INDEPENDENT BANK CORP
10-Ks and 10-Qs
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Table of Contents
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
Commission File Number: 1-9047
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 | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
Office Address: 2036 Washington Street, Hanover Massachusetts 02339
Mailing Address: 288 Union Street, Rockland, Massachusetts 02370
(Address of principal executive offices, including zip code)
Mailing Address: 288 Union Street, Rockland, Massachusetts 02370
(Address of principal executive offices, including zip code)
(781) 878-6100
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
| Large accelerated filer o | Accelerated filer þ |
Non-accelerated filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
o
No
þ
As of May 1, 2011, there were 21,433,666 shares of the issuer’s common stock outstanding, par
value $0.01 per share
INDEX
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March 31, 2011 and December 31, 2010
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Three months ended March 31, 2011 and 2010
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Three months ended March 31, 2011 and 2010
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Three months ended March 31, 2011 and 2010
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| 72 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
| EX-32.2 | ||||||||
2
Table of Contents
CONSOLIDATED BALANCE SHEETS
(Unaudited — Dollars in Thousands, Except Share and Per Share Amounts)
| March 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
|
ASSETS
|
||||||||
|
CASH AND DUE FROM BANKS
|
$ | 49,242 | $ | 42,112 | ||||
|
INTEREST EARNING DEPOSITS WITH BANKS
|
17,042 | 119,170 | ||||||
|
FED FUNDS SOLD AND SHORT TERM INVESTMENTS
|
417 | — | ||||||
|
SECURITIES
|
||||||||
|
Trading Assets
|
8,521 | 7,597 | ||||||
|
Securities Available for Sale
|
341,362 | 377,457 | ||||||
|
Securities Held to Maturity
|
||||||||
|
(fair value $237,828 and $201,234 at March 31, 2011 and December 31, 2010, respectively)
|
239,305 | 202,732 | ||||||
|
TOTAL SECURITIES
|
589,188 | 587,786 | ||||||
|
LOANS HELD FOR SALE
|
8,643 | 27,917 | ||||||
|
LOANS
|
||||||||
|
Commercial and Industrial
|
508,839 | 502,952 | ||||||
|
Commercial Real Estate
|
1,770,324 | 1,717,118 | ||||||
|
Commercial Construction
|
123,428 | 129,421 | ||||||
|
Small Business
|
80,817 | 80,026 | ||||||
|
Residential Real Estate
|
462,110 | 473,936 | ||||||
|
Residential Construction
|
3,256 | 4,175 | ||||||
|
Home Equity
|
619,727 | 579,278 | ||||||
|
Consumer — Other
|
59,873 | 68,773 | ||||||
|
TOTAL LOANS
|
3,628,374 | 3,555,679 | ||||||
|
Less: Allowance for Loan Losses
|
(46,444 | ) | (46,255 | ) | ||||
|
NET LOANS
|
3,581,930 | 3,509,424 | ||||||
|
FEDERAL HOME LOAN BANK STOCK
|
35,854 | 35,854 | ||||||
|
BANK PREMISES AND EQUIPMENT, NET
|
46,481 | 45,712 | ||||||
|
GOODWILL
|
130,074 | 129,617 | ||||||
|
IDENTIFIABLE INTANGIBLE ASSETS
|
11,877 | 12,339 | ||||||
|
BANK OWNED LIFE INSURANCE
|
83,511 | 82,711 | ||||||
|
OTHER REAL ESTATE OWNED & FORECLOSED ASSETS
|
9,406 | 7,333 | ||||||
|
OTHER ASSETS
|
82,118 | 95,763 | ||||||
|
TOTAL ASSETS
|
$ | 4,645,783 | $ | 4,695,738 | ||||
|
|
||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
DEPOSITS
|
||||||||
|
Demand Deposits
|
$ | 837,705 | $ | 842,067 | ||||
|
Savings and Interest Checking Accounts
|
1,348,242 | 1,375,254 | ||||||
|
Money Market
|
724,203 | 717,286 | ||||||
|
Time Certificates of Deposit Over $100,000
|
224,178 | 219,480 | ||||||
|
Other Time Certificates of Deposits
|
450,598 | 473,696 | ||||||
|
TOTAL DEPOSITS
|
3,584,926 | 3,627,783 | ||||||
|
BORROWINGS
|
||||||||
|
Federal Home Loan Bank Borrowings
|
277,285 | 302,414 | ||||||
|
Federal
Funds Purchased and Assets Sold Under Repurchase Agreements
|
184,738 | 168,119 | ||||||
|
Junior Subordinated Debentures
|
61,857 | 61,857 | ||||||
|
Subordinated Debentures
|
30,000 | 30,000 | ||||||
|
Other Borrowings
|
2,838 | 3,044 | ||||||
|
TOTAL BORROWINGS
|
556,718 | 565,434 | ||||||
|
OTHER LIABILITIES
|
56,154 | 66,049 | ||||||
|
TOTAL LIABILITIES
|
4,197,798 | 4,259,266 | ||||||
|
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 :
21,407,211 shares at March 31, 2011 and 21,220,801 shares at December 31, 2010
(Includes 245,340 and 219,900 shares of unvested fully participating restricted stock awards, respectively)
|
212 | 210 | ||||||
|
Shares Held in Rabbi Trust at Cost 174,537 shares in March 31, 2011 and 178,382 shares at December 31, 2010
|
(2,752 | ) | (2,738 | ) | ||||
|
|
||||||||
|
Deferred Compensation Obligation
|
2,752 | 2,738 | ||||||
|
Additional Paid in Capital
|
230,581 | 226,708 | ||||||
|
Retained Earnings
|
217,443 | 210,320 | ||||||
|
Accumulated Other Comprehensive Loss, Net of Tax
|
(251 | ) | (766 | ) | ||||
|
TOTAL STOCKHOLDERS’ EQUITY
|
447,985 | 436,472 | ||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 4,645,783 | $ | 4,695,738 | ||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
3
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited — Dollars in Thousands, Except Share and Per Share Data)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
|
INTEREST INCOME
|
||||||||
|
Interest on Loans
|
$ | 43,216 | $ | 44,047 | ||||
|
Interest on Loans Held for Sale
|
119 | 106 | ||||||
|
Taxable Interest and Dividends on Securities
|
5,493 | 6,469 | ||||||
|
Non-taxable Interest and Dividends on Securities
|
113 | 202 | ||||||
|
Interest on Federal Funds Sold and Short-Term Investments
|
17 | 24 | ||||||
|
TOTAL INTEREST AND DIVIDEND INCOME
|
48,958 | 50,848 | ||||||
|
INTEREST EXPENSE
|
||||||||
|
Interest on Deposits
|
3,485 | 5,939 | ||||||
|
Interest on Borrowings
|
4,000 | 4,699 | ||||||
|
TOTAL INTEREST EXPENSE
|
7,485 | 10,638 | ||||||
|
NET INTEREST INCOME
|
41,473 | 40,210 | ||||||
|
PROVISION FOR LOAN LOSSES
|
2,200 | 4,650 | ||||||
|
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
|
39,273 | 35,560 | ||||||
|
NON-INTEREST INCOME
|
||||||||
|
Service Charges on Deposit Accounts
|
3,959 | 3,131 | ||||||
|
Interchange and ATM Fees
|
1,702 | 1,090 | ||||||
|
Investment Management
|
3,216 | 2,728 | ||||||
|
Mortgage Banking Income, Net
|
1,047 | 1,000 | ||||||
|
Bank Owned Life Insurance Income
|
706 | 721 | ||||||
|
Gross Change on Write-Down of Certain Investments to Fair Value
|
249 | 180 | ||||||
|
Less: Non-Credit Related Other-Than-Temporary Impairment
|
(289 | ) | (358 | ) | ||||
|
Net Loss on Write-Down of Certain Investments to Fair Value
|
(40 | ) | (178 | ) | ||||
|
Other Non-Interest Income
|
2,008 | 1,558 | ||||||
|
TOTAL NON-INTEREST INCOME
|
12,598 | 10,050 | ||||||
|
NON-INTEREST EXPENSE
|
||||||||
|
Salaries and Employee Benefits
|
20,252 | 18,464 | ||||||
|
Occupancy and Equipment Expenses
|
4,575 | 4,135 | ||||||
|
Data Processing and Facilities Management
|
1,638 | 1,294 | ||||||
|
FDIC Assessment
|
1,291 | 1,321 | ||||||
|
Advertising Expense
|
938 | 441 | ||||||
|
Telephone
|
527 | 546 | ||||||
|
Software Maintenance
|
463 | 495 | ||||||
|
Legal
|
419 | 803 | ||||||
|
Other Non-Interest Expense
|
6,379 | 6,089 | ||||||
|
TOTAL NON-INTEREST EXPENSE
|
36,482 | 33,588 | ||||||
|
INCOME BEFORE INCOME TAXES
|
15,389 | 12,022 | ||||||
|
PROVISION FOR INCOME TAXES
|
4,201 | 2,795 | ||||||
|
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
|
$ | 11,188 | $ | 9,227 | ||||
|
BASIC EARNINGS PER SHARE
|
$ | 0.53 | $ | 0.44 | ||||
|
DILUTED EARNINGS PER SHARE
|
$ | 0.52 | $ | 0.44 | ||||
|
|
||||||||
|
WEIGHTED AVERAGE COMMON SHARES (BASIC)
|
21,298,257 | 20,937,589 | ||||||
|
Common Share Equivalents
|
46,082 | 70,833 | ||||||
|
WEIGHTED AVERAGE COMMON SHARES (DILUTED)
|
21,344,339 | 21,008,422 | ||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
4
Table of Contents
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited — Dollars in Thousands, Except Per Share Data)
(Unaudited — Dollars in Thousands, Except Per Share Data)
| Shares | Accumulated | |||||||||||||||||||||||||||||||
| Common | Held in | Deferred | Additional | Other | ||||||||||||||||||||||||||||
| Stock | Common | Rabbi Trust | Compensation | Paid-in | Retained | Comprehensive | ||||||||||||||||||||||||||
| Outstanding | Stock | at Cost | Obligation | Capital | Earnings | (Loss)/Income | TOTAL | |||||||||||||||||||||||||
|
BALANCE DECEMBER 31, 2010
|
$ | 21,220,801 | $ | 210 | $ | (2,738 | ) | $ | 2,738 | $ | 226,708 | $ | 210,320 | $ | (766 | ) | $ | 436,472 | ||||||||||||||
|
COMPREHENSIVE INCOME:
|
||||||||||||||||||||||||||||||||
|
Net Income
|
— | — | — | — | — | 11,188 | — | 11,188 | ||||||||||||||||||||||||
|
Change in Unrealized Gain on Securities
Available For
Sale, Net of Tax and Realized Gains/(Losses)
|
— | — | — | — | — | — | (640 | ) | ||||||||||||||||||||||||
|
Change in Fair Value of Cash Flow Hedges,
Net of Tax and Realized Gains/(Losses)
|
— | — | — | — | — | — | 994 | |||||||||||||||||||||||||
|
Amortization of Prior Service Cost, net of tax
|
— | — | — | — | — | — | 161 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
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Other Comprehensive Income
|
— | — | — | — | — | — | 515 | 515 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
TOTAL COMPREHENSIVE INCOME
|
11,703 | |||||||||||||||||||||||||||||||
|
COMMON DIVIDEND DECLARED ($0.19 PER SHARE)
|
— | — | — | — | — | (4,065 | ) | (4,065 | ) | |||||||||||||||||||||||
|
PROCEEDS FROM EXERCISE OF STOCK OPTIONS
|
133,627 | 2 | — | — | 3,065 | — | — | 3,067 | ||||||||||||||||||||||||
|
TAX BENEFIT RELATED TO EQUITY AWARD ACTIVITY
|
— | — | — | — | 231 | — | — | 231 | ||||||||||||||||||||||||
|
EQUITY BASED COMPENSATION
|
— | — | — | — | 716 | — | — | 716 | ||||||||||||||||||||||||
|
RESTRICTED
STOCK AWARDS GRANTED, NET OF AWARDS SURRENDERED
|
52,670 | — | — | — | (216 | ) | — | — | (216 | ) | ||||||||||||||||||||||
|
SHARES ISSUED UNDER DIRECT STOCK PURCHASE
PLAN
|
113 | 3 | 3 | |||||||||||||||||||||||||||||
|
DEFERRED COMPENSATION OBLIGATION
|
— | — | (14 | ) | 14 | — | — | — | — | |||||||||||||||||||||||
|
TAX BENEFIT
RELATED TO DEFERRED COMPENSATION DISTRIBUTIONS
|
74 | 74 | ||||||||||||||||||||||||||||||
|
BALANCE MARCH 31, 2011
|
$ | 21,407,211 | $ | 212 | $ | (2,752 | ) | $ | 2,752 | $ | 230,581 | $ | 217,443 | $ | (251 | ) | $ | 447,985 | ||||||||||||||
|
BALANCE DECEMBER 31, 2009
|
$ | 21,072,196 | $ | 209 | $ | (2,482 | ) | $ | 2,482 | $ | 225,088 | $ | 184,599 | $ | 2,753 | $ | 412,649 | |||||||||||||||
|
COMPREHENSIVE INCOME:
|
||||||||||||||||||||||||||||||||
|
Net Income
|
— | — | — | — | — | 9,227 | — | 9,227 | ||||||||||||||||||||||||
|
Change in Unrealized Gain on Securities
Available For Sale, Net of Tax and Realized Gains/(Losses)
|
— | — | — | — | — | — | 1,523 | |||||||||||||||||||||||||
|
Change in
Fair Value of Cash Flow Hedges, Net of Tax and Realized Gains
|
— | — | — | — | — | — | (1,721 | ) | ||||||||||||||||||||||||
|
Amortization of Prior Service Cost, net of tax
|
— | — | — | — | — | — | 23 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Other Comprehensive Income
|
(175 | ) | (175 | ) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
TOTAL COMPREHENSIVE INCOME
|
9,052 | |||||||||||||||||||||||||||||||
|
DIVIDENDS DECLARED:
|
||||||||||||||||||||||||||||||||
|
COMMON DECLARED ($0.18 PER SHARE)
|
— | — | — | — | — | (3,809 | ) | — | (3,809 | ) | ||||||||||||||||||||||
|
PROCEEDS FROM EXERCISE OF STOCK OPTIONS
|
4,050 | — | — | — | — | 47 | — | 47 | ||||||||||||||||||||||||
|
TAX BENEFIT RELATED TO EQUITY AWARD ACTIVITY
|
— | — | — | — | 27 | — | — | 27 | ||||||||||||||||||||||||
|
EQUITY BASED COMPENSATION
|
— | — | — | — | 276 | — | — | 276 | ||||||||||||||||||||||||
|
RESTRICTED
STOCK AWARDS GRANTED, NET OF AWARDS SURRENDERED
|
90,749 | — | — | — | (18 | ) | — | — | (18 | ) | ||||||||||||||||||||||
|
DEFERRED COMPENSATION OBLIGATION
|
— | — | (14 | ) | 14 | — | — | — | — | |||||||||||||||||||||||
|
BALANCE MARCH 31, 2010
|
$ | 21,166,995 | $ | 209 | $ | (2,496 | ) | $ | 2,496 | $ | 225,373 | $ | 190,064 | $ | 2,578 | $ | 418,224 | |||||||||||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements
5
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited — Dollars In Thousands)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
|
|
||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net Income
|
$ | 11,188 | $ | 9,227 | ||||
|
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
|
||||||||
|
Depreciation and Amortization
|
2,378 | 1,120 | ||||||
|
Provision for Loan Losses
|
2,200 | 4,650 | ||||||
|
Deferred Income Tax Provision
|
(11 | ) | (7 | ) | ||||
|
Net Gain on Sale of Investments
|
— | — | ||||||
|
Loss on Write-Down of Investments in Securities Available for Sale
|
40 | 178 | ||||||
|
Loss on Sale of Fixed Assets
|
— | 279 | ||||||
|
Gain on Sale of Other Real Estate Owned
|
(56 | ) | (13 | ) | ||||
|
Loss on Write-Down of Other Real Estate Owned
|
530 | — | ||||||
|
Gain Resulting from Early Termination of Hedging Relationship
|
— | — | ||||||
|
Realized Gain on Sale Leaseback Transaction
|
(258 | ) | (258 | ) | ||||
|
Stock Based Compensation
|
716 | 276 | ||||||
|
Increase in Cash Surrender Value of Bank Owned Life Insurance
|
(706 | ) | (722 | ) | ||||
|
Change in Fair Value on Loans Held for Sale
|
(639 | ) | — | |||||
|
Proceeds from Bank Owned Life Insurance
|
— | — | ||||||
|
Net Change In:
|
||||||||
|
Trading Assets
|
(924 | ) | (1,228 | ) | ||||
|
Loans Held for Sale
|
19,913 | 5,896 | ||||||
|
Other Assets
|
13,378 | 5,218 | ||||||
|
Other Liabilities
|
(8,097 | ) | 332 | |||||
|
TOTAL ADJUSTMENTS
|
28,464 | 15,721 | ||||||
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
39,652 | 24,948 | ||||||
|
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
|
||||||||
|
Proceeds from Sales of Securities Available For Sale
|
— | — | ||||||
|
Proceeds from Maturities and Principal Repayments of Securities Available For Sale
|
34,932 | 37,258 | ||||||
|
Purchase of Securities Available For Sale
|
— | — | ||||||
|
Proceeds from Maturities and Principal Repayments of Securities Held to Maturity
|
8,130 | 2,355 | ||||||
|
Purchase of Securities Held to Maturity
|
(44,931 | ) | — | |||||
|
Purchase of Federal Home Loan Bank Stock, net
|
— | — | ||||||
|
Purchase of Bank Owned Life Insurance
|
(94 | ) | (93 | ) | ||||
|
Net Increase in Loans
|
(78,228 | ) | (20,340 | ) | ||||
|
Cash Used In Business Combinations
|
(457 | ) | (269 | ) | ||||
|
Purchase of Bank Premises and Equipment
|
(1,995 | ) | (2,108 | ) | ||||
|
Proceeds from the Sale of Bank Premises and Equipment
|
— | 36 | ||||||
|
Proceeds Resulting from Early Termination of Hedging Relationship
|
— | — | ||||||
|
Proceeds from the Sale of Other Real Estate Owned and Foreclosed Assets
|
514 | 836 | ||||||
|
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
|
(82,129 | ) | 17,675 | |||||
|
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
|
||||||||
|
Net Decrease in Time Deposits
|
(18,400 | ) | (54,129 | ) | ||||
|
Net (Decrease)/Increase in Other Deposits
|
(24,457 | ) | 152,688 | |||||
|
Net Increase/(Decrease) in Federal Funds Purchased
and Assets Sold Under Repurchase Agreements
|
16,619 | (6,016 | ) | |||||
|
Net Increase/(Decrease) in Short Term Federal Home Loan Bank Advances
|
20,000 | (35,000 | ) | |||||
|
Net Decrease in Long Term Federal Home Loan Bank Advances
|
(45,000 | ) | — | |||||
|
Net (Decrease)/Increase in Treasury Tax & Loan Notes
|
(206 | ) | 721 | |||||
|
Proceeds from Exercise of Stock Options
|
3,067 | 47 | ||||||
|
Tax Benefit from Stock Option Exercises
|
231 | 27 | ||||||
|
Restricted Shares Surrendered
|
(216 | ) | (18 | ) | ||||
|
Deferred Compensation Obligation
|
74 | — | ||||||
|
Shares Issued Under Direct Stock Purchase Plan
|
3 | — | ||||||
|
Common Dividends Paid
|
(3,819 | ) | (3,793 | ) | ||||
|
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES
|
(52,104 | ) | 54,527 | |||||
|
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
|
(94,581 | ) | 97,150 | |||||
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
161,282 | 121,905 | ||||||
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 66,701 | $ | 219,055 | ||||
|
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||
|
Transfer of Loans to Foreclosed Assets
|
$ | 3,061 | $ | 2,819 | ||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial
statements.
6
Table of Contents
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding
company, incorporated in 1985. The Company is the sole stockholder of Rockland Trust Company
(“Rockland Trust” or the “Bank”), a Massachusetts trust company chartered in 1907.
In the first quarter of 2011, the Company formed Goddard Avenue Securities Corp., a
Massachusetts corporation and wholly owned subsidiary of Rockland Trust Company. This entity was
formed in order to hold investment securities for Rockland Trust Company. Subsequent to March 31,
2011, Rockland Trust established Rockland MHEF Fund LLC, a Delaware limited liability company, as a
wholly-owned subsidiary of Rockland Trust Company. Massachusetts Housing Equity Fund, Inc. is a
third party non-member manager of Rockland MHEF Fund LLC. This entity was established to
accommodate the Company’s investments in low income housing tax projects. There have been no other
changes to the entity structure of the Company subsequent to December 31, 2010.
All material intercompany balances and transactions have been eliminated in consolidation.
Certain previously reported amounts may have been reclassified to conform to the current year’s
presentation.
The accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair presentation of the
financial statements, primarily consisting of normal recurring adjustments, have been included.
Operating results for the
quarter ended March 31, 2011 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2011 or any other interim period.
For further information, refer to the consolidated financial statements and footnotes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed
with the Securities and Exchange Commission.
FASB ASC Topic No. 310, “A Creditor’s Determination of Whether a Restructuring Is a Troubled
Debt Restructuring” Update No. 2011-02.
Issued in April 2011, this update provides guidance and
clarification to help creditors in determining whether a creditor has granted a concession and
whether a debtor is experiencing financial difficulties for purposes of determining whether a
restructuring constitutes a troubled debt restructuring, in addition the previously deferred
disclosure requirements originally included in Update No. 2010-20 are
7
Table of Contents
effective upon adoption of
this standard. The amendments in this update are effective for the first interim or annual period
beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the
annual period of adoption. The Company does not anticipate the adoption of this standard to have a
material impact on the Company’s consolidated financial position.
The following table presents a summary of the cost and fair value of the Company’s investment
securities.
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 for
the periods below were as follows:
| March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||||||||||
| Gross | Unrealized | Other-Than- | Gross | Unrealized | Other-Than- | |||||||||||||||||||||||||||||||||||
| Amortized | Unrealized | Losses | Temporary | Fair | Amortized | Unrealized | Losses | Temporary | Fair | |||||||||||||||||||||||||||||||
| Cost | Gains | Other | Impairment | Value | Cost | Gains | Other | Impairment | Value | |||||||||||||||||||||||||||||||
| (Dollars In Thousands) | (Dollars In Thousands) | |||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
U.S. Treasury Securities
|
$ | 707 | $ | 2 | $ | — | $ | — | $ | 709 | $ | 715 | $ | 2 | $ | — | $ | — | $ | 717 | ||||||||||||||||||||
|
Agency Mortgage-Backed Securities
|
267,853 | 14,883 | — | — | 282,736 | 296,821 | 16,481 | — | — | 313,302 | ||||||||||||||||||||||||||||||
|
Agency Collateralized Mortgage Obligations
|
40,737 | 617 | (47 | ) | — | 41,307 | 45,426 | 779 | (70 | ) | — | 46,135 | ||||||||||||||||||||||||||||
|
Private Mortgage-Backed Securities (1) (2)
|
9,005 | — | — | 7 | 9,012 | 10,408 | — | — | (154 | ) | 10,254 | |||||||||||||||||||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks
|
5,000 | — | (538 | ) | — | 4,462 | 5,000 | — | (779 | ) | — | 4,221 | ||||||||||||||||||||||||||||
|
Pooled Trust Preferred Securities Issued by Banks and Insurers(1)
|
8,533 | — | (2,112 | ) | (3,285 | ) | 3,136 | 8,550 | — | (2,309 | ) | (3,413 | ) | 2,828 | ||||||||||||||||||||||||||
|
TOTAL
|
$ | 331,835 | $ | 15,502 | $ | (2,697 | ) | $ | (3,278 | ) | $ | 341,362 | $ | 366,920 | $ | 17,262 | $ | (3,158 | ) | $ | (3,567 | ) | $ | 377,457 | ||||||||||||||||
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 for the periods below were as follows:
| March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||||||||||
| Gross | Unrealized | Other-Than- | Gross | Unrealized | Other-Than- | |||||||||||||||||||||||||||||||||||
| Amortized | Unrealized | Losses | Temporary | Fair | Amortized | Unrealized | Losses | Temporary | Fair | |||||||||||||||||||||||||||||||
| Cost | Gains | Other | Impairment | Value | Cost | Gains | Other | Impairment | Value | |||||||||||||||||||||||||||||||
| (Dollars In Thousands) | (Dollars In Thousands) | |||||||||||||||||||||||||||||||||||||||
|
Agency Mortgage-Backed Securities
|
$ | 131,262 | $ | 1,204 | $ | (2,034 | ) | $ | — | $ | 130,432 | $ | 95,697 | $ | 1,348 | $ | (1,778 | ) | $ | — | $ | 95,267 | ||||||||||||||||||
|
Agency Collateralized Mortgage Obligations
|
86,934 | 561 | (1,337 | ) | — | 86,158 | 89,823 | 600 | (1,691 | ) | — | 88,732 | ||||||||||||||||||||||||||||
|
State, County, and Municipal Securities
|
9,454 | 137 | — | — | 9,591 | 10,562 | 167 | — | — | 10,729 | ||||||||||||||||||||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks
|
11,655 | 15 | (23 | ) | — | 11,647 | 6,650 | 19 | (163 | ) | — | 6,506 | ||||||||||||||||||||||||||||
|
TOTAL
|
$ | 239,305 | $ | 1,917 | $ | (3,394 | ) | $ | — | $ | 237,828 | $ | 202,732 | $ | 2,134 | $ | (3,632 | ) | $ | — | $ | 201,234 | ||||||||||||||||||
| (1) | During the quarter ended March 31, 2011 and the year ended December 31, 2010, the Company recorded gross changes on other-than-temporarily impaired (“OTTI”) securities of $249,000 and $497,000. Included in these amounts were losses of $289,000 and $831,000 which were reclassed to OCI as they were deemed to be non-credit related. | |
| (2) | Included in the non-credit component of OTTI for this class of securities is an unrealized gain of $89,000, which resulted from the Company having previously recognized credit losses in excess of the unrealized losses in OCI. In such instances, credit losses recognized in earnings have been offset by an unrealized gain. |
When securities are sold, the adjusted cost of the specific security sold is used to
compute the gain or loss on the sale. There were no recorded gross gains and losses on the sales
of investment securities for the periods ending March 31, 2011 and 2010.
A schedule of the contractual maturities of securities available for sale and securities held
to maturity is presented below:
8
Table of Contents
| Available for Sale | Held to Maturity | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| (Dollars in Thousands) | (Dollars in Thousands) | |||||||||||||||
|
Due in One Year or Less
|
$ | 707 | $ | 709 | $ | 1,850 | $ | 1,870 | ||||||||
|
Due from One Year to Five Years
|
20,167 | 20,799 | 10,094 | 10,169 | ||||||||||||
|
Due from Five to Ten Years
|
76,609 | 80,747 | 4,178 | 4,347 | ||||||||||||
|
Due after Ten Years
|
234,352 | 239,107 | 223,183 | 221,442 | ||||||||||||
|
TOTAL
|
$ | 331,835 | $ | 341,362 | $ | 239,305 | $ | 237,828 | ||||||||
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
March 31, 2011 and December 31, 2010, the Bank had $17.8 million and $24.3 million of callable
securities in its investment portfolio.
At March 31, 2011 and December 31, 2010 investment securities carried at $369.4 million and
$350.3 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.
At March 31, 2011 and December 31, 2010, the Company had no investments in obligations of
individual states, counties, or municipalities, which exceeded 10% of stockholders’ equity.
Other-Than-Temporary Impairment
The Company continually reviews investment securities for the existence of
other-than-temporary impairment (“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 are 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:
9
Table of Contents
| March 31, 2011 | ||||||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||||
| Description of Securities | # of holdings | Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||||
| (Dollars In Thousands) | ||||||||||||||||||||||||||||
|
Agency Mortgage-Backed Securities
|
5 | $ | 62,411 | $ | (2,034 | ) | $ | — | $ | — | $ | 62,411 | $ | (2,034 | ) | |||||||||||||
|
Agency Collateralized Mortgage Obligations
|
6 | 71,312 | (1,384 | ) | — | — | 71,312 | (1,384 | ) | |||||||||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks and Insurers
|
3 | 10,096 | (23 | ) | 4,462 | (538) | 14,558 | (561) | ||||||||||||||||||||
|
Pooled Trust Preferred Securities Issued by Banks and Insurers
|
2 | — | — | 2,552 | (2,112 | ) | 2,552 | (2,112 | ) | |||||||||||||||||||
|
TOTAL TEMPORARILY IMPAIRED SECURITIES
|
16 | $ | 143,819 | $ | (3,441 | ) | $ | 7,014 | $ | (2,650 | ) | $ | 150,833 | $ | (6,091 | ) | ||||||||||||
| December 31, 2010 | ||||||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||||
| Description of Securities | # of holdings | Value | Losses | Value | Losses | 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 | ) | ||||||||||||
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 at March 31, 2011:
| • | 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 three securities, all 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. | ||
| • | 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. |
10
Table of Contents
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 the current economic environment could lead to further
OTTI charges. The following tables summarize pertinent information that was considered by
management in determining if OTTI existed.
| Total Cumulative | ||||||||||||||||||||||||||||
| Non-Credit | Total Cumulative | Other-Than- | ||||||||||||||||||||||||||
| Related Other- | Credit Related | Temporary | ||||||||||||||||||||||||||
| Amortized | Gross Unrealized | Than-Temporary | Fair | Other-Than- | impairment | |||||||||||||||||||||||
| Class | Cost (1) | Gain/(Loss) | Impairment | Value | Temporary Impairment | to date | ||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||
|
Pooled Trust Preferred Securities
|
||||||||||||||||||||||||||||
|
Pooled Trust Preferred Security A
|
C1 | $ | 1,283 | $ | — | $ | (1,155 | ) | $ | 128 | $ | (3,676 | ) | $ | (4,831 | ) | ||||||||||||
|
Pooled Trust Preferred Security B
|
D | — | — | — | — | (3,481 | ) | (3,481 | ) | |||||||||||||||||||
|
Pooled Trust Preferred Security C
|
C1 | 505 | — | (464 | ) | 41 | (482 | ) | (946 | ) | ||||||||||||||||||
|
Pooled Trust Preferred Security D
|
D | — | — | — | — | (990 | ) | (990 | ) | |||||||||||||||||||
|
Pooled Trust Preferred Security E
|
C1 | 2,081 | — | (1,666 | ) | 415 | (1,367 | ) | (3,033 | ) | ||||||||||||||||||
|
Pooled Trust Preferred Security F
|
B | 1,890 | (1,210 | ) | — | 680 | — | — | ||||||||||||||||||||
|
Pooled Trust Preferred Security G
|
A1 | 2,774 | (902 | ) | — | 1,872 | — | — | ||||||||||||||||||||
|
TOTAL POOLED TRUST PREFERRED SECURITIES
|
$ | 8,533 | $ | (2,112 | ) | $ | (3,285 | ) | $ | 3,136 | $ | (9,996 | ) | $ | (13,281 | ) | ||||||||||||
|
|
||||||||||||||||||||||||||||
|
Private Mortgage-Backed Securities
|
||||||||||||||||||||||||||||
|
Private Mortgage-Backed Securities — One
|
2A1 | $ | 4,072 | $ | — | $ | (82 | ) | $ | 3,990 | $ | (487 | ) | $ | (569 | ) | ||||||||||||
|
Private Mortgage-Backed Securities — Two
|
A19 | 4,933 | — | 89 | 5,022 | (85 | ) | 4 | ||||||||||||||||||||
|
TOTAL PRIVATE MORTGAGE-BACKED SECURITIES
|
$ | 9,005 | $ | — | $ | 7 | $ | 9,012 | $ | (572 | ) | $ | (565 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
TOTAL
|
$ | 17,538 | $ | (2,112 | ) | $ | (3,278 | ) | $ | 12,148 | $ | (10,568 | ) | $ | (13,846 | ) | ||||||||||||
| (1) | For the securities deemed impaired, the amortized cost reflects previously recorded OTTI charges recognized in earnings. |
| Number of Performing | Total Projected | Excess Subordination (After | ||||||||||||||||||||||
| Banks and Insurance | Current | Defaults/Losses (as a | Taking into Account Best | |||||||||||||||||||||
| Cos. in Issuances | Deferrals/Defaults/Losses | % of Performing | Estimate of Future | Lowest credit | ||||||||||||||||||||
| Class | (Unique) | (As a % of Original Collateral) | Collateral) | Deferrals/Defaults/Losses) (1) | Ratings to date (2) | |||||||||||||||||||
|
Pooled Trust Preferred Securities
|
||||||||||||||||||||||||
|
Trust Preferred Security A
|
C1 | 58 | 38.24 | % | 27.24 | % | 0.00 | % | C | |||||||||||||||
|
Trust Preferred Security B
|
D | 58 | 38.24 | % | 27.24 | % | 0.00 | % | C | |||||||||||||||
|
Trust Preferred Security C
|
C1 | 48 | 37.22 | % | 25.63 | % | 0.00 | % | C | |||||||||||||||
|
Trust Preferred Security D
|
D | 48 | 37.22 | % | 25.63 | % | 0.00 | % | C | |||||||||||||||
|
Trust Preferred Security E
|
C1 | 50 | 29.56 | % | 20.65 | % | 0.00 | % | C | |||||||||||||||
|
Trust Preferred Security F
|
B | 34 | 27.07 | % | 23.50 | % | 23.24 | % | CC | |||||||||||||||
|
Trust Preferred Security G
|
A1 | 34 | 27.07 | % | 23.50 | % | 46.61 | % | CCC+ | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Private Mortgage-Backed Securities
|
||||||||||||||||||||||||
|
Private Mortgage-Backed Securities — One
|
2A1 | N/A | 0.00 | % | 9.76 | % | 0.00 | % | C | |||||||||||||||
|
Private Mortgage-Backed Securities — Two
|
A19 | N/A | 1.83 | % | 5.18 | % | 0.00 | % | B3 | |||||||||||||||
| (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. | |
| (2) | The Company reviewed credit ratings provided by S&P, Moody’s and Fitch in its evaluation of issuers |
Per review of the factors outlined above, 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 credit related OTTI of $40,000 and $178,000 through earnings for the
quarters ended March 31, 2011 and 2010, respectively. The following table shows the cumulative
credit related component of OTTI.
11
Table of Contents
| For the Three Months Ended March 31, 2011 | ||||
| Credit Related | ||||
| Component of | ||||
| Other-Than- | ||||
| Temporary | ||||
| Impairment | ||||
| (Dollars in Thousands) | ||||
|
Balance at Beginning of Period
|
$ | (10,528 | ) | |
|
Add:
|
||||
|
Incurred on Securities not Previously Impaired
|
— | |||
|
Incurred on Securities Previously Impaired
|
(40 | ) | ||
|
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 END OF PERIOD
|
$ | (10,568 | ) | |
12
Table of Contents
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 March 31, 2011 | ||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||
| Commercial and | Commercial Real | Commercial | Small | Residential Real | Consumer | Consumer | ||||||||||||||||||||||||||
| Industrial | Estate | Construction | Business | Estate | Home Equity | Other | Total | |||||||||||||||||||||||||
|
Allowance for Loan Losses:
|
||||||||||||||||||||||||||||||||
|
Beginning Balance
|
$ | 10,423 | $ | 21,939 | $ | 2,145 | $ | 3,740 | $ | 2,915 | $ | 3,369 | $ | 1,724 | $ | 46,255 | ||||||||||||||||
|
Charge-offs
|
888 | 652 | — | 266 | 122 | 78 | 478 | 2,484 | ||||||||||||||||||||||||
|
Recoveries
|
202 | — | 50 | 28 | — | 4 | 189 | 473 | ||||||||||||||||||||||||
|
Provision
|
1,106 | 1,066 | (202 | ) | (115 | ) | 63 | 100 | 182 | 2,200 | ||||||||||||||||||||||
|
Ending Balance
|
$ | 10,843 | $ | 22,353 | $ | 1,993 | $ | 3,387 | $ | 2,856 | $ | 3,395 | $ | 1,617 | $ | 46,444 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Ending Balance: individually
evaluated for
impairment
|
$ | 757 | $ | 105 | $ | — | $ | 105 | $ | 916 | $ | 18 | $ | 252 | $ | 2,153 | ||||||||||||||||
|
Ending Balance: collectively
evaluated for
impairment
|
$ | 10,086 | $ | 22,248 | $ | 1,993 | $ | 3,282 | $ | 1,940 | $ | 3,377 | $ | 1,365 | $ | 44,291 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Financing Receivables:
|
||||||||||||||||||||||||||||||||
|
Ending Balance: total
loans by group
|
$ | 508,839 | $ | 1,770,324 | $ | 123,428 | $ | 80,817 | $ | 465,366 | $ | 619,727 | $ | 59,873 | $ | 3,628,374 | (1) | |||||||||||||||
|
Ending Balance: individually
evaluated for
impairment
|
$ | 3,439 | $ | 26,412 | $ | 1,336 | $ | 2,446 | $ | 10,091 | $ | 425 | $ | 2,113 | $ | 46,262 | ||||||||||||||||
|
Ending Balance: collectively
evaluated for
impairment
|
$ | 505,400 | $ | 1,743,912 | $ | 122,092 | $ | 78,371 | $ | 455,275 | $ | 619,302 | $ | 57,760 | $ | 3,582,112 | ||||||||||||||||
| As of December 31, 2010 | ||||||||||||||||||||||||||||||||
| Commercial | Commercial Real | Commercial | Small | Residential Real | Consumer | Consumer | ||||||||||||||||||||||||||
| and Industrial | Estate | Construction | Business | Estate | Home Equity | Other | Total | |||||||||||||||||||||||||
|
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 | ||||||||||||||||
| (1) | The amount of deferred fees included in the ending balance was $2.8 million at both March 31, 2011 and December 31, 2010, respectively. |
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 Portfolio:
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.
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
13
Table of Contents
sources consist of: primarily, cash flow from operating leases and rents, and
secondarily, liquidation of assets.
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 homes, 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.
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.
For the commercial portfolio it is the Bank’s policy is to obtain personal guaranties for
payment from individuals holding material ownership interests of the borrowing entities.
Consumer Real Estate Portfolio:
Real Estate — Residential
— Residential mortgage loans held in the Bank’s
portfolio are made to borrowers who demonstrate the ability to make scheduled payments with
full consideration to underwriting factors such as current and expected income, employment
status, current assets, other financial resources, credit history and the value of the
collateral. Collateral consists of mortgage liens on 1-4 family residential properties.
The Company does not originate 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 Portfolio:
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.
14
Table of Contents
Credit Quality
The Company continually monitors the asset quality of the loan portfolio using all available
information. Based on this information, loans demonstrating certain payment issues or other
weaknesses may be categorized as delinquent, impaired, nonperforming and/or put on nonaccrual
status. Additionally, in the course of resolving such loans, the Company may choose to
restructure the contractual terms of certain loans to match the borrower’s ability to repay the
loan based on their current financial condition. If a restructured loan meets certain criteria, it
may be categorized as a troubled debt restructuring (“TDR”). The Company reviews numerous credit
quality indicators when assessing the risk in its loan portfolio.
For the commercial 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 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.
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
15
Table of Contents
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:
16
Table of Contents
| March 31, 2011 | ||||||||||||||||||||||||
| Risk | Commercial | Commercial | Commercial | |||||||||||||||||||||
| Category | Rating | and Industrial | Real Estate | Construction | Small Business | Total | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Pass
|
1 — 6 | $ | 448,098 | $ | 1,557,074 | $ | 105,373 | $ | 72,086 | $ | 2,182,631 | |||||||||||||
|
Potential Weakness
|
7 | 33,693 | 98,572 | 6,642 | 5,125 | 144,032 | ||||||||||||||||||
|
Definite Weakness — Loss Unlikely
|
8 | 25,680 | 112,447 | 11,413 | 3,459 | 152,999 | ||||||||||||||||||
|
Partial Loss Probable
|
9 | 1,368 | 2,231 | — | 147 | 3,746 | ||||||||||||||||||
|
Definitive Loss
|
10 | — | — | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 508,839 | $ | 1,770,324 | $ | 123,428 | $ | 80,817 | $ | 2,483,408 | ||||||||||||||
|
|
||||||||||||||||||||||||
| December 31, 2010 | ||||||||||||||||||||||||
| Risk | Commercial | Commercial | Commercial | |||||||||||||||||||||
| Category | Rating | and Industrial | Real Estate | Construction | Small Business | Total | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Pass
|
1 — 6 | $ | 445,116 | $ | 1,496,822 | $ | 110,549 | $ | 70,987 | $ | 2,123,474 | |||||||||||||
|
Potential Weakness
|
7 | 30,250 | 99,400 | 6,311 | 5,252 | 141,213 | ||||||||||||||||||
|
Definite Weakness — Loss Unlikely
|
8 | 25,864 | 117,850 | 12,561 | 3,533 | 159,808 | ||||||||||||||||||
|
Partial Loss Probable
|
9 | 1,722 | 3,046 | — | 254 | 5,022 | ||||||||||||||||||
|
Definitive Loss
|
10 | — | — | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 502,952 | $ | 1,717,118 | $ | 129,421 | $ | 80,026 | $ | 2,429,517 | ||||||||||||||
|
|
||||||||||||||||||||||||
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 Fair Isaac
Corporation (“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. The
following table shows the weighted average FICO scores and the weighted average combined LTV ratio
for the periods indicated below:
| As of | ||||||||
| March 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
|
Residential Portfolio
|
||||||||
|
FICO Score (re-scored)
|
736 | 738 | ||||||
|
Combined LTV (re-valued)
|
65.0 | % | 64.0 | % | ||||
|
|
||||||||
|
Home Equity Portfolio
|
||||||||
|
FICO Score (re-scored)
|
761 | 760 | ||||||
|
Combined LTV (re-valued)
|
55.0 | % | 55.0 | % | ||||
The average FICO scores above for 2011 are based upon rescores available at March 31,
2011. 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
17
Table of Contents
31, 2010. The LTV ratios for
both periods are based on updated automated valuations as of November 30, 2010.
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:
| March 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
| (Dollars In Thousands) | ||||||||
|
|
||||||||
|
Loans accounted for on a
nonaccrual basis (1)
|
||||||||
|
Commercial and Industrial
|
$ | 3,011 | $ | 3,123 | ||||
|
Commercial Real Estate
|
7,893 | 7,837 | ||||||
|
Commercial Construction
|
1,336 | 1,999 | ||||||
|
Small Business
|
617 | 887 | ||||||
|
Residential Real Estate
|
7,299 | 6,728 | ||||||
|
Home Equity
|
2,589 | 1,752 | ||||||
|
Consumer — Other
|
426 | 505 | ||||||
|
|
||||||||
|
Total nonaccrual loans
|
$ | 23,171 | $ | 22,831 | ||||
|
|
||||||||
| (1) | Included in these amounts were $4.5 million and $4.0 million nonaccruing TDRs at March 31, 2011 and December 31, 2010, respectively. |
The following table shows the age analysis of past due financing receivables as of the dates
indicated:
18
Table of Contents
| March 31, 2011 | ||||||||||||||||||||||||||||||||||||||||||||
| 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
|
29 | $ | 1,759 | 11 | $ | 1,036 | 16 | $ | 2,119 | 56 | $ | 4,914 | $ | 503,925 | $ | 508,839 | $ | — | ||||||||||||||||||||||||||
|
Commercial Real
Estate
|
18 | 3,974 | 8 | 4,901 | 27 | 6,378 | 53 | 15,253 | 1,755,071 | 1,770,324 | — | |||||||||||||||||||||||||||||||||
|
Commercial
Construction
|
1 | 400 | — | — | 5 | 1,336 | 6 | 1,736 | 121,692 | 123,428 | — | |||||||||||||||||||||||||||||||||
|
Small Business
|
53 | 732 | 12 | 612 | 16 | 99 | 81 | 1,443 | 79,374 | 80,817 | — | |||||||||||||||||||||||||||||||||
|
Residential Real
Estate
|
15 | 3,664 | 11 | 3,549 | 25 | 5,181 | 51 | 12,394 | 449,716 | 462,110 | — | |||||||||||||||||||||||||||||||||
|
Residential
Construction
|
— | — | — | — | — | — | — | — | 3,256 | 3,256 | — | |||||||||||||||||||||||||||||||||
|
Home Equity
|
26 | 1,326 | 10 | 1,063 | 21 | 1,699 | 57 | 4,088 | 615,639 | 619,727 | — | |||||||||||||||||||||||||||||||||
|
Consumer — Other
|
289 | 2,353 | 69 | 387 | 85 | 576 | 443 | 3,316 | 56,557 | 59,873 | 226 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
431 | $ | 14,208 | 121 | $ | 11,548 | 195 | $ | 17,388 | 747 | $ | 43,144 | $ | 3,585,230 | $ | 3,628,374 | $ | 226 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
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:
19
Table of Contents
| March 31, 2011 | ||||||||||||||||||||||||
| 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 | $ | 121 | 2 | $ | 859 | 12 | $ | 980 | |||||||||||||||
|
Commercial Real Estate
|
17 | 14,810 | 3 | 1,216 | 20 | 16,026 | ||||||||||||||||||
|
Small Business
|
56 | 1,761 | 2 | 39 | 58 | 1,800 | ||||||||||||||||||
|
Residential Real Estate
|
26 | 8,008 | 7 | 2,082 | 33 | 10,090 | ||||||||||||||||||
|
Home Equity
|
4 | 241 | 2 | 184 | 6 | 425 | ||||||||||||||||||
|
Consumer — Other
|
163 | 2,009 | 4 | 104 | 167 | 2,113 | ||||||||||||||||||
|
TOTAL TDRs
|
276 | $ | 26,950 | 20 | $ | 4,484 | 296 | $ | 31,434 | |||||||||||||||
| 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 | |||||||||||||||
The amount of the specific reserve associated with the TDRs was $1.3 million and $1.6
million at March 31, 2011 and December 31, 2010, respectively. At March 31, 2011 and December 31,
2010, the amount of additional commitments to lend funds to borrowers who have been a party to a
TDR was $710,000 and $1.2 million, respectively. During the quarter ended March 31, 2011, $2.0
million of loans were modified and considered to be a TDR and no TDRs moved from nonaccrual to
accrual. During the year ended December 31, 2010, $21.8 million loans were modified and considered
to be a 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:
20
Table of Contents
| Three Months Ended March 31, | ||||||||||||||||||||
| 2011 | ||||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
|
With no Related Allowance Recorded:
|
||||||||||||||||||||
|
Commercial & Industrial
|
$ | 1,876 | $ | 2,357 | $ | — | $ | 2,485 | $ | 38 | ||||||||||
|
Commercial Real Estate
|
23,484 | 23,887 | — | 23,534 | 395 | |||||||||||||||
|
Commercial Construction
|
1,336 | 1,336 | — | 1,344 | 19 | |||||||||||||||
|
Small Business
|
1,309 | 1,421 | — | 1,766 | 28 | |||||||||||||||
|
Residential Real Estate (1)
|
204 | 205 | — | 205 | — | |||||||||||||||
|
Consumer — Home Equity
|
— | — | — | — | — | |||||||||||||||
|
Consumer — Other
|
9 | 9 | — | 9 | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Subtotal
|
28,218 | 29,215 | — | 29,343 | 480 | |||||||||||||||
|
With an Allowance Recorded:
|
||||||||||||||||||||
|
Commercial & Industrial
|
$ | 1,563 | $ | 1,564 | $ | 757 | $ | 2,233 | $ | 24 | ||||||||||
|
Commercial Real Estate
|
2,929 | 3,452 | 105 | 2,935 | 42 | |||||||||||||||
|
Commercial Construction
|
— | — | — | — | — | |||||||||||||||
|
Small Business
|
1,137 | 1,151 | 105 | 1,251 | 16 | |||||||||||||||
|
Residential Real Estate (1)
|
9,886 | 10,285 | 916 | 9,899 | 92 | |||||||||||||||
|
Consumer — Home Equity
|
425 | 433 | 18 | 426 | 6 | |||||||||||||||
|
Consumer — Other
|
2,104 | 2,157 | 252 | 2,036 | 20 | |||||||||||||||
|
|
||||||||||||||||||||
|
Subtotal
|
18,044 | 19,042 | 2,153 | 18,780 | 200 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 46,262 | $ | 48,257 | $ | 2,153 | $ | 48,123 | $ | 680 | ||||||||||
| 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 | ||||||||||
| (1) | Includes residential construction loans. |
21
Table of Contents
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.
Earnings per share consisted of the following components for the periods indicated:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in Thousands) | ||||||||
|
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS
|
$ | 11,188 | $ | 9,227 | ||||
| Weighted Average Shares | ||||||||
|
BASIC SHARES
|
21,298,257 | 20,937,589 | (1) | |||||
|
Effect of Dilutive
Securities
|
46,082 | 70,833 | ||||||
|
DILUTIVE SHARES
|
21,344,339 | 21,008,422 | ||||||
|
|
||||||||
|
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS PER
SHARE
|
||||||||
|
BASIC EPS
|
$ | 0.53 | $ | 0.44 | ||||
|
Effect of Dilutive Securities
|
0.01 | — | ||||||
|
DILUTIVE EPS
|
$ | 0.52 | $ | 0.44 | ||||
| (1) | Unvested restricted stock awards were not considered outstanding in the computation of basic earning per share due to the immaterial balance for the three months ended March 31, 2010. |
The following table illustrates the options to purchase common stock and shares of
restricted stock that were excluded from the calculation of diluted earnings per share because they
were anti-dilutive:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
|
Stock Options
|
787,163 | 792,847 | ||||||
|
Restricted Stock Awards
|
— | 21,194 | ||||||
22
Table of Contents
On February 10, 2011, the Company granted 27,750 restricted stock awards to certain
non-executive officers of the Company and/or Bank. On February 17, 2011, the Company granted 33,000
restricted stock awards to certain executive officers of the Company and/or Bank. These restricted
stock awards were issued from the 2005 Employee Stock Plan and were determined to have a fair value
per share of $27.58 and $27.43, respectively, based upon 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 five year period.
On February 10, 2011, the Company awarded non-qualified options to purchase 40,000 shares of
common stock to certain non-executive officers of the Company and/or Bank. On February 17, 2011 the
Company awarded non-qualified options to purchase 54,000 shares of common stock to certain
executive officers of the Company and/or Bank. The options have been determined to have a fair
value of $6.80 and $6.39 and will vest over a three year period and have a contractual life of ten
years from date of grant. The following table shows the assumptions used to determine the fair
value of the options:
| February 10, | February 17, | |||||||
| 2011 | 2011 | |||||||
|
Volatility
|
32.38 | % | 32.11 | % | ||||
|
Expected Life
|
5.5 Years | 5 Years | ||||||
|
Dividend Yield
|
2.90 | % | 2.89 | % | ||||
|
Risk Free Interest Rate
|
2.57 | % | 2.27 | % | ||||
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 qualifies as a hedge for accounting purposes, and further, by the type of hedging
relationship. 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 afforded hedge accounting treatment.
23
Table of Contents
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 seven years. At March 31, 2011 and
December 31, 2010, the Company had a total notional amount of $175.0 million of interest rate
swaps.
The following table reflects the Company’s derivative positions for the periods indicated
below for those derivatives which qualify as hedges for accounting purposes:
Derivative Positions
Derivatives Designated as Hedging:
Cash Flow Hedges
As of March 31, 2011
| Receive | Fair Value at | |||||||||||||||||||||||||||||||
| Notional | Trade | Effective | Maturity | (Variable) | Current Rate | Pay Fixed | March 31, | |||||||||||||||||||||||||
| Amount | Date | Date | Date | Index | Received | Swap Rate | 2011 | |||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||
|
Interest Rate Swaps
|
||||||||||||||||||||||||||||||||
|
|
$ | 25,000 | 16-Feb-06 | 28-Dec-06 | 28-Dec-16 | 3 Month LIBOR | 0.31 | % | 5.04 | % | $ | (3,309 | ) | |||||||||||||||||||
|
|
25,000 | 16-Feb-06 | 28-Dec-06 | 28-Dec-16 | 3 Month LIBOR | 0.31 | % | 5.04 | % | (3,311 | ) | |||||||||||||||||||||
|
|
25,000 | 8-Dec-08 | 10-Dec-08 | 10-Dec-13 | 3 Month LIBOR | 0.31 | % | 2.65 | % | (875 | ) | |||||||||||||||||||||
|
|
25,000 | 9-Dec-08 | 10-Dec-08 | 10-Dec-13 | 3 Month LIBOR | 0.31 | % | 2.59 | % | (837 | ) | |||||||||||||||||||||
|
|
25,000 | 9-Dec-08 | 10-Dec-08 | 10-Dec-18 | 3 Month LIBOR | 0.31 | % | 2.94 | % | 210 | ||||||||||||||||||||||
|
|
50,000 | 17-Nov-09 | 20-Dec-10 | 20-Dec-14 | 3 Month LIBOR | 0.31 | % | 3.04 | % | (2,182 | ) | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 175,000 | Total | $ | (10,304 | ) | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
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 | ) | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
For derivative instruments that are designated and qualify as hedging instruments, the
effective portion of the gains or losses is reported as a component of OCI, and is 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 March 31, 2011.
The ineffective portion of the cash flow hedge is recognized directly in earnings. The Company did
not recognize any ineffectiveness for the quarter ending March 31, 2011, and recognized an
immaterial amount related to hedge ineffectiveness during the quarter ending March 31, 2010.
24
Table of Contents
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 within 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 hedged
forecasted transaction no longer being probable to occur. The Company terminated the swap in June
2010 as a result of management’s decision to pay down the underlying borrowing and recognized
$792,000 in earnings through the date of termination.
The Company recognized net amortization income of $61,000 and $37,000, recorded as an offset
to interest expense during the quarters ended March 31, 2011 and 2010, 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 do not quality as hedges for accounting purposes.
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. At March 31, 2011 and December 31, 2010 the Company had eighty-four and
seventy-two customer-related positions and offsetting dealer transactions with dealer banks,
respectively. At March 31, 2011 and December 31, 2010 the Bank had a total notional amount of
$338.8 million and $307.0 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 do not qualify as hedges for accounting purposes. 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
March 31, 2011 and December 31, 2010 the Company had eleven and eighteen foreign exchange contracts
and offsetting dealer transactions, respectively. As of March 31, 2011 and December 31, 2010 the
Company had a total notional amount of $23.0 million and $41.7 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:
25
Table of Contents
Derivative Positions
Derivatives Not Designated as Hedging:
| Notional Amount Maturing | ||||||||||||||||||||||||||||
| As of March 31, 2011 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Fair Value | |||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||
|
Customer Related Positions
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Loan Level Swaps
|
||||||||||||||||||||||||||||
|
Receive fixed, pay variable
|
$ | — | — | 21,018 | 82,352 | 235,466 | $ | 338,836 | $ | 5,321 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Pay fixed, receive variable
|
$ | — | — | 21,018 | 82,352 | 235,466 | $ | 338,836 | $ | (5,464 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Foreign Exchange Contracts
|
||||||||||||||||||||||||||||
|
Buys foreign exchange, sells US currency
|
$ | 22,974 | — | — | — | — | $ | 22,974 | $ | 1,933 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Buys US currency, sells foreign exchange
|
$ | 22,974 | — | — | — | — | $ | 22,974 | $ | (1,916 | ) | |||||||||||||||||
| Notional Amount Maturing | |||||||||||||||||||||||||||||
| As of December 31, 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Fair Value | ||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||
|
Customer Related Positions
|
|||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Loan Level Swaps
|
|||||||||||||||||||||||||||||
|
Receive fixed, pay variable
|
$ | — | — | 21,624 | 83,051 | 202,275 | $ | 306,950 | $ | 7,673 | |||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Pay fixed, receive variable
|
$ | — | — | 21,624 | 83,051 | 202,275 | $ | 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 | ) | ||||||||||||||||||
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 increase in fair
value of $22,000 for the quarter ended March 31, 2011 and a net decrease in fair value of $60,000
for the quarter ended March 31, 2010.
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 | |||||||||||||||||||||||||||||||
| March 31, | December 31, | March 31, | December 31, | |||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
| Balance Sheet | Balance Sheet | Balance Sheet | Balance Sheet | |||||||||||||||||||||||||||||
| Location | Fair Value | Location | Fair Value | Location | Fair Value | Location | Fair Value | |||||||||||||||||||||||||
| (Dollars In Thousands) | ||||||||||||||||||||||||||||||||
|
Derivatives designated as hedges:
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
Other Assets | $ | 210 | Other Assets | $ | — | Other Liabilities | $ | 10,514 | Other Liabilities | $ | 12,206 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Derivatives not designated as hedges:
|
||||||||||||||||||||||||||||||||
|
Customer Related Positions:
|
||||||||||||||||||||||||||||||||
|
Loan level swaps
|
Other Assets | $ | 9,032 | Other Assets | $ | 9,813 | Other Liabilities | $ | 9,175 | Other Liabilities | $ | 9,975 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Foreign exchange contracts
|
Other Assets | 1,946 | Other Assets | 1,655 | Other Liabilities | 1,929 | Other Liabilities | 1,640 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 10,978 | $ | 11,468 | $ | 11,104 | $ | 11,615 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
The table below presents the effect of the Company’s derivative financial instruments
included in Other Comprehensive Income and current earnings:
26
Table of Contents
Amount
of Derivative Gain/(Loss) Recognized/Reclassified
(Dollars in Thousands)
(Dollars in Thousands)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
|
|
||||||||
|
Gain/(Loss) in OCI
on Derivative
(Effective
Portion), Net of
Tax
|
$ | 304 | $ | (2,229 | ) | |||
|
|
||||||||
|
Gain/(Loss)
Reclassified from
OCI into Interest
Income (Effective
Portion)
|
$ | (1,326 | ) | $ | (1,068 | ) | ||
|
|
||||||||
|
Gain/(Loss)
Recognized in
Interest Income on
Derivative
(Ineffective
Portion & Amount
Excluded from
Effectiveness
Testing)
|
$ | — | $ | — | ||||
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’s exposure relating to interest rate swaps with institutional
counterparties was $210,000 at March 31, 2011 and the Company had no exposure at December 31, 2010.
The Company’s exposure relating to customer related positions was approximately $9.5 million and
$10.2 million at March 31, 2011 and December 31, 2010, respectively. 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, which require the Company to assign collateral. The
notional amount of these instruments as of March 31, 2011 and December 31, 2010 was $513.8 million
and $482.0 million, respectively. The aggregate fair value of these instruments at March 31, 2011
and December 31, 2010 were $15.8 million and $20.0 million, respectively. The Company has
collateral assigned to these derivative instruments amounting to $18.6 million and $30.8 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
March 31, 2011 it was determined that no additional collateral would have to be posted to
immediately settle these instruments.
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 residential 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 intended for sale. Prior to closing and
funding certain single-family residential mortgage loans, an interest rate lock
27
Table of Contents
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 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 | ||||||||
| March 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
| (Dollars in Thousands) | ||||||||
|
Interest Rate Lock Commitments
|
$ | (23 | ) | $ | (459 | ) | ||
|
Forward Sales Agreements
|
$ | (22 | ) | $ | 1,052 | |||
|
Loans Held for Sale Fair Value Adjustment
|
$ | 46 | $ | (593 | ) | |||
| Change for the Three Months | ||||||||
| Ended March 31, | ||||||||
| 2011 | 2010 | |||||||
|
Interest Rate Lock Commitments
|
$ | 436 | $ | 587 | ||||
|
Forward Sales Agreements
|
(1,075 | ) | (722 | ) | ||||
|
Loans Held for Sale Fair Value Adjustment
|
639 | — | ||||||
|
|
||||||||
|
Total Change in Fair Value (1)
|
$ | — | $ | (135 | ) | |||
|
|
||||||||
| (1) | Changes in these fair values are recorded as a component of Mortgage Banking Income. |
28
Table of Contents
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 in 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 Technique
s
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.
29
Table of Contents
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.
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.
Single and Pooled Issuer Trust Preferred Securities
The fair value of trust preferred securities, including pooled and single issuer 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.
Loans Held for Sale
The Company measures loans held for sale pursuant to the fair value option. The fair value of
loans held for sale 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.
Derivative Instruments
Derivatives
The valuation of these instruments is determined using widely accepted valuation techniques
including discounted cash flow analyses on the expected cash flows of derivatives. These
analyses reflect the contractual terms of the derivatives, including the period to
maturity, and use 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 March 31, 2011, 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
30
Table of Contents
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.
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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at the periods indicated
were as follows:
31
Table of Contents
| 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) | ||||||||||||||||
|
March 31, 2011
|
||||||||||||||||
|
Description
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Trading Securities
|
$ | 8,521 | $ | 8,521 | $ | — | $ | — | ||||||||
|
Securities Available for Sale:
|
||||||||||||||||
|
U.S. Treasury Securities
|
709 | — | 709 | — | ||||||||||||
|
Agency Mortgage-Backed Securities
|
282,736 | — | 282,736 | — | ||||||||||||
|
Agency Collateralized Mortgage Obligations
|
41,307 | — | 41,307 | — | ||||||||||||
|
Private Mortgage-Backed Securities
|
9,012 | — | — | 9,012 | ||||||||||||
|
Single Issuer Trust Preferred Securities Issued by Banks and Insurers
|
4,462 | — | — | 4,462 | ||||||||||||
|
Pooled Trust Preferred Securities Issued by Banks and Insurers
|
3,136 | — | — | 3,136 | ||||||||||||
|
Loans Held for Sale
|
8,643 | — | 8,643 | — | ||||||||||||
|
Derivative Instruments
|
11,188 | — | 11,188 | — | ||||||||||||
|
Liabilities
|
||||||||||||||||
|
Derivative Instruments
|
21,663 | — | 21,663 | — | ||||||||||||
|
|
||||||||||||||||
|
December 31, 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 | ||||||||||||
|
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 | — | ||||||||||||
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.
32
Table of Contents
| Reconciliation for All Assets and Liabilities Measured at Fair Value on | ||||||||||||||||
| 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) | ||||||||||||||||
|
|
||||||||||||||||
|
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 | ||||||||
|
Gains and Losses (realized/unrealized)
|
||||||||||||||||
|
Included in earnings
|
(8 | ) | — | (32 | ) | (40 | ) | |||||||||
|
Included in Other Comprehensive Income
|
325 | 241 | 160 | 726 | ||||||||||||
|
Purchases
|
— | — | — | — | ||||||||||||
|
Issuances
|
— | — | — | — | ||||||||||||
|
Settlements
|
(9 | ) | — | (1,370 | ) | (1,379 | ) | |||||||||
|
Transfers in to Level 3
|
— | — | — | — | ||||||||||||
|
Balance at March 31, 2011
|
$ | 3,136 | $ | 4,462 | $ | 9,012 | $ | 16,610 | ||||||||
Assets and liabilities measured at fair value on a non-recurring basis at the periods
indicated 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) | ||||||||||||||||||||
|
As of March 31, 2011
|
||||||||||||||||||||
|
Description
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Impaired Loans
|
$ | 18,044 | $ | — | $ | — | $ | 18,044 | $ | (2,153 | ) | |||||||||
|
Other Real Estate Owned
|
9,346 | — | 4,117 | 5,229 | — | |||||||||||||||
|
Mortgage Servicing Asset
|
1,564 | — | — | 1,564 | — | |||||||||||||||
|
|
||||||||||||||||||||
|
As of December 31, 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 | — | |||||||||||||||
The estimated fair values and related carrying amounts of the Company’s financial
instruments are as follows:
33
Table of Contents
| March 31, | December 31, | |||||||||||||||
| 2011 | 2010 | |||||||||||||||
| BOOK | FAIR | BOOK | FAIR | |||||||||||||
| VALUE | VALUE | VALUE | VALUE | |||||||||||||
| (Dollars In Thousands) | (Dollars In Thousands) | |||||||||||||||
|
FINANCIAL ASSETS
|
||||||||||||||||
|
Securities Held To Maturity (a)
|
$ | 239,305 | $ | 237,828 | $ | 202,732 | $ | 201,234 | ||||||||
|
Loans, Net of Allowance for Loan Losses (b)
|
3,581,930 | 3,557,415 | 3,509,424 | 3,554,761 | ||||||||||||
|
|
||||||||||||||||
|
FINANCIAL LIABILITIES
|
||||||||||||||||
|
Time Certificates of Deposits ( c)
|
$ | 674,776 | $ | 677,557 | $ | 693,176 | $ | 697,064 | ||||||||
|
Federal Home Loan Bank Advances ( c)
|
277,285 | 268,299 | 302,414 | 297,740 | ||||||||||||
|
Federal Funds Purchased and Assets
|
||||||||||||||||
|
Sold Under Repurchase Agreements ( c)
|
184,738 | 187,921 | 168,119 | 171,702 | ||||||||||||
|
Junior Subordinated Debentures (d)
|
61,857 | 60,465 | 61,857 | 60,796 | ||||||||||||
|
Subordinated Debentures ( c)
|
30,000 | 23,177 | 30,000 | 23,655 | ||||||||||||
| (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, money market deposits, and federal funds
purchased, and assets sold under repurchase agreements. The estimated fair 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.
34
Table of Contents
Information on the Company’s comprehensive income/(loss), presented net of taxes, is set forth
below for the three months ended March 31, 2011 and 2010:
| Pre Tax | Tax Expense | After Tax | ||||||||||
| Three Months Ended March 31, 2011 (Dollars in Thousands) | Amount | (Benefit) | Amount | |||||||||
|
|
||||||||||||
|
Change in Fair Value of Securities Available for Sale
|
$ | 1,051 | $ | (387 | ) | $ | (664 | ) | ||||
|
Net Security Losses Reclassified into Earnings
|
(40 | )(1) | 16 | 24 | ||||||||
|
|
||||||||||||
|
Net Change in Fair Value of Securities Available for Sale
|
1,011 | (371 | ) | (640 | ) | |||||||
|
|
||||||||||||
|
Change in Fair Value of Cash Flow Hedges
|
(514 | )(2) | 210 | 304 | ||||||||
|
Net Cash Flow Hedge Gains Reclassified into Earnings
|
(1,232 | ) | 542 | 690 | ||||||||
|
|
||||||||||||
|
Net Change in Fair Value of Cash Flow Hedges
|
(1,746 | ) | 752 | 994 | ||||||||
|
|
||||||||||||
|
Amortization of Certain Costs Included in Net Periodic
Retirement Costs
|
(187 | ) | 26 | 161 | ||||||||
|
Total Other Comprehensive Income
|
$ | (922 | ) | $ | 407 | $ | 515 | |||||
| Pre Tax | Tax Expense | After Tax | ||||||||||
| Three Months Ended March 31, 2010 (Dollars in Thousands) | Amount | (Benefit) | Amount | |||||||||
|
|
||||||||||||
|
Change in Fair Value of Securities Available for Sale
|
$ | (2,322 | ) | $ | 904 | $ | 1,418 | |||||
|
Net Security Losses Reclassified into Earnings
|
(178 | )(1) | 73 | 105 | ||||||||
|
|
||||||||||||
|
Net Change in Fair Value of Securities Available for Sale
|
(2,500 | ) | 977 | 1,523 | ||||||||
|
|
||||||||||||
|
Change in Fair Value of Cash Flow Hedges
|
3,768 | (2) | (1,539 | ) | (2,229 | ) | ||||||
|
Net Cash Flow Hedge Gains Reclassified into Earnings
|
(877 | ) | 369 | 508 | ||||||||
|
|
||||||||||||
|
Net Change in Fair Value of Cash Flow Hedges
|
2,891 | (1,170 | ) | (1,721 | ) | |||||||
|
|
||||||||||||
|
Amortization of Certain Costs Included in Net Periodic
Retirement Costs
|
(39 | ) | 16 | 23 | ||||||||
|
Total Other Comprehensive Loss
|
$ | 352 | $ | (177 | ) | $ | (175 | ) | ||||
|
|
||||||||||||
| (1) | Net security losses represent pre-tax OTTI credit related losses of $40,000 and $178,000 for the three months ended March 31, 2011 and 2010, respectively. | |
| (2) | Includes the remaining balance of a realized but unrecognized gain, net of tax, from the termination of interest rate swaps in June 2009. The original gain of $1.3 million 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 March 31, 2011 and 2010, respectively. |
Accumulated Other Comprehensive Income (Loss), net of tax, is comprised of the following components:
| At March 31, | ||||||||
| 2011 | 2010 | |||||||
|
Unrealized gain on securities available for sale
|
$ | 5,665 | $ | 5,917 | ||||
|
Net actuarial loss and prior service cost for pension and other
post retirement benefit plans
|
(933 | ) | (1,189 | ) | ||||
|
Unrealized loss on cash flow hedge
|
(6,095 | ) | (3,406 | ) | ||||
|
Deferred gain on hedge accounting transactions
|
1,112 | 1,256 | ||||||
|
Total
|
$ | (251 | ) | $ | 2,578 | |||
35
Table of Contents
The following discussion should be read in conjunction with the consolidated financial
statements, notes and tables included in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2010, filed with the Securities and Exchange Commission.
Cautionary Statement Regarding Forward-Looking Statements
A number of the presentations and disclosures in this Form 10-Q, 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; |
36
Table of Contents
| • | 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; | ||
| • | 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. |
37
Table of Contents
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-Q. 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.
38
Table of Contents
Selected Quarterly 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.
| Three Months Ended | ||||||||||||||||||||
| March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
| 2011 | 2010 | 2010 | 2010 | 2010 | ||||||||||||||||
| (Dollars in Thousands, Except Per Share Data) | ||||||||||||||||||||
|
FINANCIAL CONDITION DATA:
|
||||||||||||||||||||
|
Securities available for sale
|
$ | 341,362 | $ | 377,457 | $ | 436,887 | $ | 482,989 | $ | 473,515 | ||||||||||
|
Securities held to maturity
|
239,305 | 202,732 | 180,623 | 103,463 | 91,059 | |||||||||||||||
|
Loans
|
3,628,374 | 3,555,679 | 3,408,043 | 3,428,912 | 3,411,792 | |||||||||||||||
|
Allowance for loan losses
|
46,444 | 46,255 | 45,619 | 45,291 | 45,278 | |||||||||||||||
|
Goodwill and Core Deposit Intangibles
|
141,951 | 141,956 | 142,422 | 142,888 | 143,371 | |||||||||||||||
|
Total assets
|
4,645,783 | 4,695,738 | 4,703,791 | 4,740,975 | 4,547,207 | |||||||||||||||
|
Total deposits
|
3,584,926 | 3,627,783 | 3,617,158 | 3,679,873 | 3,473,853 | |||||||||||||||
|
Total borrowings
|
556,718 | 565,434 | 577,429 | 576,146 | 606,973 | |||||||||||||||
|
Stockholders’ equity
|
447,985 | 436,472 | 425,661 | 422,062 | 418,224 | |||||||||||||||
|
Non-performing loans
|
23,397 | 23,108 | 24,687 | 23,678 | 41,840 | |||||||||||||||
|
Non-performing assets
|
33,856 | 31,493 | 34,789 | 32,083 | 48,827 | |||||||||||||||
|
|
||||||||||||||||||||
|
OPERATING DATA:
|
||||||||||||||||||||
|
Interest income
|
$ | 48,958 | $ | 49,971 | $ | 50,588 | $ | 51,319 | $ | 50,848 | ||||||||||
|
Interest expense
|
7,485 | 8,582 | 9,391 | 10,152 | 10,638 | |||||||||||||||
|
Net interest income
|
41,473 | 41,389 | 41,197 | 41,167 | 40,210 | |||||||||||||||
|
Provision for loan losses
|
2,200 | 3,575 | 3,500 | 6,931 | 4,650 | |||||||||||||||
|
Non-interest income
|
12,598 | 14,263 | 11,654 | 10,938 | 10,050 | |||||||||||||||
|
Non-interest expenses
|
36,482 | 36,688 | 34,540 | 34,929 | 33,588 | |||||||||||||||
|
Net income available to the common shareholder
|
11,188 | 11,838 | 11,145 | 8,030 | 9,227 | |||||||||||||||
|
|
||||||||||||||||||||
|
PER SHARE DATA:
|
||||||||||||||||||||
|
Net income — Basic
|
$ | 0.53 | $ | 0.56 | $ | 0.53 | $ | 0.38 | $ | 0.44 | ||||||||||
|
Net income — Diluted
|
0.52 | 0.56 | 0.53 | 0.38 | 0.44 | |||||||||||||||
|
Cash dividends declared
|
0.19 | 0.18 | 0.18 | 0.18 | 0.18 | |||||||||||||||
|
Book value (1)
|
20.93 | 20.57 | 20.08 | 19.91 | 19.76 | |||||||||||||||
|
|
||||||||||||||||||||
|
OPERATING RATIOS:
|
||||||||||||||||||||
|
Return on average assets
|
0.98 | % | 1.01 | % | 0.95 | % | 0.70 | % | 0.84 | % | ||||||||||
|
Return on average common equity
|
10.24 | % | 10.85 | % | 10.38 | % | 7.60 | % | 8.95 | % | ||||||||||
|
Net interest margin (on a fully tax equivalent basis)
|
4.02 | % | 3.91 | % | 3.89 | % | 3.96 | % | 4.08 | % | ||||||||||
|
Equity to assets
|
9.64 | % | 9.30 | % | 9.05 | % | 8.90 | % | 9.20 | % | ||||||||||
|
Dividend payout ratio
|
36.33 | % | 32.25 | % | 34.26 | % | 47.52 | % | 41.28 | % | ||||||||||
|
|
||||||||||||||||||||
|
ASSET QUALITY RATIOS:
|
||||||||||||||||||||
|
Non-performing loans as a percent of gross loans
|
0.64 | % | 0.65 | % | 0.72 | % | 0.69 | % | 1.23 | % | ||||||||||
|
Non-performing assets as a percent of total assets
|
0.73 | % | 0.67 | % | 0.74 | % | 0.68 | % | 1.07 | % | ||||||||||
|
Allowance for loan losses as a percent of
total loans
|
1.28 | % | 1.30 | % | 1.34 | % | 1.32 | % | 1.33 | % | ||||||||||
|
Allowance for loan losses as a percent of
non-performing loans
|
198.50 | % | 200.17 | % | 184.79 | % | 191.28 | % | 108.22 | % | ||||||||||
|
|
||||||||||||||||||||
|
CAPITAL RATIOS:
|
||||||||||||||||||||
|
Tier 1 leverage capital ratio
|
8.48 | % | 8.19 | % | 7.99 | % | 7.86 | % | 8.06 | % | ||||||||||
|
Tier 1 risk-based capital ratio
|
10.48 | % | 10.28 | % | 10.35 | % | 10.01 | % | 10.02 | % | ||||||||||
|
Total risk-based capital ratio
|
12.55 | % | 12.37 | % | 12.47 | % | 12.11 | % | 12.14 | % | ||||||||||
| (1) | Calculated by dividing total stockholders’ equity by the total outstanding shares as of the end of each period. |
39
Table of Contents
Executive Level Overview
The first quarter of 2011 was marked by continued positive results. The Company
experienced solid loan growth, strong core deposit levels, and favorable asset quality trends,
resulting in net income of $11.2 million, or $0.52 on a diluted per share basis for the three
months ended March 31, 2011, which represents an increase of 21.3% and 18.2%, respectively as
compared to the three months ended March 31, 2010. The Company was able to achieve such strong
results by continuing to generate growth in both the commercial and industrial and commercial real
estate categories, resulting in total commercial loan portfolio growth of 2.2%, or 9.0% annualized
from the prior quarter. The Company’s home equity portfolio has also shown solid growth, with an
increase of 6.9%, or 28.3% on an annualized basis, as compared to prior quarter. The following
table illustrates key performance measures for the periods indicated, highlighting the positive
results:
| For the Three | ||||||||
| Months | ||||||||
| Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
|
Diluted Earnings Per Share
|
$ | 0.52 | $ | 0.44 | ||||
|
Return on Average Assets
|
0.98 | % | 0.84 | % | ||||
|
Return on Average Common Equity
|
10.24 | % | 8.95 | % | ||||
|
Net Interest Margin
|
4.02 | % | 4.08 | % | ||||
The Company’s overall financial position is influenced by a variety of factors, such as
current economic conditions and the interest rate environment. For the first quarter of 2011, the
Company’s financial performance includes the impact of:
| • | Commercial loan growth driven by continued relationship building with new and existing customers. | ||
| • | Home equity outstanding balances have increased significantly due largely to marketing and product promotion endeavors. | ||
| • | Lower cost core deposits now represent 81.2% of total deposits, leading to a cost of funds of 0.40%. | ||
| • | Investment management had a strong quarter with revenues of $3.2 million, an increase of 17.9% as compared to the same prior year period, driven by the increase in the assets under administration to $1.6 billion. |
The Company continued to experience positive asset quality trends during the first quarter of
2011. Net charge-offs have decreased to $2.0 million, or 0.23% of average loans on an annualized
basis, down from $2.9 million, or 0.33% of average loans on an annualized basis for the quarter
ended December 31, 2010. Both early and late stage delinquencies were stable quarter over
quarter, which is attributed to the Company’s focused loan workout efforts, with total
delinquencies representing 1.19% and 1.11% of loans and early stage delinquencies representing
0.71% and 0.65% of loans at March 31, 2011 and December 31, 2010, respectively. Although
nonperforming assets increased modestly in the first quarter of 2011 to $33.9 million, or 0.73% of
assets as compared to $31.5 million, or 0.67% of total assets at December 31, 2010, they are down
significantly when compared to the first quarter of 2010 with decreases of $15.0 million, or 30.7%.
Nonperforming assets are reviewed and
40
Table of Contents
closely managed to ensure an expedient workout. The following table shows the rollforward of
nonperforming assets for the quarter ended March 31, 2011:
| Nonperforming Assets | ||||||||
| (Dollars in Thousands) | ||||||||
|
Beginning Balance at January 1, 2011
|
$ | 31,493 | ||||||
|
New to Nonperforming
|
9,046 | |||||||
|
Loans Charged-Off
|
(2,484 | ) | ||||||
|
Loans Paid-Off
|
(1,934 | ) | ||||||
|
Loans Transferred to Other Real Estate Owned
|
(3,061 | ) | ||||||
|
Loans Restored to Accrual Status
|
(1,116 | ) | ||||||
|
Change to Other Real Estate Owned:
|
||||||||
|
New to Other Real Estate Owned
|
$ | 3,061 | ||||||
|
Valuation Write Down
|
(530 | ) | ||||||
|
Sale of Other Real Estate Owned
|
(457 | ) | ||||||
|
|
||||||||
|
Total Change to Other Real Estate Owned
|
2,074 | 2,074 | ||||||
|
Other
|
(162 | ) | ||||||
|
Ending Balance at March 31, 2011
|
$ | 33,856 | ||||||
The following tables display the asset quality trends that the Company has experienced
over the trailing five quarters for nonperforming loan levels, delinquency levels, and net
charge-offs:
41
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42
Table of Contents
As a result of the positive asset quality trends, the Company reduced provision for loan loss
levels. The provision for loan losses was $2.2 million for the three months ended March 31, 2011
as compared to $4.7 million for the three months ended March 31, 2010. The Company’s allowance as
a percentage of total loans was at 1.28% as compared to 1.30% and 1.33% for the quarters ended
December 31, 2010 and March 31, 2010, respectively.
The Company continues to generate adequate levels of capital internally to fund future growth.
The Company’s capital levels increased by $11.5 million, or 2.6%, from December 31, 2010,
resulting in strong capital ratios and a tangible common equity ratio which improved to 7.22%, pro
forma to include the tax deductibility of certain goodwill, and regulatory capital levels exceeded
prescribed thresholds. As a result, the Company increased the common stock dividend to $0.19 per
share for the quarter ended March 31, 2011, an increase of 5.56%.
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. The Company believes that the Company’s most critical accounting
policies are those which the Company’s financial condition depends upon, and which involve the most
complex or subjective decisions or assessments.
There have been no material changes in critical accounting policies during the first quarter
of 2011. Please refer to the 2010 Form 10-K for a complete listing of critical accounting
policies.
43
Table of Contents
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 remained relatively flat at $589.2 million at March 31, 2011 as compared to December 31,
2010. The Company purchased fixed rate mortgage-backed securities to replace runoff of existing
securities during the quarter. The ratio of securities to total assets as of March 31, 2011 was
12.7% compared to 12.5% at December 31, 2010.
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 1 hereof.
The Company’s trading assets were $8.5 million and $7.6 million at March 31, 2011 and December
31, 2010, respectively. Trading assets are comprised of securities which are held solely for the
purpose of funding certain executive non-qualified retirement obligations and an equity fund
security 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.
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 2011 and 2010, 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 table below reflects the origination of these loans during the
periods indicated:
Table 1 — Residential Mortgage Loan Sales
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in Thousands) | ||||||||
|
Loans originated and sold with
servicing rights released
|
$ | 79,191 | $ | 60,247 | ||||
|
Loans originated and sold with servicing
rights retained
|
$ | 3,670 | $ | 2,168 | ||||
The Company recognizes a mortgage servicing asset when it sells a loan with servicing
rights retained. When the Company sells a loan 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.
Loan Portfolio
Management has been focusing on changing the overall composition of the
balance sheet by emphasizing 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 than what
44
Table of Contents
otherwise may have been achieved, management believes the change to be prudent given the prevailing
interest rate and economic environment. At March 31, 2011, the Bank’s loan portfolio amounted to
$3.6 billion, an increase of $72.7 million, or 2.0%, from December 31, 2010. The Company was able
to sustain growth by continuing to generate growth in both the commercial and industrial and
commercial real estate categories, resulting in total commercial portfolio growth of 2.2%, or 9.0%
annualized from the prior quarter. The Company’s home equity portfolio has also shown solid
growth, with increases of 6.9%, or 28.3% on an annualized basis, as compared to prior quarter.
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 March 31, 2011:
|
Average Loan Size
|
$631.3k | Non-Performing Loans/Loans | 0.49 | % | ||||
| Largest Individual CRE Mortgage $11.0 million | Owner Occupied | 21.7 | % | |||||
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
45
Table of Contents
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, within commercial real estate or home equity
categories, loans more than 90 days past due with respect to principal or interest are classified
as nonaccrual loans. 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
46
Table of Contents
as performing, unless they are on nonaccrual status. 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.
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 these securities on nonaccrual status and has reversed any previously accrued
income related to these securities.
When an OREO property is deemed to be in the Bank’s control, it is recorded at fair value less
estimated costs 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 costs
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.
The following table sets forth information regarding nonperforming assets held by the Bank at
the dates indicated:
47
Table of Contents
Table 2 — Nonperforming Assets/Loans
| March 31, | December 31, | March 31, | ||||||||||
| 2011 | 2010 | 2010 | ||||||||||
| (Dollars In Thousands) | ||||||||||||
|
Loans Past Due 90 Days or
More but Still Accruing
|
||||||||||||
|
Home Equity
|
$ | — | $ | 4 | $ | — | ||||||
|
Consumer — Other
|
226 | 273 | 135 | |||||||||
|
Total
|
$ | 226 | $ | 277 | $ | 135 | ||||||
|
|
||||||||||||
|
Loans Accounted for on a
|
||||||||||||
|
Nonaccrual Basis
(1)
|
||||||||||||
|
Commercial and Industrial
|
$ | 3,011 | $ | 3,123 | $ | 7,252 | ||||||
|
Commercial Real Estate
|
9,229 | 9,836 | 23,645 | |||||||||
|
Small Business
|
617 | 887 | 1,294 | |||||||||
|
Residential Real Estate
|
7,299 | 6,728 | 8,091 | |||||||||
|
Home Equity
|
2,589 | 1,752 | 948 | |||||||||
|
Consumer — Other
|
426 | 505 | 474 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 23,171 | $ | 22,831 | $ | 41,704 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total Nonperforming Loans
|
$ | 23,397 | $ | 23,108 | $ | 41,839 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Nonaccrual Securities
|
1,054 | 1,051 | 899 | |||||||||
|
|
||||||||||||
|
Other Real Estate Owned and Assets in Possession
|
9,405 | 7,334 | 6,089 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total Nonperforming Assets
|
$ | 33,856 | $ | 31,493 | $ | 48,827 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Nonperforming Loans as a
Percent of Gross Loans
|
0.64 | % | 0.65 | % | 1.23 | % | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Nonperforming Assets as a
Percent of Total Assets
|
0.73 | % | 0.67 | % | 1.07 | % | ||||||
|
|
||||||||||||
| (1) | There were $4.5 million, $4.0 million, and $2.3 million TDRs on nonaccrual at March 31, 2011, December 31, 2010, and March 31, 2010, respectively. |
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 3 — Potential Problem Commercial Loans
| March 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
| (Dollars in Thousands) | ||||||||
|
Number of Loan Relationships
|
57 | 62 | ||||||
|
Aggregate Outstanding Balance
|
$ | 116,607 | $ | 126,167 | ||||
48
Table of Contents
At March 31, 2011, 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.
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 4 — Interest Income Recognized/Collected on
Nonaccrual Loans and Troubled Debt Restructurings
Nonaccrual Loans and Troubled Debt Restructurings
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in Thousands) | ||||||||
|
Interest income that would have been recognized if
nonaccruing
loans had been performing
|
$ | 717 | $ | 923 | ||||
|
Interest income recognized on TDRs still accruing
|
$ | 354 | $ | 203 | ||||
|
Interest collected on these nonaccrual and TDRs and
included in interest
income
|
$ | 411 | $ | 211 | ||||
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 March 31, 2011, 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 certain other loans that have been categorized as impaired.
49
Table of Contents
Total
impaired loans at March 31, 2011 and December 31, 2010 were $46.3 million and $47.4 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 1 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 the Company to increase its provision for loan losses or recognize further
loan charge-offs.
As of March 31, 2011, the allowance for loan losses totaled $46.4 million, or 1.28% of total
loans as compared to $46.3 million, or 1.30% of total loans, at December 31, 2010. The change in
the 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.
The following table summarizes changes in the allowance for loan losses and other selected
statistics for the periods presented:
50
Table of Contents
Table 5 — Summary of Changes in the Allowance for Loan Losses
| Three Months Ended | ||||||||||||||||||||
| March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
| 2011 | 2010 | 2010 | 2010 | 2010 | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
|
AVERAGE LOANS
|
$ | 3,590,829 | $ | 3,481,884 | $ | 3,430,372 | $ | 3,422,101 | $ | 3,403,909 | ||||||||||
|
Allowance for Loan Losses, Beginning of
Period
|
$ | 46,255 | $ | 45,619 | $ | 45,291 | $ | 45,278 | $ | 42,361 | ||||||||||
|
Charged-Off Loans:
|
||||||||||||||||||||
|
Commercial and Industrial
|
888 | 1,313 | 1,489 | 1,837 | 531 | |||||||||||||||
|
Commercial Real Estate
|
652 | 594 | 851 | 1,804 | 199 | |||||||||||||||
|
Commercial Construction
|
— | — | — | 1,716 | — | |||||||||||||||
|
Small Business
|
266 | 541 | 549 | 858 | 331 | |||||||||||||||
|
Residential Real Estate
|
122 | 46 | 51 | 321 | 139 | |||||||||||||||
|
Consumer — Home Equity
|
78 | 384 | 24 | 289 | 242 | |||||||||||||||
|
Consumer — Other
|
478 | 512 | 515 | 469 | 582 | |||||||||||||||
|
Total Charged-Off Loans
|
2,484 | 3,390 | 3,479 | 7,294 | 2,024 | |||||||||||||||
|
Recoveries on Loans Previously Charged-Off:
|
||||||||||||||||||||
|
Commercial and Industrial
|
202 | 276 | 60 | 21 | 4 | |||||||||||||||
|
Commercial Real Estate
|
— | — | — | — | 1 | |||||||||||||||
|
Commercial Construction
|
50 | — | — | — | — | |||||||||||||||
|
Small Business
|
28 | 46 | 34 | 57 | 80 | |||||||||||||||
|
Residential Real Estate
|
— | — | 26 | 28 | 4 | |||||||||||||||
|
Consumer — Home Equity
|
4 | 6 | 63 | 55 | 8 | |||||||||||||||
|
Consumer — Other
|
189 | 123 | 124 | 215 | 194 | |||||||||||||||
|
Total Recoveries
|
473 | 451 | 307 | 376 | 291 | |||||||||||||||
|
Net Loans Charged-Off:
|
||||||||||||||||||||
|
Commercial and Industrial
|
686 | 1,037 | 1,429 | 1,816 | 527 | |||||||||||||||
|
Commercial Real Estate
|
652 | 594 | 851 | 1,804 | 198 | |||||||||||||||
|
Commercial Construction
|
(50 | ) | — | — | 1,716 | — | ||||||||||||||
|
Small Business
|
238 | 495 | 515 | 801 | 251 | |||||||||||||||
|
Residential Real Estate
|
122 | 46 | 25 | 293 | 135 | |||||||||||||||
|
Consumer — Home Equity
|
74 | 378 | (39 | ) | 234 | 234 | ||||||||||||||
|
Consumer — Other
|
289 | 389 | 391 | 254 | 388 | |||||||||||||||
|
Total Net Loans Charged-Off
|
2,011 | 2,939 | 3,172 | 6,918 | 1,733 | |||||||||||||||
|
Provision for Loan Losses
|
2,200 | 3,575 | 3,500 | 6,931 | 4,650 | |||||||||||||||
|
TOTAL ALLOWANCES FOR LOAN LOSSES, END
OF PERIOD
|
$ | 46,444 | $ | 46,255 | $ | 45,619 | $ | 45,291 | $ | 45,278 | ||||||||||
|
|
||||||||||||||||||||
|
Net Loans Charged-off as a Percent of
Average Total
Loans (Annualized)
|
0.23 | % | 0.33 | % | 0.37 | % | 0.81 | % | 0.21 | % | ||||||||||
|
Total Allowance for Loan Losses as a
Percent of
Total Loans
|
1.28 | % | 1.30 | % | 1.34 | % | 1.32 | % | 1.33 | % | ||||||||||
|
Total Allowance for Loan Losses as a
Percent of
Nonperforming Loans
|
198.50 | % | 200.17 | % | 184.79 | % | 191.28 | % | 108.22 | % | ||||||||||
|
Net Loans Charged-Off as a Percent of
Allowance for
Loan Losses (Annualized)
|
17.56 | % | 25.21 | % | 27.89 | % | 61.3 | % | 15.5 | % | ||||||||||
|
Recoveries as a Percent of Charge-Offs
(Annualized)
|
19.04 | % | 13.30 | % | 8.82 | % | 5.15 | % | 14.38 | % | ||||||||||
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.
51
Table of Contents
The following table sets forth the allocation of the allowance for loan losses by loan
category at the dates indicated:
Table 6 — Summary of Allocation of Allowance for Loan Losses
| March 31, | December 31, | |||||||||||||||
| 2011 | 2010 | |||||||||||||||
| (Dollars In thousands) | ||||||||||||||||
| Percent of | Percent of | |||||||||||||||
| Loans | Loans | |||||||||||||||
| Allowance | In Category | Allowance | In Category | |||||||||||||
| Amount | To Total Loans | Amount | To Total Loans | |||||||||||||
|
Commercial and Industrial
|
$ | 10,843 | 14.0 | % | $ | 10,423 | 14.1 | % | ||||||||
|
Commercial Real Estate
|
22,353 | 48.8 | % | 21,939 | 52.0 | % | ||||||||||
|
Commercial Construction
|
1,993 | 3.4 | % | 2,145 | 0.1 | % | ||||||||||
|
Small Business
|
3,387 | 2.2 | % | 3,740 | 2.3 | % | ||||||||||
|
Residential Real Estate (1)
|
2,856 | 12.8 | % | 2,915 | 13.3 | % | ||||||||||
|
Home Equity
|
3,395 | 17.1 | % | 3,369 | 16.3 | % | ||||||||||
|
Consumer — Other
|
1,617 | 1.7 | % | 1,724 | 1.9 | % | ||||||||||
|
|
||||||||||||||||
|
Total Allowance for Loan Losses
|
$ | 46,444 | 100.0 | % | $ | 46,255 | 100.0 | % | ||||||||
|
|
||||||||||||||||
| (1) | Includes residential construction. |
When available information confirms that specific loans 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 which are determined to be uncollectible by management 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 the first quarter of 2011, the allowance increased by approximately $189,000 to $46.4
million at March 31, 2011.
For additional information regarding the Bank’s allowance for loan losses, see
Note 4, “Loans,
Allowance for Loan Losses, and Credit Quality”
within Notes to Consolidated Financial Statements
included in Item 1 hereof.
52
Table of Contents
Federal Home Loan Bank Stock
The Bank held an investment in Federal Home Loan Bank Boston
(“FHLBB”) of $35.9 million at March 31, 2011 and December 31, 2010 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 the first quarter of 2011 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.
Goodwill and Identifiable Intangible Assets
Goodwill and identifiable intangible assets were
$142.0 million at both March 31, 2011 and December 31, 2010.
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 $83.5 million and $82.7 million at March 31, 2011 and December 31,
2010, respectively. The bank recorded tax exempt income from BOLI of $706,000 and $721,000 for the
quarters ended March 31, 2011 and 2010, respectively.
Deposits
Total deposits decreased by $42.9 million, or 1.2%, during the quarter ended March
31, 2011. Core deposits were lower by $24.5 million, or 0.8%, driven by seasonality in the
Company’s deposit base. The Company’s emphasis on lower cost core deposits has led to a steady
reduction in time deposits which declined by $18.4 million, or 2.7%, in the first quarter. Core
deposits to total deposits rose to 81.2% and the total cost of deposits continued to decline to
0.40% for the current quarter, down 5 basis points from the prior period.
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. As of March
31, 2011 and December 31, 2010, CDARS deposits totaled $26.9 million and $13.6 million,
respectively.
Borrowings
The Company’s borrowings amounted to $556.7 million at March 31, 2011, a decrease
of $8.7 million from year-end 2010. The following table shows the balance of borrowings at the
periods indicated:
53
Table of Contents
Table 7 — Borrowings by Category
| March 31, | December 31, | |||||||||||
| 2011 | 2010 | % Change | ||||||||||
| (Dollars in Thousands) | ||||||||||||
|
Federal Home Loan Bank Advances
|
$ | 277,285 | $ | 302,414 | -8.3 | % | ||||||
|
Fed Funds Purchased and Assets Sold
Under Repurchase Agreements
|
184,738 | 168,119 | 9.9 | % | ||||||||
|
Junior Subordinated Debentures
|
61,857 | 61,857 | 0.0 | % | ||||||||
|
Subordinated Debentures
|
30,000 | 30,000 | 0.0 | % | ||||||||
|
Other Borrowings
|
2,838 | 3,044 | -6.8 | % | ||||||||
|
|
||||||||||||
|
Total Borrowings
|
$ | 556,718 | $ | 565,434 | -1.5 | % | ||||||
|
|
||||||||||||
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 March 31, 2011, the Company and the Bank exceeded the
minimum requirements for Tier 1 risk-based, total risk-based capital, and Tier 1 leverage capital.
The Company’s and the Bank’s actual capital amounts and ratios are also presented in the
following table:
54
Table of Contents
Table 8 — Company and Bank’s Capital Amounts and Ratios
| March 31, 2011 | ||||||||||||||||||||||||||||||||
| To Be Well Capitalized | ||||||||||||||||||||||||||||||||
| For Capital | Under Prompt Corrective | |||||||||||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||
|
Company: (Consolidated)
|
||||||||||||||||||||||||||||||||
|
Total capital (to risk weighted assets)
|
$ | 456,237 | 12.55 | % | $ | 290,724 | > | 8.0 | % | N/A | N/A | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Tier 1 capital (to risk weighted assets)
|
380,793 | 10.48 | $ | 145,362 | > | 4.0 | N/A | N/A | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Tier 1 capital (to average assets)
|
380,793 | 8.48 | 179,650 | > | 4.0 | N/A | N/A | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Bank:
|
||||||||||||||||||||||||||||||||
|
Total capital (to risk weighted assets)
|
$ | 437,164 | 12.03 | % | $ | 290,656 | > | 8.0 | % | $ | 363,320 | > | 10.0 | % | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Tier 1 capital (to risk weighted assets)
|
361,730 | 9.96 | $ | 145,328 | > | 4.0 | $ | 217,992 | > | 6.0 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Tier 1 capital (to average assets)
|
361,730 | 8.05 | 179,716 | > | 4.0 | 224,645 | > | 5.0 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| December 31, 2010 | ||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Company: (Consolidated)
|
||||||||||||||||||||||||||||||||
|
Total capital (to risk weighted assets)
|
$ | 444,963 | 12.37 | % | $ | 287,846 | > | 8.0 | % | N/A | N/A | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Tier 1 capital (to risk weighted assets)
|
369,965 | 10.28 | 143,923 | > | 4.0 | N/A | N/A | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Tier 1 capital (to average assets)
|
369,965 | 8.19 | 180,784 | > | 4.0 | N/A | N/A | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Bank:
|
||||||||||||||||||||||||||||||||
|
Total capital (to risk weighted assets)
|
$ | 429,304 | 11.92 | % | $ | 288,098 | > | 8.0 | % | $ | 360,123 | > | 10.0 | % | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Tier 1 capital (to risk weighted assets)
|
354,267 | 9.84 | 144,049 | > | 4.0 | 216,074 | > | 6.0 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Tier 1 capital (to average assets)
|
354,267 | 7.83 | 181,039 | > | 4.0 | 226,299 | > | 5.0 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
On March 17, 2011 the Company’s Board of Directors declared a cash dividend of $0.19 per
share to stockholders of record as of the close of business on March 28, 2011. This dividend was
paid on April 8, 2011. For the quarter ended March 31, 2011, the dividend payout ratio amounted to
36.33%.
Investment Management
As of March 31, 2011, the Rockland Trust Investment Management Group had assets under
administration of $1.6 billion representing approximately 3,318 trust, fiduciary, and agency
accounts. At December 31, 2010, assets under administration were $1.6 billion, representing
approximately 3,181 trust, fiduciary, and agency accounts. Included in these amounts as of March
31, 2011 and December 31, 2010 are assets under administration of $112.9 million and $103.6
million, respectively, relating to the Company’s registered investment advisor, Bright Rock Capital
Management, LLC., which was established in 2010 and provides institutional quality investment
management services to institutional and high net worth clients. Revenue from the Investment
Management Group amounted to $2.9 million and $2.3 million for the quarters ended March 31, 2011
and 2010, respectively.
Additionally, for the quarters ended March 31, 2011 and 2010, retail investments and insurance
revenue was $350,000 and $410,000, 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”).
55
Table of Contents
Mortgage Banking
The Bank originates residential loans for its portfolio as well as with the intention of
selling them in the secondary market. The Bank’s mortgage banking income consists primarily of
revenue from premiums received on loans sold with servicing released, origination fees, and gains
and losses on sold mortgages less related commission expense. 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. For the quarter ended March 31,
2011, the Bank closed approximately $81.7 million of residential loans, of which $19.3 million were
held in portfolio and $62.4 million were sold or held for sale in the secondary market. This
volume reflects an overall increase from the quarter ended March 31, 2010, during which closings
totaled approximately $72.9 million, of which $15.7 million were held in portfolio and $57.2
million were sold or held for sale in the secondary market.
Included in the mortgage banking income results is the impact of the Bank’s mortgage servicing
assets. Servicing assets are 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 $268.0 million at March
31, 2011 and $279.7 million at December 31, 2010. 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 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 in the consolidated balance sheets 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. The following table shows fair value of the
servicing rights associated with these loans and the changes for the periods indicated:
56
Table of Contents
Table 9 — Mortgage Servicing Asset
| (Dollars in Thousands) | ||||
|
Balance as of January 1, 2010
|
$ | 2,195 | ||
|
Additions
|
77 | |||
|
Amortization
|
(652 | ) | ||
|
Change in Valuation Allowance
|
(1 | ) | ||
|
|
||||
|
Balance as of December 31, 2010
|
$ | 1,619 | ||
|
|
||||
|
|
||||
|
Balance as of January 1, 2011
|
$ | 1,619 | ||
|
Additions
|
33 | |||
|
Amortization
|
(139 | ) | ||
|
Change in Valuation Allowance
|
38 | |||
|
|
||||
|
Balance as of March 31, 2011
|
$ | 1,551 | ||
|
|
||||
RESULTS OF OPERATIONS
The following table provides a summary of results of operations:
Table 10 — Summary of Results of Operations
| For the Three Months Ended, | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in Thousands) | ||||||||
|
Net Income Available to Common Shareholders
|
$ | 11,188 | $ | 9,227 | ||||
|
Diluted Earnings Per Share
|
$ | 0.52 | $ | 0.44 | ||||
|
Return on Average Assets
|
0.98 | % | 0.84 | % | ||||
|
Return on Average Equity
|
10.24 | % | 8.95 | % | ||||
|
Stockholders’ Equity as % of Assets
|
9.64 | % | 9.20 | % | ||||
Net Interest Income
The amount of net interest income is affected by changes in
interest rates and by the volume and mix of interest earning assets and interest bearing
liabilities.
On a fully tax equivalent basis, net interest income for the first quarter of 2011 increased
$1.3 million, or 3.2%, to $41.8 million, when compared to the first quarter of 2010. The Company’s
net interest margin was 4.02% for the quarter ended March 31, 2011 as compared to 4.08% for the
quarter ended March 31, 2010. The Company’s interest rate spread (the difference between the
weighted average yield on interest-earning assets and the weighted average cost of interest-bearing
liabilities) was 3.82% and 3.83% for the first quarters of 2011 and 2010, respectively.
57
Table of Contents
The decline in the net interest margin is primarily the result of assets re-pricing in a lower
rate environment without the ability to fully offset this impact through a reduction in funding
costs.
The following tables present the Company’s daily average balances, net interest income,
interest rate spread, and net interest margin for the three months ending March 31, 2011 and 2010.
For purposes of the table and the following discussion, income from interest-earning assets and net
interest income are presented on a fully-taxable equivalent basis by adjusting income and yields
earned on tax-exempt interest received on securities and loans, to make them equivalent to income
and yields on fully-taxable earning assets. The fully-taxable equivalent was calculated using the
blended federal and state statutory tax rate:
58
Table of Contents
Table 11 — Average Balance, Interest Earned/Paid & Average Yields
| Three Months Ended March 31, | ||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||
| Interest | Interest | |||||||||||||||||||||||
| Average | Earned/ | Yield/ | Average | Earned/ | Yield/ | |||||||||||||||||||
| Balance | Paid | Rate | Balance | Paid | Rate | |||||||||||||||||||
| (Dollar in Thousands) | ||||||||||||||||||||||||
|
INTEREST-EARNING ASSETS
|
||||||||||||||||||||||||
|
Interest Earning Deposits with Banks, Federal Funds Sold, and Short Term Investments
|
$ | 27,652 | $ | 17 | 0.25 | % | $ | 23,144 | $ | 24 | 0.42 | % | ||||||||||||
|
SECURITIES
|
||||||||||||||||||||||||
|
Trading Assets
|
8,124 | 63 | 3.15 | % | 6,800 | 60 | 3.58 | % | ||||||||||||||||
|
Taxable Investment Securities
|
568,933 | 5,430 | 3.87 | % | 568,550 | 6,409 | 4.57 | % | ||||||||||||||||
|
Non-taxable Investment Securities (1)
|
10,175 | 191 | 7.61 | % | 19,111 | 342 | 7.26 | % | ||||||||||||||||
|
TOTAL SECURITIES
|
587,232 | 5,684 | 3.93 | % | 594,461 | 6,811 | 4.65 | % | ||||||||||||||||
|
LOANS HELD FOR SALE
|
14,190 | 119 | 3.40 | % | 7,125 | 106 | 6.03 | % | ||||||||||||||||
|
LOANS
|
||||||||||||||||||||||||
|
Commercial and Industrial
|
500,202 | 5,401 | 4.38 | % | 377,855 | 4,248 | 4.56 | % | ||||||||||||||||
|
Commercial Real Estate
|
1,749,292 | 23,197 | 5.38 | % | 1,630,944 | 23,258 | 5.78 | % | ||||||||||||||||
|
Commercial Construction
|
123,501 | 1,410 | 4.63 | % | 171,535 | 2,076 | 4.91 | % | ||||||||||||||||
|
Small Business
|
80,286 | 1,179 | 5.96 | % | 82,476 | 1,217 | 5.98 | % | ||||||||||||||||
|
TOTAL COMMERCIAL
|
2,453,281 | 31,187 | 5.16 | % | 2,262,810 | 30,799 | 5.52 | % | ||||||||||||||||
|
Residential Real Estate
|
468,146 | 5,399 | 4.68 | % | 548,533 | 6,765 | 5.00 | % | ||||||||||||||||
|
Residential Construction
|
3,712 | 44 | 4.81 | % | 9,102 | 118 | 5.26 | % | ||||||||||||||||
|
Consumer — Home Equity
|
601,624 | 5,622 | 3.79 | % | 478,324 | 4,522 | 3.83 | % | ||||||||||||||||
|
TOTAL CONSUMER REAL ESTATE
|
1,073,482 | 11,065 | 4.18 | % | 1,035,959 | 11,405 | 4.46 | % | ||||||||||||||||
|
TOTAL OTHER CONSUMER
|
64,066 | 1,229 | 7.78 | % | 105,140 | 2,012 | 7.76 | % | ||||||||||||||||
|
TOTAL LOANS
|
3,590,829 | 43,481 | 4.91 | % | 3,403,909 | 44,216 | 5.27 | % | ||||||||||||||||
|
TOTAL INTEREST EARNING ASSETS
|
4,219,903 | 49,301 | 4.74 | % | 4,028,639 | 51,157 | 5.15 | % | ||||||||||||||||
|
CASH AND DUE FROM BANKS
|
52,023 | 66,405 | ||||||||||||||||||||||
|
FEDERAL HOME LOAN BANK STOCK
|
35,854 | 35,854 | ||||||||||||||||||||||
|
OTHER ASSETS
|
320,658 | 304,200 | ||||||||||||||||||||||
|
TOTAL ASSETS
|
$ | 4,628,438 | $ | 4,435,098 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
INTEREST-BEARING LIABILITIES
|
||||||||||||||||||||||||
|
DEPOSITS
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Savings and Interest Checking Accounts
|
$ | 1,289,201 | $ | 760 | 0.24 | % | $ | 1,056,156 | $ | 1,184 | 0.45 | % | ||||||||||||
|
Money Market
|
723,946 | 785 | 0.44 | % | 702,390 | 1,320 | 0.76 | % | ||||||||||||||||
|
Time Deposits
|
672,893 | 1,940 | 1.17 | % | 889,449 | 3,435 | 1.57 | % | ||||||||||||||||
|
TOTAL INTEREST-BEARING DEPOSITS
|
2,686,040 | 3,485 | 0.53 | % | 2,647,995 | 5,939 | 0.91 | % | ||||||||||||||||
|
BORROWINGS
|
||||||||||||||||||||||||
|
Federal Home Loan Bank Borrowings
|
335,457 | 1,910 | 2.31 | % | 340,301 | 2,432 | 2.90 | % | ||||||||||||||||
|
Federal
Funds Purchased and Assets Sold Under Repurchase Agreement
|
178,185 | 651 | 1.48 | % | 184,624 | 830 | 1.82 | % | ||||||||||||||||
|
Junior Subordinated Debentures
|
61,857 | 904 | 5.93 | % | 61,857 | 902 | 5.91 | % | ||||||||||||||||
|
Subordinated Debentures
|
30,000 | 535 | 7.23 | % | 30,000 | 535 | 7.23 | % | ||||||||||||||||
|
Other Borrowings
|
2,761 | — | 0.00 | % | 2,360 | — | 0.00 | % | ||||||||||||||||
|
TOTAL BORROWINGS
|
608,260 | 4,000 | 2.67 | % | 619,142 | 4,699 | 3.08 | % | ||||||||||||||||
|
TOTAL INTEREST-BEARING LIABILITIES
|
3,294,300 | 7,485 | 0.92 | % | 3,267,137 | 10,638 | 1.32 | % | ||||||||||||||||
|
DEMAND DEPOSITS
|
831,032 | 702,833 | ||||||||||||||||||||||
|
OTHER LIABILITIES
|
59,791 | 47,020 | ||||||||||||||||||||||
|
TOTAL LIABILITIES
|
4,185,123 | 4,016,990 | ||||||||||||||||||||||
|
STOCKHOLDERS’ EQUITY
|
443,315 | 418,108 | ||||||||||||||||||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 4,628,438 | $ | 4,435,098 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
NET INTEREST INCOME
|
$ | 41,816 | $ | 40,519 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
INTEREST RATE SPREAD (2)
|
3.82 | % | 3.83 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
NET INTEREST MARGIN (3)
|
4.02 | % | 4.08 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Supplemental Information:
|
||||||||||||||||||||||||
|
Total Deposits, including Demand Deposits
|
$ | 3,517,072 | $ | 3,485 | $ | 3,350,828 | $ | 5,939 | ||||||||||||||||
|
Cost of Total Deposits
|
0.40 | % | 0.72 | % | ||||||||||||||||||||
|
Total Funding Liabilities, including Demand Deposits
|
$ | 4,125,332 | $ | 7,485 | $ | 3,969,970 | $ | 10,638 | ||||||||||||||||
|
Cost of Total Funding Liabilities
|
0.74 | % | 1.09 | % | ||||||||||||||||||||
| (1) | The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $343 and $309 for the three months ended March 31, 2011 and 2010, respectively. | |
| (2) | Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. | |
| (3) | Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. |
Certain amounts in prior year financial statement have been reclassified to conform to the
current year’s presentation.
59
Table of Contents
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
old volume), (2) changes in volume (change in volume multiplied by old rate), and (3) changes in
volume/rate (change in volume multiplied by change in rate) which is allocated to the change due to
rate column:
Table 12 — Volume Rate Analysis
| Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||||||||||
| 2011 Compared to 2010 | 2010 Compared to 2009 | |||||||||||||||||||||||
| Change | Change | Change | Change | |||||||||||||||||||||
| Due to | Due to | Total | Due to | Due to | Total | |||||||||||||||||||
| Rate (1) | Volume | Change | Rate (1) | Volume | Change | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
|
INCOME ON INTEREST-EARNING ASSETS:
|
||||||||||||||||||||||||
|
INTEREST EARNING DEPOSITIS WITH BANKS, FEDERAL FUNDS SOLD
AND SHORT TERM INVESTMENTS
|
$ | (12 | ) | $ | 5 | $ | (7 | ) | $ | (14 | ) | $ | (160 | ) | $ | (174 | ) | |||||||
|
SECURIITIES:
|
||||||||||||||||||||||||
|
Taxable Securities
|
(983 | ) | 4 | (979 | ) | (562 | ) | 34 | (528 | ) | ||||||||||||||
|
Non-Taxable Securities (2)
|
9 | (160 | ) | (151 | ) | 45 | (172 | ) | (127 | ) | ||||||||||||||
|
Trading Assets
|
(9 | ) | 12 | 3 | (3 | ) | 38 | 35 | ||||||||||||||||
|
TOTAL SECURITIES
|
(983 | ) | (144 | ) | (1,127 | ) | (520 | ) | (100 | ) | (620 | ) | ||||||||||||
|
LOANS HELD FOR SALE
|
(92 | ) | 105 | 13 | 27 | (89 | ) | (62 | ) | |||||||||||||||
|
LOANS (2)(3)
|
(3,163 | ) | 2,428 | (735 | ) | (1,859 | ) | 10,178 | 8,319 | |||||||||||||||
|
TOTAL
|
$ | (4,250 | ) | $ | 2,394 | $ | (1,856 | ) | $ | (2,366 | ) | $ | 9,829 | $ | 7,463 | |||||||||
|
|
||||||||||||||||||||||||
|
EXPENSE OF INTEREST-BEARING LIABILITIES:
|
||||||||||||||||||||||||
|
DEPOSITS:
|
||||||||||||||||||||||||
|
Savings and Interest Checking Accounts
|
$ | (685 | ) | $ | 261 | $ | (424 | ) | $ | (237 | ) | $ | 425 | $ | 188 | |||||||||
|
Money Market
|
(576 | ) | 41 | (535 | ) | (978 | ) | 602 | (376 | ) | ||||||||||||||
|
Time Deposits
|
(659 | ) | (836 | ) | (1,495 | ) | (2,681 | ) | 401 | (2,280 | ) | |||||||||||||
|
TOTAL INTEREST-BEARING DEPOSITS
|
(1,920 | ) | (534 | ) | (2,454 | ) | (3,896 | ) | 1,428 | (2,468 | ) | |||||||||||||
|
BORROWINGS:
|
||||||||||||||||||||||||
|
Federal Home Loan Bank Borrowings
|
$ | (487 | ) | $ | (35 | ) | $ | (522 | ) | $ | 212 | $ | (455 | ) | $ | (243 | ) | |||||||
|
Federal Funds Purchased and Assets Sold Under
Repurchase Agreements
|
(150 | ) | (29 | ) | (179 | ) | (84 | ) | 58 | (26 | ) | |||||||||||||
|
Junior Subordinated Debentures
|
2 | — | 2 | (45 | ) | — | (45 | ) | ||||||||||||||||
|
Subordinated Debentures
|
— | — | — | (2 | ) | — | (2 | ) | ||||||||||||||||
|
Other Borrowings
|
— | — | — | — | — | — | ||||||||||||||||||
|
TOTAL BORROWINGS
|
(635 | ) | (64 | ) | (699 | ) | 81 | (397 | ) | (316 | ) | |||||||||||||
|
TOTAL
|
$ | (2,555 | ) | $ | (598 | ) | $ | (3,153 | ) | $ | (3,815 | ) | $ | 1,031 | $ | (2,784 | ) | |||||||
|
CHANGE IN NET INTEREST INCOME
|
$ | (1,695 | ) | $ | 2,992 | $ | 1,297 | $ | 1,449 | $ | 8,798 | $ | 10,247 | |||||||||||
| (1) | The changes for each category of interest income and expense are divided between the portion of change attributable to the variances 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 the adjustment to present income and yield on a fully tax-equivalent basis is $343 and $309 for the three months ended March 31, 2011 and 2010, respectively. | |
| (3) | Loans include portfolio loans, and nonperforming loans; however unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. |
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 $2.2 million at March 31, 2011, compared with $4.7 million at March 31, 2010. The
Company’s allowance for loan losses, as a percentage of total loans, was 1.28% at March 31, 2011
compared to 1.30% at December 31, 2010 and 1.33% at March 31, 2010. For the quarter ended March 31,
2011, net loan charge-offs totaled $2.0 million, an increase of $278,000 from the quarter ended
March 31, 2010. While the total loan portfolio increased by 6.4% for the quarter ended March 31,
2011 as compared to the first quarter of 2010, the Company’s improved asset quality trends led to
lower provisioning levels in the first quarter of 2011.
Although the economic environment remains challenging, regional and local general economic
conditions continued to show gradual improvement during the first quarter of 2011,
60
Table of Contents
as measured in
terms of employment levels, statewide economic activity, and other regional economic indicators.
Local residential real estate market fundamentals weakened during the first quarter of 2011,
partially resulting from severe winter weather and the lasting effects of the expiration of the
Federal Housing Tax Credit in 2010. However, foreclosure activity in Massachusetts slowed during
early 2011. Regional commercial real estate market conditions were mixed during the first three
months of 2011, with some areas experiencing a recovery, and others still exhibiting higher vacancy
rates and negative absorption. Leading economic indicators signal continued economic improvement
through the remainder of 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.
Non-Interest Income
The following table sets forth information regarding non-interest income
for the periods shown:
Table 13 — Non-Interest Income
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars In Thousands) | ||||||||
|
Service Charges on Deposit Accounts
|
$ | 3,959 | $ | 3,131 | ||||
|
Interchange and ATM Fees
|
1,702 | 1,090 | ||||||
|
Investment Management
|
3,216 | 2,728 | ||||||
|
Mortgage Banking
|
1,047 | 1,000 | ||||||
|
Bank Owned Life Insurance
|
706 | 721 | ||||||
|
Gross Change on Write-Down of Certain Investments to Fair Value
|
249 | 180 | ||||||
|
Less: Non-Credit Related Other-Than-Temporary Impairment
|
(289 | ) | (358 | ) | ||||
|
Net Loss on Write-Down of Certain Investments to Fair Value
|
(40 | ) | (178 | ) | ||||
|
Other Non-Interest Income
|
2,008 | 1,558 | ||||||
|
TOTAL
|
$ | 12,598 | $ | 10,050 | ||||
Non-interest income increased by $2.5 million, or 25.4%, during the three months ended
March 31, 2011, as compared to the same period in the prior year. The change in non-interest
income is attributable to the following:
Service charges on deposit accounts increased $828,000, or 26.5%, due primarily to increased
customer utilization of the Bank’s overdraft privilege program.
Interchange and ATM fees increased $612,000, or 56.2%, mainly due to the reclassification of
certain net interchange revenue as other non-interest expense. Previously, the net amount was
recorded in noninterest expense.
Investment management revenue increased by $488,000, or 17.9%, for the three months ended
March 31, 2011, as compared to the same period in the prior year. This increase is mainly due to
increases in assets under administration, which were $1.6 billion at March 31, 2011, an increase of
$317.5 million, or 23.9%, as compared to the same period in
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Table of Contents
the prior year. The increase is due to the general increases in the stock market in these
comparable periods and net new client asset flows.
Other non-interest income increased by $450,000, or 28.9%, the increases in the quarter are
primarily due to income associated with loan level interest rate derivatives.
Non-Interest Expense
The following table sets forth information regarding non-interest
expense for the periods shown:
Table 14- Non-Interest Expense
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in Thousands) | ||||||||
|
Salaries and Employee Benefits
|
$ | 20,252 | $ | 18,464 | ||||
|
Occupancy and Equipment Expenses
|
4,575 | 4,135 | ||||||
|
Data Processing and Facilities Management
|
1,638 | 1,294 | ||||||
|
FDIC Assessment
|
1,291 | 1,321 | ||||||
|
Advertising
|
938 | 441 | ||||||
|
Telephone
|
527 | 546 | ||||||
|
Software Maintenance
|
463 | 495 | ||||||
|
Legal Fees
|
419 | 803 | ||||||
|
Other Non-Interest Expense
|
6,379 | 6,089 | ||||||
|
TOTAL
|
$ | 36,482 | $ | 33,588 | ||||
Non-interest expense increased by $2.9 million, or 8.6%, for the quarter ended March 31, 2011,
as compared to the same period in 2010. The change in non-interest expense is attributable to the
following:
Salaries and employee benefits increased by $1.8 million, or 9.7%, with the increase
attributable to salary increases, incentive programs and equity compensation plans.
Occupancy and equipment expense increased by $440,000, or 10.6%, mainly due to snow removal.
Data processing and facilities management expense increased by $344,000, or 26.6%, due
primarily to one time system conversion costs incurred by the Company.
Advertising expense increased by $497,000, or 112.7%. The large increase is due to a kickoff
of a major advertising campaign including television, radio and billboard advertisements.
Other non-interest expense increased by $290,000, or 4.8%, primarily due to increases in
write-downs on OREO properties offset by reduced loan workout costs.
Income Taxes
For the quarters ended March 31, 2011 and 2010, the Company recorded combined
federal and state income tax provisions of $4.2 million and $2.8 million equating to an effective
tax rate of 27.3% and 23.1%, respectively. The Company’s effective rates for each year were lower
than the blended federal and state statutory rates of 41.2% and
62
Table of Contents
41.5% for the 2011 and 2010 tax
years, attributable to certain tax preference assets such as BOLI, tax exempt bonds, as well as
federal tax credits recognized in connection with the New Markets Tax Credit (“NMTC”) program. The
increase in the Company’s effective tax rate in 2011 was primarily attributable to a reduction in
tax credits from the NMTC program in 2011. 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 and will result
in a blended statutory rate of 40.9% in 2012.
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 assets determined not
likely to be realized. The Company had no recorded tax valuation allowance as of March 31, 2011
and 2010.
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 has received and continues to receive eligible aggregated 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 15 — 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 | |||||||||||||||||||
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 supplementary retirement plan managed by the Company’s investment management group.
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 risk arises directly
63
Table of Contents
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 rate 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 7, “Derivatives and Hedging
Activities”
within Notes to Consolidated Financial Statements included in Item 1 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 or materially impacted by movements in foreign
currency rates or commodity prices. Movements in equity prices may have a 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.
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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 March 31,
2011 and 2010, 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 March 31, 2011 and 2010. The Company also reviews
numerous other scenarios, such as a 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.
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 16 — Interest Rate Sensitivity
| 500 Basis Point | ||||||||||||
| 200 Basis Point | 100 Basis Point | Rate Increase | ||||||||||
| Rate Increase | Rate Decrease | Flattening Curve | ||||||||||
|
March 31, 2011
|
0.4 | % | 0.4 | % | 0.3 | % | ||||||
|
March 31, 2010
|
0.5 | % | 0.4 | % | 0.0 | % | ||||||
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 the first quarter of 2011 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.
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 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 March 31, 2011 the Bank had the following sources of
liquidity:
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| • | Outstanding FHLBB borrowings of $277.3 million, with access to $393.1 million additional available borrowing capacity. | ||
| • | No outstanding borrowings with the Federal Reserve Bank of Boston with access to $649.1 million of available borrowing capacity. | ||
| • | Unpledged securities of $154.2 million. | ||
| • | Outstanding repurchase agreements with major brokerage firms of $50.0 million. | ||
| • | Outstanding customer repurchase agreements amounting to $134.7 million. |
In connection with the repurchase agreements, the Company had investment securities carried at
$222.5 million that were pledged to secure assets sold under these repurchase agreements.
Also included in borrowings at March 31, 2011 were $61.8 million of junior subordinated
debentures, comprised primarily of trust preferred debt issued to the public and $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 March 31, 2011 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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Off-Balance Sheet Arrangements
There have been no material changes in off-balance sheet
financial instruments during the first quarter of 2011. Please refer to the 2010 Form 10-K for a
complete table of contractual obligations, commitments, contingencies and off-balance sheet
financial instruments.
Contractual Obligations, Commitments, and Contingencies
There have been no material changes
in contractual obligations, commitments, or contingencies during the first quarter of 2011. Please
refer to the 2010 Form 10-K for a complete table of contractual obligations, commitments,
contingencies, and off-balance sheet financial instruments.
Regulatory Update
In July 2010, Congress enacted the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”). This 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 implementing rules and regulations, and to prepare numerous
studies and reports for Congress.
The Company continues to review the provisions of the Dodd-Frank Act, monitor its
implementation and assess its probable impact on our 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, remains uncertain at this time.
Provisions under the Dodd-Frank Act are as follows:
| • | Effective July 1, 2011 is a provision of the Dodd-Frank Act that 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 are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increased 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, 2013. | ||
| • | 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 board 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. | ||
| • | The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The |
67
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| 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. |
Information required by this Item 3 is included in Item 2 of Part I of this Form 10-Q,
entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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
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 quarterly report.
Changes in Internal Controls over Financial Reporting
. There were no changes in our internal
control over financial reporting that occurred through the first quarter of 2011 that have
materially affected or are reasonably likely to materially affect the Company’s internal controls
over financial reporting.
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.
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As of the date of this report, there have been no material changes with regard to the Risk
Factors disclosed in Item 1A of our 2010 Annual Report on Form 10-K, which are incorporated herein
by reference.
(a) - (c) Not applicable.
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 |
69
Table of Contents
| No. | Exhibit | |
|
|
||
|
|
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. | |
|
|
||
|
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. |
70
Table of Contents
| No. | Exhibit | |
|
|
||
|
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. | |
|
|
||
|
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 |
71
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SIGNATURES
Pursuant to the requirements 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.
(registrant) |
||||
| Date: May 5, 2011 | /s/ Christopher Oddleifson | |||
| Christopher Oddleifson | ||||
|
President and
Chief Executive Officer
(Principal Executive Officer) |
||||
| Date: May 5, 2011 | /s/ Denis K. Sheahan | |||
| Denis K. Sheahan | ||||
|
Chief Financial Officer
(Principal Financial Officer) |
||||
|
INDEPENDENT BANK CORP.
(registrant) |
||||
72
TABLE OF CONTENTS
Part 1. Financial InformationItem 1. Financial StatementsNote 1 Basis Of PresentationNote 2 Recent Accounting StandardsNote 3 SecuritiesNote 4 Loans, Allowance For Loan Losses and Credit QualityNote 5 Earnings Per ShareNote 6 Stock Based CompensationNote 7 Derivatives and Hedging ActivitiesNote 8 Fair Value MeasurementsNote 9 Comprehensive Income/(loss)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior Securities NoneItem 5. Other Information NoneItem 6. Exhibits