December 31,
|
|||||||||||||||||||||||||||
| Amount | Date | Date | Date | Index | Received | Swap Rate | 2009 | |||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||
|
Interest Rate Swaps
|
||||||||||||||||||||||||||||||||||
| $ | 35,000 | 19-Mar-08 | 19-Mar-08 | 20-Jan-10 | 3 Month LIBOR | 0.28 | % | 2.28 | % | $ | (37 | ) | ||||||||||||||||||||||
| 25,000 | 16-Feb-06 | 28-Dec-06 | 28-Dec-16 | 3 Month LIBOR | 0.26 | % | 5.04 | % | (2,641 | ) | ||||||||||||||||||||||||
| 25,000 | 16-Feb-06 | 28-Dec-06 | 28-Dec-16 | 3 Month LIBOR | 0.25 | % | 5.04 | % | (2,588 | ) | ||||||||||||||||||||||||
| 25,000 | 8-Dec-08 | 10-Dec-08 | 10-Dec-13 | 3 Month LIBOR | 0.26 | % | 2.65 | % | (156 | ) | ||||||||||||||||||||||||
| 25,000 | 9-Dec-08 | 10-Dec-08 | 10-Dec-13 | 3 Month LIBOR | 0.26 | % | 2.59 | % | (101 | ) | ||||||||||||||||||||||||
| 25,000 | 9-Dec-08 | 10-Dec-08 | 10-Dec-18 | 3 Month LIBOR | 0.26 | % | 2.94 | % | 1,400 | |||||||||||||||||||||||||
| 25,000 | 16-Dec-08 | 18-Dec-08 | 18-Dec-13 | 3 Month LIBOR | 0.25 | % | 2.09 | % | 354 | |||||||||||||||||||||||||
| 50,000 | 17-Nov-09 | 20-Dec-10 | 20-Dec-14 | 3 Month LIBOR | 0.00 | % | 3.04 | % | 766 | (1) | ||||||||||||||||||||||||
|
Total
|
$ | 235,000 | Total | $ | (3,003 | ) | ||||||||||||||||||||||||||||
| (1) | In November 2009, the Company entered into a forward starting swap with a notional amount of $50.0 million, with the intention of hedging $50.0 million of a replacement of an existing FHLB advance with a variable rate, which matured in December 2010. |
For derivative instruments that are designated and qualify as
hedging instruments, the effective portion of the gains or
losses are reported as a component of OCI, and are subsequently
reclassified into earnings in the period that the hedged
forecasted transaction affects earnings. The Company expects
approximately $5.1 million pre-tax, to be reclassified to
earnings from OCI, as an increase in interest expense, related
to the Company’s cash flow hedges, in the next twelve
months. This reclassification is due to anticipated payments
that will be made
and/or
received on the swaps based upon the forward curve as of
December 31, 2010.
The ineffective portion of the cash flow hedge is recognized
directly in earnings. The Company recognized no ineffective
portion during the year ended December 31, 2010 and $61,000
and $54,000 during the years ended December 31, 2009 and
2008, respectively.
During the first quarter of 2010, one of the Company’s
$25.0 million interest rate swaps failed to qualify for
hedge accounting. The Company ceased hedge accounting on
January 6, 2010, which was the last date the interest rate
swap qualified for hedge accounting. As a result, the Company
recognized a loss of $238,000 directly in earnings as part of
non-interest expense and reclassified $107,000 from interest
expense to non-interest expense during the first quarter of
2010. Additionally, a gain of $191,000 which was previously
deferred in OCI was immediately recognized in income during the
first quarter, based on the Company’s anticipation of the
hedge forecasted transaction no longer being probable to occur.
The Company recognized a decrease in fair value of $792,000
through earnings, during the year ended December 31, 2010.
The Company terminated the swap in June 2010 as a result of
management’s decision to paydown the underlying borrowing.
In June 2009, the Company repaid certain borrowings and
consequently terminated the corresponding cash flow hedges. As a
result of the termination of the cash flow hedges, the Company
recognized a gain of $3.8 million, pre-tax in non-interest
income. Additionally, a gain of $1.4 million remained in
OCI, net of tax, and will be amortized through interest expense
on borrowings over the original maturity of the swap (December
2018), to the extent the hedged forecasted transaction remains
probable.
In March 2008, the Company terminated a $35.0 million
notional value LIBOR based interest rate swap hedging
3 month revolving FHLB advances and replaced it with a
$35.0 million notional value LIBOR based interest rate swap
hedging 3 month revolving FHLB advances. Upon exiting the
swap, a $1.2 million loss remained in OCI, net of tax,
which was amortized into interest expense on borrowings over the
original maturity of the swap (until January 2010).
104
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company recognized net amortization income of $222,000,
recorded as an offset to interest expense during the year ended
December 31, 2010. Net amortization expense of $496,000 and
$485,000 was recorded in interest expense during the years ended
December 31, 2009 and 2008, respectively, related to
previously terminated swaps.
Customer
Related Positions
Interest rate derivatives, primarily interest-rate swaps,
offered to commercial borrowers through the Bank’s loan
level derivative program are not designated as hedging
instruments. However, the Bank believes that its exposure to
commercial customer derivatives is limited because these
contracts are simultaneously matched at inception with an
offsetting dealer transaction. The commercial customer
derivative program allows the Bank to retain variable-rate
commercial loans while allowing the customer to synthetically
fix the loan rate by entering into a
variable-to-fixed
interest rate swap. It is anticipated that over time, customer
interest rate derivatives will reduce the interest rate risk
inherent in the longer-term, fixed-rate commercial business and
real estate loans. At December 31, 2010 and 2009 the
Company had seventy-two and twenty-seven customer-related
positions and offsetting dealer transactions with dealer banks,
respectively. At December 31, 2010 and 2009 the Bank had a
total notional amount of $307.0 million and
$122.1 million, respectively, of interest rate swap
agreements with commercial borrowers and an equal notional
amount of dealer transactions.
Foreign exchange contracts offered to commercial borrowers
through the Bank’s derivative program are not designated as
hedging instruments. The Company acts as a seller and buyer of
foreign exchange contracts to accommodate its customers. To
mitigate the market and liquidity risk associated with these
derivatives, the Company enters into similar offsetting
positions. At December 31, 2010 and 2009 the Company had
eighteen and four foreign exchange contracts and offsetting
dealer transactions, respectively. As of December 31, 2010
and 2009 the Company had a total notional amount of
$41.7 million and $8.4 million of foreign exchange
contracts with commercial borrowers and an equal notional amount
of dealer transactions.
The Company does not enter into proprietary trading positions
for any derivatives.
The following table reflects the Company’s derivative
positions for the periods indicated below for those derivatives
not designated as hedging:
Derivatives
Not Designated as Hedging:
|
Derivative Positions
|
||||||||||||||||||||||||
| Notional Amount Maturing | ||||||||||||||||||||||||
|
As of December 31, 2010
|
2011 | 2012 | 2013 | Thereafter | Total | Fair Value | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Customer Related Positions
|
||||||||||||||||||||||||
|
Loan Level Swaps
|
||||||||||||||||||||||||
|
Receive fixed, pay variable
|
$ | — | — | 21,624 | 285,326 | $ | 306,950 | $ | 7,673 | |||||||||||||||
|
Pay fixed, receive variable
|
$ | — | — | 21,624 | 285,326 | $ | 306,950 | $ | (7,835 | ) | ||||||||||||||
|
Foreign Exchange Contracts
|
||||||||||||||||||||||||
|
Buys foreign exchange, sells US currency
|
$ | 41,706 | — | — | — | $ | 41,706 | $ | 1,301 | |||||||||||||||
|
Buys US currency, sells foreign exchange
|
$ | 41,706 | — | — | — | $ | 41,706 | $ | (1,286 | ) | ||||||||||||||
105
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Notional Amount Maturing | ||||||||||||||||||||||||
|
As of December 31, 2009
|
2010 | 2011 | 2012 | Thereafter | Total | Fair Value | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Customer Related Positions
|
||||||||||||||||||||||||
|
Loan Level Swaps
|
||||||||||||||||||||||||
|
Receive fixed, pay variable
|
$ | — | — | — | 122,125 | $ | 122,125 | $ | (1,273 | ) | ||||||||||||||
|
Pay fixed, receive variable
|
$ | — | — | — | 122,125 | $ | 122,125 | $ | 1,404 | |||||||||||||||
|
Foreign Exchange Contracts
|
||||||||||||||||||||||||
|
Buys foreign exchange, sells US currency
|
$ | 8,424 | — | — | — | $ | 8,424 | $ | (5 | ) | ||||||||||||||
|
Buys US currency, sells foreign exchange
|
$ | 8,424 | — | — | — | $ | 8,424 | $ | 12 | |||||||||||||||
Changes in the fair value of customer related positions are
recorded directly in earnings as they are not afforded hedge
accounting treatment. The Company recorded a net decrease in
fair value of $285,000, a net increase in fair value of
$174,000, and a net decrease in fair value of $37,000, for the
years ended December 31, 2010, 2009, and 2008, respectively.
The table below presents the fair value of the Company’s
derivative financial instruments as well as their classification
on the Balance Sheet at the periods indicated:
| Fair Values of Derivative Instruments | ||||||||||||||||||||||||||||||||
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
December 31,
|
|||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||
|
Balance
|
Balance
|
Balance
|
Balance
|
|||||||||||||||||||||||||||||
|
Sheet
|
Fair
|
Sheet
|
Sheet
|
Fair
|
Sheet
|
|||||||||||||||||||||||||||
| Location | Value | Location | Fair Value | Location | Value | Location | Fair Value | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
|
Derivatives designated as hedges:
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
Other Assets | $ | — | Other Assets | $ | 2,519 | Other Liabilities | $ | 12,206 | Other Liabilities | $ | 5,522 | ||||||||||||||||||||
|
Derivatives not designated as hedges:
|
||||||||||||||||||||||||||||||||
|
Customer Related Positions:
|
||||||||||||||||||||||||||||||||
|
Loan level swaps
|
Other Assets | $ | 9,813 | Other Assets | $ | 2,224 | Other Liabilities | $ | 9,975 | Other Liabilities | $ | 2,093 | ||||||||||||||||||||
|
Foreign exchange contracts
|
Other Assets | 1,655 | Other Assets | 15 | Other Liabilities | 1,640 | Other Liabilities | 8 | ||||||||||||||||||||||||
|
Total
|
$ | 11,468 | $ | 2,239 | $ | 11,615 | $ | 2,101 | ||||||||||||||||||||||||
106
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The table below presents the effect of the Company’s
derivative financial instruments included in Other Comprehensive
Income and current earnings:
| Amount of Derivative Gain/(Loss) Recognized/Reclassified | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Gain/(Loss) in OCI on Derivative (Effective Portion)
|
$ | (7,894 | ) | $ | 6,995 | $ | 6,615 | |||||
|
Gain/(Loss) Reclassified from OCI into Income (Effective Portion)
|
||||||||||||
|
Interest Income/(Expense)
|
$ | (3,829 | ) | $ | (1,714 | ) | $ | 284 | ||||
|
Other Income
|
— | 937 | — | |||||||||
|
Total
|
$ | (3,829 | ) | $ | (777 | ) | $ | 284 | ||||
|
Gain/(Loss) Recognized in Income on Derivative (Ineffective
Portion & Amount Excluded from Effectiveness Testing)
|
||||||||||||
|
Interest Expense
|
$ | — | $ | (61 | ) | $ | (54 | ) | ||||
|
Other Expense
|
(154 | ) | — | — | ||||||||
|
Total
|
$ | (154 | ) | $ | (61 | ) | $ | (54 | ) | |||
Derivative contracts involve the risk of dealing with derivative
counterparties and their ability to meet contractual terms.
Institutional counterparties must have an investment grade
credit rating and be approved by the Company’s Board of
Directors. The Company’s credit exposure on interest rate
swaps is limited to the net positive fair value and accrued
interest of all swaps with each counterparty. The Company had no
exposure at December 31, 2010 and 2009 relating to interest
rate swaps with institutional counterparties. Credit exposure
may be reduced by the amount of collateral pledged by the
counterparty.
The Company currently holds derivative instruments that contain
credit-risk related contingent features that are in a net
liability position. The notional amount of these instruments as
of December 31, 2010 and 2009 were $482.0 million and
$209.2 million, respectively. The aggregate fair value of
these instruments at December 31, 2010 and 2009 were
$20.0 million and $7.3 million, respectively. The
Company has collateral assigned to these derivative instruments
amounting to $30.8 million and $17.1 million,
respectively. Collateral legally required to be maintained at
dealer banks by the Company is monitored and adjusted as
necessary. Per a review completed by management of these
instruments at December 31, 2010 it was determined that no
additional collateral would have to be posted to immediately
settle these instruments.
The Company’s credit exposure relating to interest rate
swaps with bank customers was approximately $8.1 million
and $1.9 million at December 31, 2010 and 2009. The
credit exposure is partly mitigated as transactions with
customers are secured by the collateral, securing the underlying
transaction being hedged.
The Company does not offset fair value amounts recognized for
derivative instruments. The Company does net the amount
recognized for the right to reclaim cash collateral against the
obligation to return cash collateral arising from derivative
instruments executed with the same counterparty under a master
netting arrangement.
Forward sale contracts of mortgage loans, considered derivative
instruments for accounting purposes, are utilized by the Company
in its efforts to manage risk of loss associated with its
mortgage loan commitments and mortgage loans held for sale.
Prior to closing and funding certain single-family residential
mortgage loans, an interest rate lock commitment is generally
extended to the borrower. During the period from commitment date
to closing date, the Company is subject to the risk that market
rates of interest may change. If market rates rise, investors
generally will pay less to purchase such loans resulting in a
reduction in the gain on sale of the loans or, possibly, a loss.
In an effort to mitigate such risk, forward delivery sales
commitments are executed, under which the Company agrees to
deliver whole mortgage loans to various investors. The interest
rate lock commitments and forward sales commitments are recorded
at fair value, with changes in fair value recorded in current
period earnings. Effective July 1, 2010, pursuant to FASB
ASC Topic No. 825, “Financial Instruments,” the
Company
107
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
elected to carry newly originated closed loans held for sale at
fair value, as such, the change in fair value of loans held for
sale is recorded in current period earnings.
The table below summarizes the fair value of residential
mortgage loans commitments, forward sales agreements, and loans
held for sale:
| Fair Value at | ||||||||
|
December 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Interest Rate Lock Commitments
|
$ | (459 | ) | $ | (523 | ) | ||
|
Forward Sales Agreements
|
$ | 1,052 | $ | 767 | ||||
|
Loans Held for Sale Fair Value Adjustment(1)
|
$ | (593 | ) | $ | — | |||
|
Change For
|
||||||||
|
the Year Ended
|
||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Interest Rate Lock Commitments
|
$ | 64 | $ | (861 | ) | |||
|
Forward Sales Agreements
|
285 | 738 | ||||||
|
Loans Held for Sale Fair Value Adjustment(1)
|
(593 | ) | — | |||||
|
Total Change in Fair Value*(2)
|
$ | (244 | ) | $ | (123 | ) | ||
| (1) | Pursuant to FASB ASC Topic No. 825, “Financial Instruments,” effective July 1, 2010 the Company has elected to carry residential real estate loans held for sale at fair value. At December 31, 2010 the amortized cost was $28.5 million and the fair value was $27.9 million, respectively. | |
| (2) | Changes in these fair values are recorded as a component of Mortgage Banking Income. |
| (13) | Income Taxes |
The provision for income taxes is comprised of the following
components:
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars In thousands) | ||||||||||||
|
Current Expense
|
||||||||||||
|
Federal
|
$ | 10,453 | $ | 6,422 | $ | 10,133 | ||||||
|
State
|
4,268 | 2,606 | 4,289 | |||||||||
|
TOTAL CURRENT EXPENSE
|
14,721 | 9,028 | 14,422 | |||||||||
|
Deferred Benefit
|
||||||||||||
|
Federal
|
(2,223 | ) | (1,430 | ) | (6,568 | ) | ||||||
|
State
|
(271 | ) | (851 | ) | (1,303 | ) | ||||||
|
TOTAL DEFERRED BENEFIT
|
(2,494 | ) | (2,281 | ) | (7,871 | ) | ||||||
|
TOTAL EXPENSE
|
$ | 12,227 | $ | 6,747 | $ | 6,551 | ||||||
Effective July 1, 2008 Massachusetts state legislation was
passed which enacted corporate tax reform. As a result of this
new legislation the state tax will be reduced 1.5%, with the
reduction being phased in over three years beginning on or after
January 1, 2010. As a result of the change in tax rate, the
Company recorded $109,000 of tax expense during the third
quarter of 2008 in order to correctly reflect deferred taxes at
the new rate.
108
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The difference between the statutory federal income tax rate and
the effective federal income tax rate is as follows:
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Computed statutory federal income tax provision
|
$ | 18,364 | $ | 10,408 | $ | 10,679 | ||||||
|
State taxes, net of federal tax benefit
|
2,598 | 1,141 | 1,941 | |||||||||
|
Nontaxable interest, net
|
(564 | ) | (646 | ) | (889 | ) | ||||||
|
Tax Credits
|
(6,932 | ) | (4,550 | ) | (4,050 | ) | ||||||
|
Bank Owned Life Insurance
|
(1,117 | ) | (981 | ) | (894 | ) | ||||||
|
Merger and other related costs
|
— | 1,627 | — | |||||||||
|
Reduction in the tax allowance for uncertain tax positions, net
|
— | 3 | (49 | ) | ||||||||
|
Other, net
|
(122 | ) | (255 | ) | (187 | ) | ||||||
|
TOTAL EXPENSE
|
$ | 12,227 | $ | 6,747 | $ | 6,551 | ||||||
The effective tax rate for years ended December 31, 2010,
2009, and 2008 was 23.30%, 22.69%, and 21.47%, respectively.
The tax-effected components of the net deferred tax asset at
December 31 were as follows:
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Deferred Tax Assets
|
||||||||
|
Allowance for loan losses
|
$ | 19,040 | $ | 17,460 | ||||
|
Other-than-temporary
impairment on securities
|
4,304 | 4,167 | ||||||
|
Accrued expenses not deducted for tax purposes
|
5,359 | 5,308 | ||||||
|
Deferred gain on sale leaseback transaction
|
4,394 | 4,820 | ||||||
|
Derivatives fair value adjustment
|
4,282 | 1,303 | ||||||
|
Employee and director equity compensation
|
2,008 | 1,021 | ||||||
|
Amounts not yet recognized as a component of net periodic post
retirement cost
|
777 | 846 | ||||||
|
Federal Home Loan Bank Borrowings fair value adjustment
|
534 | 857 | ||||||
|
Limited partnerships
|
47 | 33 | ||||||
|
New market tax credit carry forward
|
327 | — | ||||||
|
Other
|
1,421 | 233 | ||||||
|
TOTAL
|
$ | 42,493 | $ | 36,048 | ||||
|
Deferred Tax Liabilities
|
||||||||
|
Goodwill
|
$ | 10,238 | $ | 9,030 | ||||
|
Net unrealized gain on securities available for sale
|
4,232 | 3,206 | ||||||
|
Core deposit and other intangibles
|
4,143 | 4,932 | ||||||
|
Fixed Assets
|
5,037 | 4,426 | ||||||
|
Loan basis difference fair value adjustment
|
1,826 | 2,403 | ||||||
|
Deferred loan fees, net
|
2,383 | 2,087 | ||||||
|
Mortgage servicing asset
|
633 | 856 | ||||||
|
Mark to market adjustment
|
490 | 642 | ||||||
|
Prepaid expenses
|
328 | 234 | ||||||
|
TOTAL
|
$ | 29,310 | $ | 27,816 | ||||
|
TOTAL NET DEFERRED TAX ASSET
|
$ | 13,183 | $ | 8,232 | ||||
109
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The change in the net deferred tax asset during 2009 includes
the recording of a $1.1 million net deferred tax asset,
including the tax effect of the purchase accounting adjustments
recorded at the date of the acquisitions resulting from the
Company’s acquisitions of Ben Franklin.
The Company has determined that a valuation allowance is not
required for any of its deferred tax assets since it is more
likely than not that these assets will be realized principally
through carry-back to taxable income on prior years and future
reversals of existing taxable temporary differences and by
offsetting other future taxable income.
Uncertainty
in Income Taxes
The Company accounts for certain uncertainties in income taxes
by providing a tax reserve for certain positions. The following
is a reconciliation of the beginning and ending amount of
unrecognized tax benefits:
|
Balance at December 31, 2008
|
$ | 211,000 | ||
|
Reduction of tax positions for prior years
|
(105,000 | ) | ||
|
Increase for current year tax positions
|
69,000 | |||
|
Balance at December 31, 2009
|
175,000 | |||
|
Reduction of tax positions for prior years
|
— | |||
|
Increase for current year tax positions
|
51,000 | |||
|
Balance at December 31, 2010
|
$ | 226,000 | ||
At December 31, 2010 and 2009, the Company had unrecognized
tax benefits of approximately $226,000 and $175,000, related to
dividends received deductions on mutual bond funds and
deductions of interest expense and treatment of acquisition
related costs in both 2010 and 2009, all of which, if
recognized, would be recorded as a component of income tax
expense therefore affecting the effective tax rate. The Company
records interest and penalties related to uncertain tax
positions in the provision for income taxes.
The Company and its subsidiaries file income tax returns in the
U.S. federal jurisdiction, and in the states of
Massachusetts, Rhode Island, New Hampshire, and Connecticut. The
Company is subject to U.S. federal, state and local income
tax examinations by tax authorities for the years 2007 through
2010 tax years including any related income tax filings from its
recent Bank acquisitions.
| (14) | Employee Benefit Plans |
Pension
The Company maintains a defined benefit pension plan (the
“Pension Plan”) administered by Pentegra Retirement
Services (the “Fund”), a multiemployer plan. The Fund
does not segregate the assets or liabilities of all
participating employers and, accordingly, disclosure of
accumulated vested and nonvested benefits is not possible.
Effective July 1, 2006, the Company froze the defined
benefit plan by eliminating all future benefit accruals.
Employees who were participants on July 1, 2006 will
continue to vest in the benefits, but there will be no future
accruals. All benefits accrued up to July 1, 2006 remain in
the pension plan and the participants’ frozen benefit was
determined as of July 1, 2006. Contributions to the plan
are based on each individual employer’s experience. The
pension plan year is July 1st through June 30th. The
following table shows the cash contributions the Bank made and
the corresponding plan year the expense relates to:
| Plan Year Allocation | ||||||||||||||||
| Cash Payment | 2010-2011 | 2009-2010 | 2008-2009 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
2010
|
$ | 1,650 | $ | 1,650 | $ | — | $ | — | ||||||||
|
2009
|
1,190 | — | 1,150 | 40 | ||||||||||||
|
2008
|
917 | — | — | 917 | ||||||||||||
110
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company’s total defined benefit plan expense was
$1.6 million, $988,000, and $1.0 million, for the
years ending December 31, 2010, 2009, and 2008,
respectively.
Post-Retirement
Benefits
Employees retiring from the Bank after attaining age 65 who
have rendered at least 10 years of continuous service to
the Bank are entitled to a fixed contribution toward the premium
for post-retirement health care benefits and a $5,000 death
benefit paid by the Bank. The health care benefits are subject
to deductibles, co-payment provisions and other limitations. The
Bank may amend or change these benefits periodically.
Post-retirement benefit expense was $281,000, $252,000, and
$216,000, for the years ending December 31, 2010, 2009, and
2008, respectively.
Supplemental
Executive Retirement Plans
The Bank maintains supplemental retirement plans
(“SERP”) for certain highly compensated employees
designed to offset the impact of regulatory limits on benefits
under qualified pension plans. There are supplemental retirement
plans in place for seven current and five former employees.
Also included in the Company’s SERP are three former Slades
executive officers who will receive supplemental benefits
commencing with their retirement.
The Bank has established and funded Rabbi Trusts to accumulate
funds in order to satisfy the contractual liability of the
supplemental retirement plan benefits for seven current
executives and eight former executives, including certain former
Slades executives. These agreements provide for the Bank to pay
all benefits from its general assets, and the establishment of
these trust funds does not reduce nor otherwise affect the
Bank’s continuing liability to pay benefits from such
assets except that the Bank’s liability shall be offset by
actual benefit payments made from the trusts. The related trust
assets, included in trading securities, totaled
$4.4 million and $3.0 million at December 31,
2010 and 2009, respectively.
The following table shows the supplemental retirement expense,
including expenses for the former Slades executives and the
contributions paid to the plan, which were used only to pay the
current year benefits, as of the dates indicated:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Retirement Expense
|
$ | 757 | $ | 679 | $ | 479 | ||||||
|
Contributions Paid
|
253 | 226 | 152 | |||||||||
The Company’s best estimate of contributions expected to be
paid in 2011 is $253,000. The following table shows the benefits
expected to be paid in each of the next five years, in the
aggregate for the next five fiscal years thereafter and in the
aggregate after those 10 years:
|
Supplemental Executive
|
||||
|
Retirement Plans
|
||||
|
Expected Benefit
|
||||
| Payment | ||||
|
Year
|
Total | |||
| (Dollars in thousands) | ||||
|
2011
|
$ | 253 | ||
|
2012
|
253 | |||
|
2013
|
253 | |||
|
2014
|
253 | |||
|
2015
|
288 | |||
|
2016-2020
|
1,882 | |||
|
2021 and later
|
$ | 20,368 | ||
111
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The measurement date used to determine the supplemental
executive retirement plans benefits is
December 31st for each of the years reported. The
following table illustrates the status of the supplemental
executive retirement plans at December 31 for the years
presented:
|
Supplemental Executive
|
||||||||||||
| Retirement Benefits | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Change in accumulated benefit obligation
|
||||||||||||
|
Benefit obligation at beginning of year
|
$ | 5,597 | $ | 4,353 | $ | 3,306 | ||||||
|
Benefit obligation acquired
|
— | — | 548 | |||||||||
|
Accumulated service cost
|
335 | 304 | 197 | |||||||||
|
Interest cost
|
301 | 271 | 220 | |||||||||
|
Plan amendment
|
— | 618 | — | |||||||||
|
Actuarial loss/(gain)
|
(27 | ) | 273 | 233 | ||||||||
|
Benefits paid
|
(253 | ) | (222 | ) | (151 | ) | ||||||
|
Accumulated benefit obligation at end of year
|
$ | 5,953 | $ | 5,597 | $ | 4,353 | ||||||
|
Change in plan assets
|
||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | — | $ | — | $ | — | ||||||
|
Employer contribution
|
253 | 222 | 152 | |||||||||
|
Benefits paid
|
(253 | ) | (222 | ) | (152 | ) | ||||||
|
Fair value of plan assets at end of year
|
$ | — | $ | — | $ | — | ||||||
|
Funded status at end of year
|
$ | (5,953 | ) | $ | (5,597 | ) | $ | (4,353 | ) | |||
|
Assets
|
— | — | — | |||||||||
|
Liabilities
|
(5,953 | ) | (5,597 | ) | (4,353 | ) | ||||||
|
Accrued benefit cost
|
$ | (5,953 | ) | $ | (5,597 | ) | $ | (4,353 | ) | |||
|
Amounts recognized in Accumulated Other Comprehensive Income
(“AOCI”), net of tax
|
||||||||||||
|
Net loss
|
$ | 336 | $ | 356 | $ | 185 | ||||||
|
Prior service cost
|
590 | 656 | 351 | |||||||||
|
Amounts recognized in AOCI, net of tax
|
$ | 926 | $ | 1,012 | $ | 536 | ||||||
|
Information for pension plans with an accumulated benefit
obligation in excess of plan assets
|
||||||||||||
|
Projected benefit obligation
|
$ | 5,953 | $ | 5,597 | $ | 4,353 | ||||||
|
Accumulated benefit obligation
|
$ | 5,953 | $ | 5,597 | $ | 4,353 | ||||||
|
Net periodic benefit cost
|
||||||||||||
|
Service cost
|
$ | 335 | $ | 304 | $ | 197 | ||||||
|
Interest cost
|
301 | 271 | 220 | |||||||||
|
Amortization of prior service cost
|
113 | 112 | 64 | |||||||||
|
Recognized net actuarial gain
|
6 | (8 | ) | (3 | ) | |||||||
|
Net periodic benefit cost
|
$ | 755 | $ | 679 | $ | 478 | ||||||
|
Amounts in accumulated other comprehensive income expected to
be recognized in net periodic benefit cost over next fiscal
year
|
||||||||||||
|
Net actuarial (gain) loss
|
$ | (1 | ) | $ | 5 | $ | (3 | ) | ||||
|
Net prior service cost
|
$ | 113 | $ | 113 | $ | 64 | ||||||
|
Discount rate used for benefit obligation
|
5.54 | % | 5.49 | % | 5.54 | % | ||||||
|
Discount rate used for net periodic benefit cost
|
5.49 | % | 5.54 | % | 5.75 | % | ||||||
|
Rate of compensation increase
|
N/A | N/A | N/A | |||||||||
112
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Other
Employee Benefits
The Bank from time to time creates an incentive compensation
plan for senior management and other officers to participate in
at varying levels. In addition, the Bank sometimes also pays a
discretionary bonus to senior management, officers,
and/or
non-officers of the Bank. The expense for the incentive plans
and the discretionary bonus amounted to $6.9 million,
$5.5 million, and $3.3 million in 2010, 2009, and
2008, respectively.
The Bank amended its Profit Sharing Plan by converting it to an
Employee Savings Plan that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue
Code. Under the Employee Savings Plan, participating employees
may defer a portion of their pre-tax earnings, not to exceed the
Internal Revenue Service annual contribution limits. The Bank
matches 25% of each employee’s contributions up to 6% of
the employee’s earnings. During 2005, the 401K Plan was
amended to incorporate an Employee Stock Ownership Plan for
contributions invested in the Company’s common stock. In
2006 the Company amended the Plan to provide non discretionary
contributions in which employees, with one year of service,
receive a 5% cash contribution of eligible pay up to the social
security limit and a 10% cash contribution of eligible pay over
the social security limit up to the maximum amount permitted by
law. Benefits contributed to employees under the new defined
contribution plan vest immediately. The defined contribution
plan expense was $3.2 million in 2010, $3.0 million in
2009, and $2.5 million in 2008.
The Company also maintains a deferred compensation plan for the
Company’s Board of Directors. The Board of Directors is
entitled to elect to defer their director’s fees until
retirement. If the Director elects to do so, their compensation
is invested in the Company’s stock and maintained within
the Company’s Investment Management Group. The amount of
compensation deferred in 2010, 2009, and 2008 was $160,000,
$118,000, and $156,000, respectively. At December 31, 2010
and 2009 the Company had 178,382 and 176,507, of shares provided
for the plan with a related liability of $2.7 million and
$2.5 million established within shareholders’ equity,
respectively.
As a result of the acquisition of Ben Franklin, during 2009 the
Company acquired an Employee Stock Ownership Program
(“ESOP”). After receiving approval from the Internal
Revenue Service the Company terminated the plan during 2010. All
vested participants’ benefits were distributed as of
December 31, 2010.
| (15) | Other Non-Interest Expenses |
Included in other non-interest expenses for each of the three
years ended December 31, were the following:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Exams, audits, and regulatory fees
|
$ | 1,416 | $ | 1,233 | $ | 1,084 | ||||||
|
Postage expense
|
1,361 | 1,277 | 1,140 | |||||||||
|
Recovery and collection
|
1,173 | 741 | 313 | |||||||||
|
Loan level derivative expenses
|
1,159 | 213 | — | |||||||||
|
Internet banking
|
1,139 | 866 | 640 | |||||||||
|
Investment management software
|
699 | 652 | 750 | |||||||||
|
Directors fees
|
834 | 617 | 536 | |||||||||
|
Real estate appraisals
|
717 | 327 | 426 | |||||||||
|
Foreclosure expenses
|
701 | 823 | 224 | |||||||||
|
Insurance — other
|
699 | 622 | 468 | |||||||||
|
Printing
|
654 | 737 | 546 | |||||||||
|
Mileage expense
|
581 | 571 | 503 | |||||||||
|
Computer software write-off
|
560 | — | — | |||||||||
|
Armored car expense
|
502 | 442 | 357 | |||||||||
|
Shareholder relations
|
500 | 483 | 353 | |||||||||
|
Other non-interest expenses
|
8,921 | 8,957 | 7,684 | |||||||||
|
TOTAL
|
$ | 21,616 | $ | 18,561 | $ | 15,024 | ||||||
113
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (16) | Fair Value Measurements |
Fair value is a market-based measure considered from the
perspective of a market participant rather than an
entity-specific measure. Therefore, even when market assumptions
are not readily available, the Company’s own assumptions
are set to reflect those that market participants would use in
pricing the asset or liability at the measurement date. If there
has been a significant decrease in the volume and level of
activity for the asset or liability, regardless of the valuation
technique(s) used, the objective of a fair value measurement
remains the same. Fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed
sale) between market participants at the measurement date under
current market conditions. The Company uses prices and inputs
that are current as of the measurement date, including during
periods of market dislocation. In periods of market dislocation,
the observability of prices and inputs may be reduced for many
instruments. This condition could cause an instrument to be
reclassified from one level to another.
The Fair Value Measurements and Disclosures Topic of the FASB
ASC defines fair value and establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets
or liabilities (level 1 measurements) and the lowest
priority to unobservable inputs (level 3 measurements). The
three levels of the fair value hierarchy under the Fair Value
Measurements and Disclosures Topic of the FASB ASC are described
below:
Level 1 — Inputs are quoted prices (unadjusted)
in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement
date.
Level 2 — Valuations based on quoted prices in
markets that are not active or for which all significant inputs
are observable, either directly or indirectly.
Level 3 — Prices or valuations that require
inputs that are both significant to the fair value measurement
and unobservable.
To the extent that valuation is based on models or inputs that
are less observable or unobservable in the market, the
determination of fair value requires more judgment. Accordingly,
the degree of judgment exercised by the Company in determining
fair value is greatest for instruments categorized in
Level 3. A financial instrument’s level within the
fair value hierarchy is based on the lowest level of any input
that is significant to the fair value measurement.
Valuation
Techniques
There have been no changes in the valuation techniques used
during the current period.
Trading
Securities
These equity and fixed income securities are valued based on
market quoted prices. These securities are categorized in
Level 1 as they are actively traded and no valuation
adjustments have been applied.
U.S. Treasury
Securities
Fair value is estimated using either multi-dimensional spread
tables or benchmarks. The inputs used include benchmark yields,
reported trades, and broker/dealer quotes. These securities are
classified as Level 2.
Agency
Mortgage-Backed Securities
Fair value is estimated using either a matrix or benchmarks. The
inputs used include benchmark yields, reported trades,
broker/dealer quotes, and issuer spreads. These securities are
categorized as Level 2.
114
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Agency
Collateralized Mortgage Obligations and Private Mortgage-Backed
Securities
The valuation model for these securities is volatility-driven
and ratings based, and uses multi-dimensional spread tables. The
inputs used include benchmark yields, recent reported trades,
new issue data, broker and dealer quotes, and collateral
performance. If there is at least one significant model
assumption or input that is not observable, these securities are
categorized as Level 3 within the fair value hierarchy;
otherwise, they are classified as Level 2.
State,
County, and Municipal Securities
The fair value is estimated using a valuation matrix with inputs
including bond interest rate tables, recent transactions, and
yield relationships. These securities are categorized as
Level 2.
Single
and Pooled Issuer Trust Preferred Securities
The fair value of trust preferred securities, including pooled
and single issued preferred securities, is estimated using
external pricing models, discounted cash flow methodologies or
similar techniques. The inputs used in these valuations include
benchmark yields, recent reported trades, new issue data, broker
and dealer quotes and collateral performance. Accordingly, these
trust preferred securities are categorized as Level 3.
Derivative
Instruments
Derivatives
The valuation of these instruments is determined using widely
accepted valuation techniques including discounted cash flow
analysis on the expected cash flows of each derivative. This
analysis reflects the contractual terms of the derivatives,
including the period to maturity, and uses observable
market-based inputs, including interest rate curves and implied
volatilities. The Company incorporates credit valuation
adjustments to appropriately reflect both its own nonperformance
risk and the respective counterparty’s nonperformance risk
in the fair value measurements. In adjusting the fair value of
its derivative contracts for the effect of nonperformance risk,
the Company has considered the impact of netting and any
applicable credit enhancements, such as collateral postings.
Although the Company has determined that the majority of the
inputs used to value its interest rate derivatives fall within
Level 2 of the fair value hierarchy, the credit valuation
adjustments associated with its derivatives utilize Level 3
inputs, such as estimates of current credit spreads to evaluate
the likelihood of default by the Company and its counterparties.
However, as of December 31, 2010, the Company has assessed
the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions
and has determined that the credit valuation adjustments are not
significant to the overall valuation of its derivatives. As a
result, the Company has determined that its derivative
valuations in their entirety are classified in Level 2.
Residential
Mortgage Loan Commitments and Forward Sales
Agreements
The fair value of the commitments and agreements are estimated
using the anticipated market price based on pricing indications
provided from syndicate banks. These commitments and agreements
are categorized as Level 2.
Loans
Held for Sale
Effective July 1, 2010, the Company elected to account for
new originations of loans held for sale at fair value. Fair
value is measured using quoted market prices when available. If
quoted market prices are not available, comparable market values
or discounted cash flow analysis may be utilized. These assets
are typically categorized as Level 2.
115
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Impaired
Loans
Loans that are deemed to be impaired are valued based upon the
lower of cost or fair value of the underlying collateral or
discounted cash flow analyses. The inputs used in the appraisals
of the collateral are not always observable, and therefore the
loans may be categorized as Level 3 within the fair value
hierarchy; otherwise, they are classified as Level 2. The
inputs used in performing discounted cash flow analyses are not
observable and therefore such loans are classified as
Level 3.
Other
Real Estate Owned
The fair values are estimated based upon recent appraisal values
of the property less costs to sell the property. Certain inputs
used in appraisals are not always observable, and therefore
Other Real Estate Owned may be categorized as Level 3
within the fair value hierarchy. When inputs in appraisals are
observable, they are classified as Level 2.
Mortgage
Servicing Asset
The mortgage servicing asset is amortized in proportion to and
over the period of estimated servicing income, and is assessed
for impairment based upon fair value at each reporting date. A
valuation model, which utilizes a discounted cash flow analysis
using interest rates and prepayment speed assumptions currently
quoted for comparable instruments, is used for impairment
testing. If the valuation model reflects a value less than the
carrying value, loan servicing rights are adjusted to fair value
through a valuation allowance as determined by the model. As
such, the Company classifies the mortgage servicing asset as
Level 3.
Goodwill
and Other Intangible Assets
Goodwill and identified intangible assets are subject to
impairment testing. The Company conducts an annual impairment
test of goodwill in the third quarter of each year and more
frequently if necessary. To estimate the fair value of goodwill
and other intangible assets the Company utilizes both a
comparable analysis of relevant price multiples in recent market
transactions and discounted cash flow analysis. Both valuation
models require a significant degree of management judgment. In
the event the fair value as determined by the valuation model is
less than the carrying value, the intangibles may be impaired.
If the impairment testing resulted in impairment, the Company
would classify goodwill and other intangible assets subjected to
non-recurring fair value adjustments as Level 3.
116
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Assets and Liabilities Measured at Fair Value on a Recurring
Basis at December 31 were as follows:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
|
Quoted Prices
|
||||||||||||||||
|
in Active
|
Significant
|
|||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
||||||||||||||
| Balance | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
|
2010
|
||||||||||||||||
|
Description
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Trading Securities
|
$ | 7,597 | $ | 7,597 | $ | — | $ | — | ||||||||
|
Securities Available for Sale:
|
||||||||||||||||
|
U.S. Treasury Securities
|
717 | — | 717 | — | ||||||||||||
|
Agency Mortgage-Backed Securities
|
313,302 | — | 313,302 | — | ||||||||||||
|
Agency Collateralized Mortgage Obligations
|
46,135 | — | 46,135 | — | ||||||||||||
|
Private Mortgage-Backed Securities
|
10,254 | — | — | 10,254 | ||||||||||||
|
State, County, and Municipal Securities
|
— | — | — | — | ||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks
and Insurers
|
4,221 | — | — | 4,221 | ||||||||||||
|
Pooled Trust Preferred Securities Issued by Banks and
Insurers
|
2,828 | — | — | 2,828 | ||||||||||||
|
Loans Held for Sale
|
27,917 | — | 27,917 | — | ||||||||||||
|
Derivative Instruments
|
12,520 | — | 12,520 | — | ||||||||||||
|
Liabilities
|
||||||||||||||||
|
Derivative Instruments
|
24,280 | — | 24,280 | — | ||||||||||||
|
2009
|
||||||||||||||||
|
Description
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Trading Securities
|
$ | 6,171 | $ | 6,171 | $ | — | $ | — | ||||||||
|
Securities Available for Sale:
|
||||||||||||||||
|
U.S. Treasury Securities
|
744 | — | 744 | — | ||||||||||||
|
Agency Mortgage-Backed Securities
|
451,909 | — | 451,909 | — | ||||||||||||
|
Agency Collateralized Mortgage Obligations
|
32,022 | — | 32,022 | — | ||||||||||||
|
Private Mortgage-Backed Securities
|
14,289 | — | — | 14,289 | ||||||||||||
|
State, County, and Municipal Securities
|
4,081 | — | 4,081 | — | ||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks
and Insurers
|
3,010 | — | — | 3,010 | ||||||||||||
|
Pooled Trust Preferred Securities Issued by Banks and
Insurers
|
2,595 | — | — | 2,595 | ||||||||||||
|
Derivative Instruments
|
5,525 | — | 5,525 | — | ||||||||||||
|
Liabilities
|
||||||||||||||||
|
Derivative Instruments
|
8,146 | — | 8,146 | — | ||||||||||||
117
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The table below presents a reconciliation for all assets and
liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3). These
instruments were valued using pricing models and discounted cash
flow methodologies.
Reconciliation
for All Assets and Liabilities Measured at Fair Value on
a Recurring Basis Using Significant Unobservable Inputs (Level 3)
a Recurring Basis Using Significant Unobservable Inputs (Level 3)
| Securities Available for Sale | ||||||||||||||||
|
Private
|
||||||||||||||||
|
Pooled Trust
|
Single Trust
|
Mortgage-
|
||||||||||||||
|
Preferred
|
Preferred
|
Backed
|
||||||||||||||
| Securities | Securities | Securities | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Year-to-Date
|
||||||||||||||||
|
Balance at January 1, 2009
|
$ | 5,193 | $ | — | $ | — | $ | 5,193 | ||||||||
|
Gains and Losses (realized/unrealized)
|
||||||||||||||||
|
Included in earnings
|
(8,641 | ) | — | (317 | ) | (8,958 | ) | |||||||||
|
Included in Other Comprehensive Income
|
6,138 | 808 | 5,170 | 12,116 | ||||||||||||
|
Purchases
|
— | — | — | — | ||||||||||||
|
Issuances
|
— | — | — | — | ||||||||||||
|
Settlements
|
(95 | ) | — | (6,078 | ) | (6,173 | ) | |||||||||
|
Transfers in to Level 3
|
— | 2,202 | 15,514 | 17,716 | ||||||||||||
|
Balance at January 1, 2010
|
$ | 2,595 | $ | 3,010 | $ | 14,289 | $ | 19,894 | ||||||||
|
Gains and Losses (realized/unrealized)
|
||||||||||||||||
|
Included in earnings
|
(112 | ) | — | (222 | ) | (334 | ) | |||||||||
|
Included in Other Comprehensive Income
|
388 | 1,211 | 1,197 | 2,796 | ||||||||||||
|
Purchases
|
— | — | — | — | ||||||||||||
|
Issuances
|
— | — | — | — | ||||||||||||
|
Settlements
|
(43 | ) | — | (5,010 | ) | (5,053 | ) | |||||||||
|
Transfers in to Level 3
|
— | — | — | — | ||||||||||||
|
Balance at December 31, 2010
|
$ | 2,828 | $ | 4,221 | $ | 10,254 | $ | 17,303 | ||||||||
118
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Assets and liabilities measured at fair value on a non-recurring
basis at December 31 were as follows:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
|
Quoted
|
||||||||||||||||||||
|
Prices in
|
||||||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
Total
|
|||||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
Gains
|
|||||||||||||||||
| Balance | (Level 1) | (Level 2) | (Level 3) | (Losses) | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
2010
|
||||||||||||||||||||
|
Description
|
||||||||||||||||||||
|
Impaired Loans
|
$ | 23,411 | $ | — | $ | — | $ | 23,411 | $ | (2,547 | ) | |||||||||
|
Other Real Estate Owned
|
7,273 | — | 2,933 | 4,340 | — | |||||||||||||||
|
Mortgage Servicing Asset
|
1,635 | — | — | 1,635 | — | |||||||||||||||
|
2009
|
||||||||||||||||||||
|
Description
|
||||||||||||||||||||
|
Impaired Loans
|
$ | 16,680 | $ | — | $ | — | $ | 16,680 | $ | (449 | ) | |||||||||
|
Loans Held For Sale
|
13,527 | — | 13,527 | — | — | |||||||||||||||
|
Other Real Estate Owned
|
3,994 | — | 1,134 | 2,860 | — | |||||||||||||||
|
Mortgage Servicing Asset
|
2,195 | — | — | 2,195 | — | |||||||||||||||
The estimated fair values and related carrying amounts of the
Company’s financial instruments are as follows:
|
December
|
December
|
|||||||||||||||
| 2010 | 2009 | |||||||||||||||
|
Book
|
Fair
|
Book
|
Fair
|
|||||||||||||
| Value | Value | Value | Value | |||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
|
FINANCIAL ASSETS
|
||||||||||||||||
|
Securities Held To Maturity(a)
|
$ | 202,732 | $ | 201,234 | $ | 93,410 | $ | 93,438 | ||||||||
|
Loans, Net of Allowance for Loan Losses(b)
|
3,509,424 | 3,554,761 | 3,353,154 | 3,316,117 | ||||||||||||
|
FINANCIAL LIABILITIES
|
||||||||||||||||
|
Time Certificates of Deposits(c)
|
$ | 693,176 | $ | 697,064 | $ | 917,781 | $ | 907,499 | ||||||||
|
Federal Home Loan Bank Advances(c)
|
302,414 | 297,740 | 362,936 | 350,503 | ||||||||||||
|
Federal Funds Purchased and Assets
|
||||||||||||||||
|
Sold Under Repurchase Agreements(c)
|
168,119 | 171,702 | 190,452 | 193,943 | ||||||||||||
|
Junior Subordinated Debentures(d)
|
61,857 | 60,796 | 61,857 | 52,888 | ||||||||||||
|
Subordinated Debentures(c)
|
30,000 | 23,655 | 30,000 | 27,529 | ||||||||||||
| (a) | The fair values presented are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments and/or discounted cash flow analyses. | |
| (b) | Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities or cash flows. | |
| (c) | Fair value was determined by discounting anticipated future cash payments using rates currently available for instruments with similar remaining maturities. | |
| (d) | Fair value was determined based upon market prices of securities with similar terms and maturities. |
This summary excludes financial assets and liabilities for which
the carrying value approximates fair value. For financial
assets, these include cash and due from banks, federal funds
sold, short-term investments, Federal Home Loan Bank stock, and
bank owned life insurance. For financial liabilities, these
include demand, savings, and money market deposits, federal
funds purchased, and assets sold under repurchase agreements.
The estimated fair
119
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
value of demand, savings and money market deposits is the amount
payable at the reporting date. Also excluded from the summary
are financial instruments measured at fair value on a recurring
and non-recurring basis, as previously described.
(17) Other
Comprehensive Income/(Loss)
| Year Ended December 31, 2010 | ||||||||||||
|
Pre Tax
|
Tax Expense
|
After Tax
|
||||||||||
| Amount | (Benefit) | Amount | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Change in Fair Value of Securities Available for Sale
|
3,363 | 1,356 | 2,007 | |||||||||
|
Net Security Losses Reclassified into Earnings
|
(124 | )(1) | (29 | ) | (95 | ) | ||||||
|
Net Change in Fair Value of Securities Available for Sale
|
3,239 | 1,327 | 1,912 | |||||||||
|
Change in Fair Value of Cash Flow Hedges
|
(13,346 | )(2) | (5,452 | ) | (7,894 | ) | ||||||
|
Net Cash Flow Hedge Gains Reclassified into Earnings
|
3,983 | 1,638 | 2,345 | |||||||||
|
Net Change in Fair Value of Cash Flow Hedges
|
(9,363 | ) | (3,814 | ) | (5,549 | ) | ||||||
|
Amortization of Certain Costs Included in Net Periodic
Retirement Costs
|
199 | 81 | 118 | |||||||||
|
Total Other Comprehensive Loss
|
$ | (5,925 | ) | $ | (2,406 | ) | $ | (3,519 | ) | |||
| Year Ended December 31, 2009 | ||||||||||||
|
Pre Tax
|
Tax Expense
|
After Tax
|
||||||||||
| Amount | (Benefit) | Amount | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Cumulative Effect Accounting Adjustment
|
$ | (5,974 | )(3) | $ | (2,151 | ) | $ | (3,823 | ) | |||
|
Change in Fair Value of Securities Available for Sale
|
7,124 | 2,335 | 4,789 | |||||||||
|
Net Security Losses Reclassified into Earnings
|
7,604 | (1) | 2,805 | 4,799 | ||||||||
|
Net Change in Fair Value of Securities Available for Sale
|
14,728 | 5,140 | 9,588 | |||||||||
|
Change in Fair Value of Cash Flow Hedges
|
14,549 | (2) | 5,965 | 8,584 | ||||||||
|
Net Cash Flow Hedge Gains Reclassified into Earnings
|
(1,932 | ) | (794 | ) | (1,138 | ) | ||||||
|
Net Change in Fair Value of Cash Flow Hedges
|
12,617 | 5,171 | 7,446 | |||||||||
|
Amortization of Certain Costs Included in Net Periodic
Retirement Costs
|
(982 | ) | (394 | ) | (588 | ) | ||||||
|
Total Other Comprehensive Income
|
$ | 20,389 | $ | 7,766 | $ | 12,623 | ||||||
| Year Ended December 31, 2008 | ||||||||||||
|
Pre Tax
|
Tax Expense
|
After Tax
|
||||||||||
| Amount | (Benefit) | Amount | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Change in Fair Value of Securities Available for Sale
|
$ | (4,311 | ) | $ | (1,039 | ) | $ | (3,272 | ) | |||
|
Net Security Losses Reclassified into Earnings
|
7,820 | (1) | 2,816 | 5,004 | ||||||||
|
Net Change in Fair Value of Securities Available for Sale
|
3,509 | 1,777 | 1,732 | |||||||||
|
Change in Fair Value of Cash Flow Hedges
|
(11,803 | )(2) | (4,900 | ) | (6,903 | ) | ||||||
|
Net Cash Flow Hedge Losses Reclassified into Earnings
|
495 | 207 | 288 | |||||||||
|
Net Change in Fair Value of Cash Flow Hedges
|
(11,308 | ) | (4,693 | ) | (6,615 | ) | ||||||
|
Amortization of Certain Costs Included in Net Periodic
Retirement Costs
|
(204 | ) | (86 | ) | (118 | ) | ||||||
|
Total Other Comprehensive Loss
|
$ | (8,003 | ) | $ | (3,002 | ) | $ | (5,001 | ) | |||
120
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (1) | Net security losses include pre-tax OTTI credit related losses of $334,000, $9.0 million and $7.2 million for the years ended December 31, 2010, 2009, and 2008, respectively. | |
| (2) | Includes the remaining balance of a $1.3 million realized but unrecognized gain, net of tax, from the termination of interest rate swaps in June 2009. The gain will be recognized in earnings through December 2018, the original maturity date of the swap. The balance of this gain had amortized to $1.1 million and $1.3 million at December 31, 2010 and 2009, respectively. Also, includes the remaining balance of a $675,000 realized but unrecognized loss from the termination of an interest rate swap in March 2008. The loss was recognized in earnings through January 2010, the original maturity date of the interest rate swap. The balance of this loss had amortized to $9,000 and $387,000 at December 2009 and 2008, respectively. | |
| (3) | Represents reclassifications of non credit related components of previously recorded OTTI pursuant to the adoption of the Investments — Debt and Equity Securities topic of the FASB ASC. |
Accumulated Other Comprehensive Income (Loss), net of tax, is
comprised of the following components:
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Unrealized gain on securities available for sale
|
$ | 6,305 | $ | 4,393 | ||||
|
Net actuarial loss and prior service cost for pension and other
post retirement benefit plans
|
(1,094 | ) | (1,212 | ) | ||||
|
Unrealized loss on cash flow hedge
|
(7,125 | ) | (1,712 | ) | ||||
|
Deferred gain on hedge accounting transactions
|
1,148 | 1,284 | ||||||
|
Total
|
$ | (766 | ) | $ | 2,753 | |||
| (18) | Commitments and Contingencies |
Financial
Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure
to fluctuations in interest rates. These financial instruments
involve, to varying degrees, elements of credit and interest
rate risk in excess of amounts recognized in the consolidated
balance sheets. The Company uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance sheet instruments.
Off-balance sheet financial instruments whose contractual
amounts present credit risk include the following at December 31:
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Commitments to extend credit:
|
||||||||
|
Fixed rate
|
$ | 43,669 | $ | 18,293 | ||||
|
Adjustable rate
|
9,412 | 3,233 | ||||||
|
Unused portion of existing credit lines and loan commitments
|
972,489 | 823,312 | ||||||
|
Unadvanced construction loans
|
108,906 | 54,254 | ||||||
|
Standby letters of credit
|
21,524 | 19,104 | ||||||
The Company’s exposure to credit loss in the event of
nonperformance by the counterparty for commitments to extend
credit and standby letters of credit is represented by the
contractual amounts of those instruments. Commitments to extend
credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. The
Bank evaluates each customer’s creditworthiness on an
individual basis. The amount of collateral obtained upon
extension of the credit is based upon management’s credit
evaluation of the customer. Collateral varies but may include
accounts receivable, inventory, property, plant and equipment
and
121
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
income-producing commercial real estate. Commitments generally
have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments may
expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by
the Bank to guarantee performance of a customer to a third
party. These guarantees are primarily issued to support public
and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that
involved in extending loans to customers. The collateral
supporting those commitments is essentially the same as for
other commitments. Most guarantees extend for one year.
Guarantees are recorded on the Company’s consolidated
balance sheet at fair value at inception. The Company considers
standby letters of credit to be guarantees and the amount of the
recorded liability related to such guarantees at both
December 31, 2010 and 2009 was approximately $95,000 and
$49,000, respectively.
Leases
The Company leases office space, space for ATM locations, and
certain branch locations under non-cancelable operating leases.
The following is a schedule of minimum future lease commitments
under such leases as of December 31, 2010:
|
Lease
|
||||
|
Years
|
Commitments | |||
| (Dollars in thousands) | ||||
|
2011
|
$ | 6,921 | ||
|
2012
|
6,767 | |||
|
2013
|
6,624 | |||
|
2014
|
6,384 | |||
|
2015
|
6,287 | |||
|
Thereafter
|
32,073 | |||
|
Total future minimum rentals
|
$ | 65,056 | ||
Rent expense incurred under operating leases was approximately
$6.9 million in 2010, $7.0 million in 2009 and
$5.0 million in 2008. Renewal options ranging from
3 — 20 years exist for several of these leases.
The Company has entered into lease agreements with related third
parties on substantially the same terms as those prevailing at
the time for comparable transactions with unrelated parties.
Rent expense incurred under related third party leases was
approximately $1.0 million, $755,000, and $909,000 in 2010,
2009, and 2008.
Other
Contingencies
At December 31, 2010, Rockland Trust was involved in
pending lawsuits that arose in the ordinary course of business.
Management has reviewed these pending lawsuits with legal
counsel and has taken into consideration the view of counsel as
to their outcome. In the opinion of management, the final
disposition of pending lawsuits is not expected to have a
material adverse effect on the Company’s financial position
or results of operations.
The Bank is required to maintain certain reserve requirements of
vault cash
and/or
deposits with the Federal Reserve Bank of Boston. The amount of
this reserve requirement was $5.5 million and
$4.2 million at December 31, 2010 and 2009,
respectively.
| (19) | Regulatory Capital Requirements |
The Company and the Bank are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements.
Under capital adequacy guidelines and the regulatory framework
for prompt
122
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of the
Company’s and the Bank’s assets, liabilities and
certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios (set forth in the table below) of
Total and Tier 1 Capital (as defined) to average assets (as
defined) and Tier 1 Capital to risk weighted assets (as
defined). Management believes, as of December 31, 2010 and
2009, that the Company and the Bank met all capital adequacy
requirements to which they are subject.
At December 31, 2010, the Bank was well capitalized under
the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an institution must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the following tables. There are
no conditions or events since the notification that management
believes have changed the Bank’s category. The
Company’s and the Bank’s actual capital amounts and
ratios as of December 31, 2010 and 2009 are also presented
in the table that follows:
|
To Be Well Capitalized
|
||||||||||||||||||||||||||||||||
|
Under Prompt
|
||||||||||||||||||||||||||||||||
|
For Capital
|
Corrective Action
|
|||||||||||||||||||||||||||||||
| Actual | Adequacy Purposes | Provisions | ||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
|
As of December 31, 2010:
|
||||||||||||||||||||||||||||||||
|
Company: (Consolidated)
|
||||||||||||||||||||||||||||||||
|
Total capital (to risk weighted assets)
|
$ | 444,963 | 12.37 | % | $ | 287,846 | ³ | 8.0 | % | N/A | N/A | |||||||||||||||||||||
|
Tier 1 capital (to risk weighted assets)
|
369,965 | 10.28 | 143,923 | ³ | 4.0 | N/A | N/A | |||||||||||||||||||||||||
|
Tier 1 capital (to average assets)
|
369,965 | 8.19 | 180,784 | ³ | 4.0 | N/A | N/A | |||||||||||||||||||||||||
|
Bank:
|
||||||||||||||||||||||||||||||||
|
Total capital (to risk weighted assets)
|
$ | 429,304 | 11.92 | % | $ | 288,098 | ³ | 8.0 | % | $ | 360,123 | ³ | 10.0 | % | ||||||||||||||||||
|
Tier 1 capital (to risk weighted assets)
|
354,267 | 9.84 | 144,049 | ³ | 4.0 | 216,074 | ³ | 6.0 | ||||||||||||||||||||||||
|
Tier 1 capital (to average assets)
|
354,267 | 7.83 | 181,039 | ³ | 4.0 | 226,299 | ³ | 5.0 | ||||||||||||||||||||||||
|
As of December 31, 2009:
|
||||||||||||||||||||||||||||||||
|
Company: (Consolidated)
|
||||||||||||||||||||||||||||||||
|
Total capital (to risk weighted assets)
|
$ | 412,674 | 11.92 | % | $ | 277,029 | ³ | 8.0 | % | N/A | N/A | |||||||||||||||||||||
|
Tier 1 capital (to risk weighted assets)
|
340,313 | 9.83 | 138,515 | ³ | 4.0 | N/A | N/A | |||||||||||||||||||||||||
|
Tier 1 capital (to average assets)
|
340,313 | 7.87 | 172,897 | ³ | 4.0 | N/A | N/A | |||||||||||||||||||||||||
|
Bank:
|
||||||||||||||||||||||||||||||||
|
Total capital (to risk weighted assets)
|
$ | 398,890 | 11.49 | % | $ | 277,699 | ³ | 8.0 | % | $ | 347,124 | ³ | 10.0 | % | ||||||||||||||||||
|
Tier 1 capital (to risk weighted assets)
|
326,529 | 9.41 | 138,850 | ³ | 4.0 | 208,275 | ³ | 6.0 | ||||||||||||||||||||||||
|
Tier 1 capital (to average assets)
|
326,529 | 7.55 | 173,022 | ³ | 4.0 | 216,278 | ³ | 5.0 | ||||||||||||||||||||||||
123
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (20) | Parent Company Financial Statements |
Condensed financial information relative to the Parent
Company’s balance sheets at December 31, 2010 and 2009
and the related statements of income and cash flows for the
years ended December 31, 2010, 2009, and 2008 are presented
below. The statement of stockholders’ equity is not
presented below as the parent company’s stockholders’
equity is that of the consolidated Company.
BALANCE
SHEETS
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Assets:
|
||||||||
|
Cash(1)
|
$ | 21,994 | $ | 18,678 | ||||
|
Investments in subsidiaries(2)
|
486,918 | 463,728 | ||||||
|
Deferred tax asset
|
3,663 | 2,668 | ||||||
|
Deferred stock issuance costs
|
177 | 184 | ||||||
|
Total assets
|
$ | 512,752 | $ | 485,258 | ||||
|
Liabilities and Stockholders’ Equity:
|
||||||||
|
Dividends payable
|
$ | 3,818 | $ | 3,793 | ||||
|
Junior subordinated debentures
|
61,857 | 61,857 | ||||||
|
Accrued income taxes
|
— | 1,675 | ||||||
|
Derivative instruments
|
7,395 | 5,229 | ||||||
|
Intercompany payable(1)
|
3,153 | — | ||||||
|
Other liabilities
|
57 | 55 | ||||||
|
Total liabilities
|
76,280 | 72,609 | ||||||
|
Stockholders’ equity
|
436,472 | 412,649 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 512,752 | $ | 485,258 | ||||
| (1) | Entire balance eliminates in consolidation. | |
| (2) | $485,060 and $461,869 eliminate in consolidation at December 31, 2010 and 2009, respectively. |
124
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
STATEMENTS
OF INCOME
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Income:
|
||||||||||||
|
Dividends received from subsidiaries(1)
|
$ | 18,857 | $ | 23,610 | $ | 36,463 | ||||||
|
Interest income(2)
|
85 | 222 | 30 | |||||||||
|
Gain on sale of securities
|
— | — | 74 | |||||||||
|
Income from hedging relationship
|
— | — | — | |||||||||
|
Other income
|
— | 115 | 5 | |||||||||
|
Total income
|
18,942 | 23,947 | 36,572 | |||||||||
|
Expenses:
|
||||||||||||
|
Interest expense
|
3,692 | 3,700 | 3,700 | |||||||||
|
Other expenses
|
1 | 3 | — | |||||||||
|
Total expenses
|
3,693 | 3,703 | 3,700 | |||||||||
|
Income before income taxes and equity in undistributed income of
subsidiaries
|
15,249 | 20,244 | 32,872 | |||||||||
|
Income tax benefit
|
(1,184 | ) | (786 | ) | (677 | ) | ||||||
|
Income of Parent Company
|
16,433 | 21,030 | 33,549 | |||||||||
|
Equity in undistributed income (loss) of subsidiaries(3)
|
23,807 | 1,959 | (9,585 | ) | ||||||||
|
Net income
|
$ | 40,240 | $ | 22,989 | $ | 23,964 | ||||||
| (1) | Income of $18,819, $23,557 and $36,368 eliminated in consolidation for the years ended December 31, 2010, 2009, and 2008, respectively. | |
| (2) | Entire balance eliminated in consolidation. | |
| (3) | Income of $23,807, $1,961 and a loss of $9,589 eliminated in consolidation for the years ended December 31, 2010, 2009, and 2008, respectively. |
125
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
STATEMENTS
OF CASH FLOWS
| Years Ended December 31 , | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net income
|
$ | 40,240 | $ | 22,989 | $ | 23,964 | ||||||
|
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY
OPERATING ACTIVITIES:
|
||||||||||||
|
Amortization
|
7 | 7 | 6 | |||||||||
|
Deferred income tax benefit
|
(110 | ) | — | (999 | ) | |||||||
|
Gain on sale of assets
|
— | — | (74 | ) | ||||||||
|
Decrease in other assets
|
— | 1 | 49 | |||||||||
|
Increase in other liabilities
|
1,480 | 260 | 1,225 | |||||||||
|
Equity in undistributed (income) loss of subsidiaries
|
(23,807 | ) | (1,959 | ) | 9,585 | |||||||
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
17,810 | 21,298 | 33,756 | |||||||||
|
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
|
||||||||||||
|
Proceeds from sales of securities available for sale
|
— | — | 6,554 | |||||||||
|
Payments for investments in subsidiaries
|
— | — | (4,000 | ) | ||||||||
|
Cash paid for acquisitions, net of cash acquired
|
— | 10,416 | (25,903 | ) | ||||||||
|
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
— | 10,416 | (23,349 | ) | ||||||||
|
CASH FLOWS USED IN FINANCING ACTIVITIES:
|
||||||||||||
|
Proceeds from stock issued and stock options exercised
|
743 | 307 | 695 | |||||||||
|
Issuance of preferred stock and stock warrants
|
— | 78,158 | — | |||||||||
|
Redemption of preferred stock
|
— | (78,158 | ) | — | ||||||||
|
Redemption of warrants
|
— | (2,200 | ) | — | ||||||||
|
Dividends paid
|
||||||||||||
|
Preferred
|
— | (1,118 | ) | — | ||||||||
|
Common
|
(15,237 | ) | (13,455 | ) | (11,135 | ) | ||||||
|
NET CASH USED IN FINANCING ACTIVITIES
|
(14,494 | ) | (16,466 | ) | (10,440 | ) | ||||||
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
3,316 | 15,248 | (33 | ) | ||||||||
|
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR
|
18,678 | 3,430 | 3,463 | |||||||||
|
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR
|
$ | 21,994 | $ | 18,678 | $ | 3,430 | ||||||
126
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (21) | Selected Quarterly Financial Data (Unaudited) |
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||||||||||||||
|
INTEREST INCOME
|
$ | 50,848 | $ | 43,411 | $ | 51,319 | $ | 52,806 | $ | 50,588 | $ | 53,590 | $ | 49,971 | $ | 52,883 | ||||||||||||||||
|
INTEREST EXPENSE
|
10,638 | 13,422 | 10,152 | 13,706 | 9,391 | 12,682 | 8,582 | 12,185 | ||||||||||||||||||||||||
|
NET INTEREST INCOME
|
$ | 40,210 | $ | 29,989 | $ | 41,167 | $ | 39,100 | $ | 41,197 | $ | 40,908 | $ | 41,389 | $ | 40,698 | ||||||||||||||||
|
PROVISION FOR LOAN LOSSES
|
4,650 | 4,000 | 6,931 | 4,468 | 3,500 | 4,443 | 3,575 | 4,424 | ||||||||||||||||||||||||
|
NON-INTEREST INCOME
|
10,228 | 9,094 | 10,541 | 11,123 | 11,683 | 9,607 | 14,329 | 12,194 | ||||||||||||||||||||||||
|
GROSS CHANGE ON WRITE-DOWN OF CERTAIN INVESTMENTS TO FAIR VALUE
|
180 | (102 | ) | (63 | ) | (2,174 | ) | 207 | (5,108 | ) | 172 | 2 | ||||||||||||||||||||
|
LESS: PORTION OF
OTHER-THAN-TEMPORARY
IMPAIRMENT RECOGNIZED IN
|
||||||||||||||||||||||||||||||||
|
OTHER COMPREHENSIVE INCOME
|
(358 | ) | 102 | (21 | ) | 521 | (214 | ) | (33 | ) | (238 | ) | (2,167 | ) | ||||||||||||||||||
|
NET IMPAIRMENT LOSSES RECOGNIZED IN EARNINGS ON
AVAILABLE-FOR-SALE
DEBT SECURITIES
|
(178 | ) | — | (84 | ) | (1,653 | ) | (7 | ) | (5,141 | ) | (66 | ) | (2,165 | ) | |||||||||||||||||
|
GAIN RESULTING FROM EARLY TERMINATION OF HEDGING RELATIONSHIP
|
— | — | — | 3,778 | — | — | — | — | ||||||||||||||||||||||||
|
NET (LOSS)/GAIN ON SECURITIES
|
— | 1,379 | 481 | (25 | ) | (22 | ) | — | — | — | ||||||||||||||||||||||
|
NON-INTEREST EXPENSES
|
32,267 | 26,233 | 33,658 | 31,860 | 33,188 | 30,996 | 35,385 | 33,328 | ||||||||||||||||||||||||
|
MERGER & ACQUISITION EXPENSES
|
— | 1,538 | — | 10,844 | — | 41 | — | — | ||||||||||||||||||||||||
|
FDIC ASSESSMENT
|
1,321 | 536 | 1,271 | 3,852 | 1,352 | 1,267 | 1,303 | 1,320 | ||||||||||||||||||||||||
|
PROVISION FOR INCOME TAXES
|
2,795 | 1,767 | 2,215 | 639 | 3,666 | 1,786 | 3,551 | 2,555 | ||||||||||||||||||||||||
|
NET INCOME
|
$ | 9,227 | $ | 6,388 | $ | 8,030 | $ | 660 | $ | 11,145 | $ | 6,841 | $ | 11,838 | $ | 9,100 | ||||||||||||||||
|
PREFERRED STOCK DIVIDEND
|
$ | — | $ | 1,173 | $ | — | $ | 4,525 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
|
$ | 9,227 | $ | 5,215 | $ | 8,030 | $ | (3,865 | ) | $ | 11,145 | $ | 6,841 | $ | 11,838 | $ | 9,100 | |||||||||||||||
|
BASIC EARNINGS PER SHARE
|
$ | 0.44 | $ | 0.32 | $ | 0.38 | $ | (0.19 | ) | $ | 0.53 | $ | 0.33 | $ | 0.56 | $ | 0.43 | |||||||||||||||
|
DILUTED EARNINGS PER SHARE
|
$ | 0.44 | $ | 0.32 | $ | 0.38 | $ | (0.19 | ) | $ | 0.53 | $ | 0.33 | $ | 0.56 | $ | 0.43 | |||||||||||||||
|
Weighted average common shares (Basic)
|
20,937,589 | 16,285,955 | 20,964,706 | 20,360,046 | 20,981,372 | 20,921,635 | 21,208,509 | 20,931,154 | ||||||||||||||||||||||||
|
Common stock equivalents
|
70,833 | 17,881 | 90,939 | 25,563 | 52,793 | 48,254 | 29,973 | 44,653 | ||||||||||||||||||||||||
|
Weighted average common shares (Diluted)
|
21,008,422 | 16,303,836 | 21,055,645 | 20,385,609 | 21,034,165 | 20,969,889 | 21,238,482 | 20,975,807 | ||||||||||||||||||||||||
127
Table of Contents
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None
| Item 9A. | Controls and Procedures |
Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures
The Company carried out an
evaluation, under the supervision and with the participation of
the Company’s management, including the Company’s
Chief Executive Officer along with the Company’s Chief
Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and
procedures, as such term is defined under
Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). Based upon that
evaluation, the Company’s Chief Executive Officer along
with the Company’s Chief Financial Officer concluded that
the Company’s disclosure controls and procedures are
effective as of the end of the period covered by this annual
report.
Changes in Internal Controls over Financial
Reporting
There were no changes in our internal
control over financial reporting that occurred during the fourth
quarter that have materially affected, or are reasonably likely
to materially affect, the Company’s internal controls over
financial reporting.
Management’s Report on Internal Control Over Financial
Reporting
Management of Independent Bank Corp. is
responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over
financial reporting is defined in
Rule 13a-15(f)
under the Exchange Act as a process designed by, or under the
supervision of, the Company’s principal executive and
principal financial officers and effected by the Company’s
Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles. Independent Bank Corp.’s internal
control over financial reporting includes those policies and
procedures that:
(i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflects the
transactions and disposition of the assets of the Company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2010. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on our assessment and those criteria, management believes
that the Company maintained effective internal control over
financial reporting as of December 31, 2010.
Independent Bank Corp.’s independent registered public
accounting firm has issued a report on the Company’s
internal control over financial reporting. That report appears
below.
128
Table of Contents
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Independent Bank Corp.:
We have audited Independent Bank Corp. and subsidiaries’
(the “Company”) internal control over financial
reporting as of December 31, 2010, based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“the COSO Criteria”). The
Company’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management
Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition use or disposition of the
Company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Independent Bank Corp. and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, based on
the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
2010 consolidated financial statements of Independent Bank Corp.
and subsidiaries and our report dated March 4, 2011
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 4, 2011
129
Table of Contents
| Item 9B. | Other Information |
None
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required herein is incorporated by reference
from the Company’s proxy statement (the “Definitive
Proxy Statement”) relating to its May 19, 2011 Annual
Meeting of Stockholders that will be filed with the Commission
within 120 days following the fiscal year end
December 31, 2010.
| Item 11. | Executive Compensation |
The information required herein is incorporated by reference
from the Definitive Proxy Statement.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table sets forth information as of
December 31, 2010 about the securities authorized for
issuance under our equity compensation plans, consisting of our
1996 Director Stock Plan, our 1997 Employee Stock Option
Plan, our 2005 Employee Stock Plan, our 2006 Non-Employee
Director Stock Plan (“the 2006 Plan”), the Ben
Franklin Plan, and our 2010 Non-Employee Director Stock Plan.
Our shareholders previously approved each of these plans and all
amendments that were subject to shareholder approval. The
Company has no other equity compensation plans that have not
been approved by shareholders.
Equity
Compensation Plans
|
Number of
|
||||||||||||
|
Securities
|
||||||||||||
|
Remaining
|
||||||||||||
|
Available
|
||||||||||||
|
Number of
|
Weighted-
|
for Future Issuance
|
||||||||||
|
Securities to be
|
Average
|
Under Equity
|
||||||||||
|
Issued upon
|
Exercise Price of
|
Compensation
|
||||||||||
|
Exercise of
|
Outstanding
|
Plans
|
||||||||||
|
Outstanding
|
Options,
|
(Excluding
|
||||||||||
|
Options, Warrants
|
Warrants and
|
Securities Reflected
|
||||||||||
|
Equity Compensation Plan Category
|
and Rights | Rights | in Column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
|
Plans approved by security holders
|
1,119,760 | $ | 27.85 | 452,235 | (1) | |||||||
|
Plans not approved by security holders
|
— | — | — | |||||||||
|
Total
|
1,119,760 | $ | 27.85 | 452,235 | ||||||||
| (1) | There are no shares available for future issuance under the 1996 Director Stock Plan, the 1997 Employee Stock Option Plan, and the 2006 Non-Employee Director Stock Plan. There are 161,865 shares available for future issuance under the 2005 Employee Stock Plan. Although there are 7,570 shares available to grant under the BFBC Stock Plan, they expire in early 2011, the Company will not grant any additional awards from this plan. |
There are 282,800 shares avaialbe for future issuance under
the 2010 Non-Employee Director Stock Plan. Shares under the 2005
and 2010 Plans may be issued as non-qualified stock options or
restricted stock awards.
The information required herein by Item 403 of
Regulation S-K
regarding the security ownership of management and certain
beneficial owners is incorporated by reference from the
Definitive Proxy Statement.
130
Table of Contents
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required herein is incorporated by reference
from the Definitive Proxy Statement.
| Item 14. | Principal Accounting Fees and Services |
The information required herein is incorporated by reference
from the Definitive Proxy Statement.
| Item 15. | Exhibits, Financial Statement Schedules |
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated
herein by reference from Item 8 hereto:
Management’s Report on Internal Control over Financial
Reporting
Reports of Independent Registered Public Accounting Firm.
Consolidated balance sheets as of December 31, 2010 and
2009.
Consolidated statements of income for each of the years in the
three-year period ended December 31, 2010.
Consolidated statements of stockholders’ equity for each of
the years in the three-year period ended December 31, 2010.
Consolidated statements of cash flows for each of the years in
the three-year period ended December 31, 2010.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the
applicable accounting regulations of the SEC are omitted because
of the absence of conditions under which they are required or
because the required information is included in the consolidated
financial statements and related notes thereto.
(3) The following exhibits are filed as part of this
Form 10-K,
and this list includes the Exhibit Index.
(b) See (a)(3) above for all exhibits filed herewith and
the Exhibit Index.
(c) All schedules are omitted as the required information
is not applicable or the information is presented in the
Consolidated Financial Statements or related notes.
131
Table of Contents
EXHIBITS INDEX
| No. |
Exhibit
|
|
|
3.(i)
|
Restated Articles of Organization, as adopted May 20, 2010, incorporated by reference to Form 8-K filed on May 24, 2010. | |
|
3.(ii)
|
Amended and Restated Bylaws of the Company, incorporated by reference to Form 8-K filed on May 24, 2010. | |
|
4.1
|
Specimen Common Stock Certificate, incorporated by reference to Form 10-K for the year ended December 31, 1992. | |
|
4.2
|
Specimen preferred Stock Purchase Rights Certificate, incorporated by reference to Form 8-A Registration Statement filed on November 5, 2001. | |
|
4.3
|
Indenture of Registrant relating the Junior Subordinated Debt Securities issued to Independent Capital Trust V is incorporated by reference to Form 10-K for the year ended December 31, 2006 filed on February 28, 2007. | |
|
4.4
|
Form of Certificate of Junior Subordinated Debt Security for Independent Capital Trust V (included as Exhibit A to Exhibit 4.9) | |
|
4.5
|
Amended and Restated Declaration of Trust for Independent Capital Trust V is incorporated by reference to Form 10-K for the year ended December 31, 2006 filed on February 28, 2007. | |
|
4.6
|
Form of Capital Security Certificate for Independent Capital Trust V (included as Exhibit A-1 to Exhibit 4.9). | |
|
4.7
|
Guarantee Agreement relating to Independent Capital Trust V is incorporated by reference to Form 10-K for the year ended December 31, 2006 filed on February 28, 2007. | |
|
4.8
|
Forms of Capital Securities Purchase Agreements for Independent Capital Trust V is incorporated by reference to Form 10-K for the year ended December 31, 2006 filed on February 28, 2007. | |
|
4.9
|
Subordinated Debt Purchase Agreement between USB Capital Resources and Rockland Trust Company dated as of August 27, 2008 is incorporated by reference to Form 8-K filed on September 2, 2008. | |
|
4.10
|
Rockland Trust Company Employee Savings, Profit Sharing and Stock Ownership Plan incorporated by reference to Form S-8 filed on April 16, 2010. | |
|
4.11
|
Independent Bank Corp. 2010 Dividend Reinvestment and Stock Purchase Plan incorporated by reference to Form S-3 filed on August 24, 2010. | |
|
10.1
|
Independent Bank Corp. 1996 Non-Employee Directors’ Stock Option Plan incorporated by reference to Definitive Proxy Statement for the 1996 Annual Meeting of Stockholders filed on March 19, 1996. | |
|
10.2
|
Independent Bank Corp. 1997 Employee Stock Option Plan incorporated by reference to the Definitive Proxy Statement for the 1997 Annual Meeting of Stockholders filed on March 20, 1997. | |
|
10.3
|
Independent Bank Corp. 2005 Employee Stock Plan incorporated by reference to Form S-8 filed on July 28, 2005. | |
|
10.4
|
Renewal Rights Agreement dated as of September 14, 2000 by and between the Company and Rockland Trust, as Rights Agent, is incorporated by reference to Form 8-K filed on October 23, 2000. | |
|
10.5
|
Independent Bank Corp. Deferred Compensation Program for Directors (restated as amended as of December 1, 2000) is incorporated by reference to Form 10-K for the year ended December 31, 2000. | |
|
10.6
|
Master Securities Repurchase Agreement, incorporated by reference to Form S-1 Registration Statement filed on September 18, 1992. | |
|
10.7
|
Revised employment agreements between Christopher Oddleifson, Raymond G. Fuerschbach, Edward F. Jankowski, Jane L. Lundquist, Gerard F. Nadeau, Edward H. Seksay, and Denis K. Sheahan and the Company and/or Rockland Trust and a Rockland Trust Company amended and restated Supplemental Executive Retirement Plan dated November 20, 2008 are incorporated by reference to Form 8-K filed on November 21, 2008. | |
|
10.8
|
Specimen forms of stock option agreements for the Company’s Chief Executive and other executive officers are incorporated by reference to Form 8-K filed on December 20, 2005. |
132
Table of Contents
| No. |
Exhibit
|
|
|
10.9
|
On-Site Outsourcing Agreement by and between Fidelity Information Services, Inc. and Independent Bank Corp., effective as of November 1, 2004 is incorporated by reference to Form 10-K for the year ended December 31, 2004 filed on March 4, 2005. Amendment to On-Site Outsourcing Agreement incorporated by reference to Form 8-K filed on May 7, 2008. | |
|
10.10
|
New Markets Tax Credit program Allocation Agreement between the Community Development Financial Institutions Fund of the United States Department of the Treasury and Rockland Community Development with an Allocation Effective Date of September 22, 2004 is incorporated by reference to Form 8-K filed on October 14, 2004. | |
|
10.11
|
Independent Bank Corp. 2006 Non-Employee Director Stock Plan incorporated by reference to Form S-8 filed on April 17, 2006. | |
|
10.12
|
Independent Bank Corp. 2006 Stock Option Agreement for Non-Employee Director is incorporated by reference to Form 10-Q filed on May 9, 2006. | |
|
10.13
|
Independent Bank Corp. 2006 Restricted Stock Agreement for Non-Employee Director is incorporated by reference to Form 10-Q filed on May 9, 2006. | |
|
10.14
|
New Markets Tax Credit program Allocation Agreement between the Community Development Financial Institutions Fund of the United States Department of the Treasury and Rockland Community Development with an Allocation Effective Date of January 9, 2007 is incorporated by reference to Form 10-K for the year ended December 31, 2006 filed on February 28, 2007. | |
|
10.15
|
New Markets Tax Credit program Allocation Agreement between the Community Development Financial Institutions Fund of the United States Department of the Treasury and Rockland Community Development with an Allocation Effective Date of June 18, 2009 is incorporated by reference to the third quarter 2009 Form 10-Q. | |
|
10.16
|
Item Processing and Other Services Agreement dated and effective as of July 1, 2010 by and between Fidelity Information Services, Inc. and Independent Bank Corp. is incorporated by reference to Form 10-Q filed August 5, 2010. | |
|
10.17
|
Independent Bank Corp. 2010 Non-Employee Director Stock Plan, incorporated by reference to Form 8-K filed May 24, 2010. | |
|
10.18
|
Independent Bank Corp. 2010 Stock Option Agreement for Non-Employee Director, incorporated by reference to Form 8-K filed May 24, 2010. | |
|
10.20
|
Independent Bank Corp. 2010 Restricted Stock Agreement for Non-Employee Director, incorporated by reference to Form 8-K filed May 24, 2010. | |
|
23.1
|
Consent of Independent Registered Public Accounting Firm* | |
|
23.2
|
Consent of Independent Registered Public Accounting Firm* | |
|
31.1
|
Section 302 Certification of Sarbanes-Oxley Act of 2002 is attached hereto.* | |
|
31.2
|
Section 302 Certification of Sarbanes-Oxley Act of 2002 is attached hereto.* | |
|
32.1
|
Section 906 Certification of Sarbanes-Oxley Act of 2002 is attached hereto.+ | |
|
32.2
|
Section 906 Certification of Sarbanes-Oxley Act of 2002 is attached hereto.+ |
| * | Filed herewith | |
| + | Furnished herewith |
133
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Independent Bank Corp.
|
/s/
Christopher
Oddleifson
|
Christopher Oddleifson,
Chief Executive Officer and President
Date: March 8, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated. Each person whose signature appears below
hereby makes, constitutes and appoints Christopher Oddleifson
and Denis K. Sheahan and each of them acting individually, his
true and lawful attorneys, with full power to sign for such
person and in such person’s name and capacity indicated
below any and all amendments to this
Form 10-K,
hereby ratifying and confirming such person’s signature as
it may be signed by said attorneys to any and all amendments.
|
/s/
Christopher
Oddleifson
|
Director CEO/President
(Principal Executive Officer) |
Date: March 8, 2011 | ||||
|
/s/
Thomas
J. Teuten
|
Director and Chairman of the Board | Date: March 8, 2011 | ||||
|
/s/
Denis
K. Sheahan
|
CFO (Principal Financial Officer) | Date: March 8, 2011 | ||||
|
/s/
Barry
H. Jensen
|
Controller
(Principal Accounting Officer) |
Date: March 8, 2011 | ||||
|
/s/
Donna
L. Abelli
|
Director | Date: March 8, 2011 | ||||
|
/s/
Richard
S. Anderson
|
Director | Date: March 8, 2011 | ||||
|
/s/
William
P. Bissonnette
|
Director | Date: March 8, 2011 | ||||
|
/s/
Benjamin
A. Gilmore, II
|
Director | Date: March 8, 2011 | ||||
|
/s/
Kevin
J. Jones
|
Director | Date: March 8, 2011 | ||||
|
/s/
Eileen
C. Miskell
|
Director | Date: March 8, 2011 | ||||
|
/s/
Daniel
F. O’Brien
|
Director | Date: March 8, 2011 | ||||
|
/s/
Carl
Ribeiro
|
Director | Date: March 8, 2011 | ||||
|
/s/
Richard
H. Sgarzi
|
Director | Date: March 8, 2011 | ||||
134
Table of Contents
|
/s/
John
H. Spurr, Jr.
|
Director | Date: March 8, 2011 | ||||
|
/s/
Robert
D. Sullivan
|
Director | Date: March 8, 2011 | ||||
|
/s/
Brian
S. Tedeschi
|
Director | Date: March 8, 2011 | ||||
|
/s/
Thomas
R. Venables
|
Director | Date: March 8, 2011 | ||||
135
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 5. Market For Independent Bank Corp. S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules