Edgar Filing: INDEPENDENT BANK CORP

INDB 9.30.2013 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________________________________

FORM 10-Q

___________________________________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

Commission File Number: 1-9047

___________________________________________________

Independent Bank Corp.

(Exact name of registrant as specified in its charter)

___________________________________________________



Massachusetts	04-2870273
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Office Address: 2036 Washington Street, Hanover Massachusetts 02339

Mailing Address: 288 Union Street, Rockland, Massachusetts 02370

(Address of principal executive offices, including zip code)

(781) 878-6100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer	o	Accelerated Filer	x

Non-accelerated Filer	o	Smaller Reporting Company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 1, 2013, there were 22,971,619 shares of the issuer’s common stock outstanding, par value $0.01 per share.

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INDEX



	PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - September 30, 2013 and December 31, 2012	4
Consolidated Statements of Income - Three and nine months ended September 30, 2013 and 2012	6
Consolidated Statements of Comprehensive Income -Three and nine months ended September 30, 2013 and 2012	7
Consolidated Statements of Stockholders’ Equity - Nine months ended September 30, 2013 and 2012	8
Consolidated Statements of Cash Flows - Nine months ended September 30, 2013 and 2012	9

Notes to Consolidated Financial Statements - September 30, 2013

Note 1 - Basis of Presentation	11
Note 2 - Recent Accounting Standards Updates	11
Note 3 - Securities	13
Note 4 - Loans, Allowance for Loan Losses, and Credit Quality	17
Note 5 - Earnings Per Share	30
Note 6 - Stock Based Compensation	30
Note 7 - Derivative and Hedging Activities	31
Note 8 - Fair Value Measurements	37
Note 9 - Comprehensive Income/(Loss)	45

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	47
Table 1 - Nonperforming Assets	58
Table 2 - Activity in Nonperforming Assets	59
Table 3 - Troubled Debt Restructurings	59
Table 4 - Activity in Troubled Debt Restructurings	60
Table 5 - Interest Income on Nonaccrual Loans And Troubled Debt Restructurings	60
Table 6 - Potential Problem Commercial Loans	61
Table 7 - Summary of Changes in the Allowance for Loan Losses	62
Table 8 - Summary of Allocation of the Allowance for Loan Losses	63
Table 9 - Borrowings	64
Table 10 - Company and Bank’s Capital Amounts and Ratios	65
Table 11 - Closed Residential Real Estate Loans	67
Table 12 - Mortgage Servicing Asset	67
Table 13 - Summary of Results of Operations	68
Table 14 - Average Balance, Interest Earned/Paid & Average Yields – Three Months Ended	68
Table 15 - Average Balance, Interest Earned/Paid & Average Yields – Nine Months Ended	70
Table 16 - Volume Rate Analysis	71
Table 17 - Noninterest Income – Three and Nine Months Ended	75
Table 18 - Noninterest Expense – Three and Nine Months Ended	77

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Table 19 - Tax Provision and Applicable Tax Rates	78
Table 20 - New Markets Tax Credit Recognition Schedule	78
Table 21 - Interest Rate Sensitivity	80
Table 22 - Sources of Liquidity	82



Item 3. Quantitative and Qualitative Disclosures About Market Risk	83
Item 4. Controls and Procedures	83

PART II. OTHER INFORMATION	83
Item 1. Legal Proceedings	83
Item 1A. Risk Factors	83
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	83
Item 3. Defaults Upon Senior Securities	84
Item 4. Mine Safety Disclosures	84
Item 5. Other Information	84
Item 6. Exhibits	85

Signatures	88
Exhibit 31.1 – Certification 302
Exhibit 31.2 – Certification 302
Exhibit 32.1 – Certification 906
Exhibit 32.2 – Certification 906

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

INDEPENDENT BANK CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited—Dollars in thousands)



	September 30, 2013			December 31, 2012
Assets
Cash and due from banks	$	185,111		$	98,144
Interest-earning deposits with banks	122,072			117,330
Securities
Securities available for sale	284,398			329,286
Securities held to maturity (fair value $316,597 and $185,824)	317,373			178,318
Total securities	601,771			507,604
Loans held for sale (at fair value)	10,667			48,187
Loans
Commercial and industrial	756,222			687,511
Commercial real estate	2,166,281			2,122,153
Commercial construction	236,466			188,768
Small business	75,273			78,594
Residential real estate	496,464			612,881
Home equity—1st position	492,732			487,246
Home equity—2nd position	311,938			314,903
Other consumer	20,653			26,955
Total loans	4,556,029			4,519,011
Less: allowance for loan losses	(53,562		)	(51,834		)
Net loans	4,502,467			4,467,177
Federal Home Loan Bank stock	38,674			41,767
Bank premises and equipment, net	56,729			55,227
Goodwill	150,391			150,391
Identifiable intangible assets	10,171			11,753
Cash surrender value of life insurance policies	99,805			97,261
Other real estate owned & other foreclosed assets	9,364			12,150
Other assets	108,242			149,994
Total assets	$	5,895,464		$	5,756,985
Liabilities and Stockholders' Equity
Deposits
Demand deposits	$	1,339,134		$	1,248,394
Savings and interest checking accounts	1,843,795			1,691,187
Money market	882,764			853,971
Time certificates of deposit of $100,000 and over	282,219			317,438
Other time certificates of deposits	409,397			435,687
Total deposits	4,757,309			4,546,677
Borrowings
Federal Home Loan Bank and other borrowings	189,539			283,569
Wholesale repurchase agreements	50,000			50,000
Customer repurchase agreements	164,180			153,359

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Junior subordinated debentures	73,962			74,127
Subordinated debentures	30,000			30,000
Total borrowings	507,681			591,055
Other liabilities	74,730			89,933
Total liabilities	5,339,720			5,227,665
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value. authorized: 1,000,000 shares, outstanding: none	—			—
Common stock, $.01 par value. authorized: 75,000,000 shares,
issued and outstanding: 22,959,287 shares at September 30, 2013 and 22,774,009 shares at December 31, 2012 (includes 271,390 and 264,124 shares of unvested participating restricted stock awards, respectively)	227			225
Shares held in rabbi trust at cost: 177,476 shares at September 30, 2013 and 179,814 shares at December 31, 2012	(3,344		)	(3,179		)
Deferred compensation obligation	3,344			3,179
Additional paid in capital	274,369			269,950
Retained earnings	288,208			263,671
Accumulated other comprehensive loss, net of tax	(7,060		)	(4,526		)
Total stockholders’ equity	555,744			529,320
Total liabilities and stockholders' equity	$	5,895,464		$	5,756,985

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

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited—Dollars in thousands, except per share data)



	Three Months Ended				Nine Months Ended
	September 30				September 30
	2013		2012		2013		2012
Interest income
Interest on loans	$	47,019	$	44,251	$	141,717	$	131,142
Taxable interest and dividends on securities	3,763		3,995		10,798		12,938
Nontaxable interest and dividends on securities	10		20		32		72
Interest on loans held for sale	156		255		661		541
Interest on federal funds sold	79		34		134		85
Total interest and dividend income	51,027		48,555		153,342		144,778
Interest expense
Interest on deposits	2,649		2,619		7,857		8,045
Interest on borrowings	3,182		3,098		9,812		9,413
Total interest expense	5,831		5,717		17,669		17,458
Net interest income	45,196		42,838		135,673		127,320
Provision for loan losses	2,650		3,606		7,050		13,706
Net interest income after provision for loan losses	42,546		39,232		128,623		113,614
Noninterest income
Deposit account fees	4,604		3,959		13,164		11,771
Interchange and ATM fees	2,845		2,422		7,934		7,189
Investment management	4,175		3,723		12,417		11,113
Mortgage banking income	1,843		1,445		5,794		4,238
Loan level derivative income	1,331		1,047		2,679		2,747
Increase in cash surrender value of life insurance policies	793		757		2,325		2,211
Gain on extinguishment of debt	763		—		763		—
Proceeds from life insurance policies	—		1,307		—		1,307
Other noninterest income	1,776		1,448		5,469		4,424
Total noninterest income	18,130		16,108		50,545		45,000
Noninterest expenses
Salaries and employee benefits	22,654		20,704		66,963		61,915
Occupancy and equipment expenses	4,573		4,218		14,742		12,752
Data processing & facilities management	1,179		1,144		3,564		3,418
Consulting expense	914		691		2,291		1,900
FDIC assessment	898		775		2,653		2,354
Advertising expense	759		1,267		3,410		3,478
Debit card expense	766		648		2,209		1,844
Software maintenance	599		491		1,878		1,467
Telecommunication expense	523		479		1,726		1,763
Merger and acquisition expense	366		595		2,465		1,267
Goodwill impairment	—		2,227		—		2,227
Other noninterest expenses	7,491		6,813		23,904		20,025
Total noninterest expenses	40,722		40,052		125,805		114,410
Income before income taxes	19,954		15,288		53,363		44,204
Provision for income taxes	5,299		3,687		13,698		11,546
Net income	$	14,655	$	11,601	$	39,665	$	32,658
Basic earnings per share	0.64		0.54		1.73		1.51
Diluted earnings per share	0.64		0.53		1.73		1.51
Weighted average common shares (basic)	22,946,308		21,654,188		22,886,521		21,613,157
Common shares equivalents	100,806		52,116		72,799		31,300
Weighted average common shares (diluted)	23,047,114		21,706,304		22,959,320		21,644,457
Cash dividends declared per common share	0.22		0.21		0.66		0.63

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

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited—Dollars in thousands)



	Three Months Ended						Nine Months Ended
	September 30						September 30
	2013			2012			2013			2012
Net income	$	14,655		$	11,601		$	39,665		$	32,658
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities
Change in fair value of securities available for sale	(148		)	837			(5,517		)	537
Less: net security losses reclassified into earnings	—			—			3			45
Net change in fair value of securities available for sale	(148		)	837			(5,514		)	582
Unrealized gains (losses) on cash flow hedges
Change in fair value of cash flow hedges	(411		)	(929		)	350			(2,125		)
Less: net cash flow hedge losses reclassified into earnings	866			810			2,557			2,371
Net change in fair value of cash flow hedges	455			(119		)	2,907			246
Amortization of certain costs included in net periodic retirement costs	30			23			73			69
Total other comprehensive (loss) income	337			741			(2,534		)	897
Total comprehensive income	$	14,992		$	12,342		$	37,131		$	33,555

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

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited—Dollars in thousands, except per share data)



	Common Stock Outstanding	Common Stock		Value of Shares Held in Rabbi Trust at Cost			Deferred Compensation Obligation		Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance at December 31, 2012	22,774,009	$	225	$	(3,179	)	$	3,179	$	269,950		$	263,671		$	(4,526	)	$	529,320
Net income	—	—		—			—		—			39,665			—			39,665
Other comprehensive loss	—	—		—			—		—			—			(2,534		)	(2,534		)
Common dividend declared ($0.66 per share)	—	—		—			—		—			(15,128		)	—			(15,128		)
Proceeds from exercise of stock options	76,253	1		—			—		1,993			—			—			1,994
Tax benefit related to equity award activity	—	—		—			—		412			—			—			412
Equity based compensation	—	—		—			—		1,923			—			—			1,923
Restricted stock awards issued, net of awards surrendered	89,431	1		—			—		(670		)	—			—			(669		)
Shares issued under direct stock purchase plan	19,594	—		—			—		656			—			—			656
Deferred compensation obligation	—	—		(165		)	165		—			—			—			—
Tax benefit related to deferred compensation distributions	—	—		—			—		105			—			—			105
Balance at September 30, 2013	22,959,287	$	227	$	(3,344	)	$	3,344	$	274,369		$	288,208		$	(7,060	)	$	555,744
Balance at December 31, 2011	21,499,768	$	213	$	(2,980	)	$	2,980	$	233,878		$	239,452		$	(4,486	)	$	469,057
Net income	—	—		—			—		—			32,658			—			32,658
Other comprehensive income	—	—		—			—		—			—			897			897
Common dividend declared ($0.63 per share)	—	—		—			—		—			(13,629		)	—			(13,629		)
Proceeds from exercise of stock options	48,976	—		—			—		953			—			—			953
Tax benefit related to equity award activity	—	—		—			—		153			—			—			153
Equity based compensation	—	—		—			—		2,178			—			—			2,178
Restricted stock awards issued, net of awards surrendered	85,254	1		—			—		(345		)	—			—			(344		)
Shares issued under direct stock purchase plan	32,928	—		—			—		953			—			—			953
Deferred compensation obligation	—	—		(123		)	123		—			—			—			—
Tax benefit related to deferred compensation distributions	—	—		—			—		89			—			—			89
Balance September 30, 2012	21,666,926	$	214	$	(3,103	)	$	3,103	$	237,859		$	258,481		$	(3,589	)	$	492,965

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

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited—Dollars in thousands)



	Nine Months Ended
	September 30
	2013			2012
Cash flow from operating activities
Net income	$	39,665		$	32,658
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization	6,268			7,900
Goodwill impairment	—			2,227
Provision for loan losses	7,050			13,706
Deferred income tax expense (benefit)	5			(28		)
Net loss on sale of investments	4			—
Loss on write-down of investments in securities available for sale	—			76
Loss (gain) on sale of fixed assets	27			(29		)
Gain on extinguishment of debt	(763		)	—
Loss on sale of other real estate owned and foreclosed assets	47			796
Gain realized from early termination of hedging relationship	—			(22		)
Realized gain on sale leaseback transaction	(775		)	(775		)
Equity based compensation	1,923			2,178
Excess tax benefit related to equity award activity	(412		)	(153		)
Increase in cash surrender value of life insurance policies	(2,325		)	(3,515		)
Change in fair value on loans held for sale	(274		)	(788		)
Proceeds from bank owned life insurance policies	—			2,891
Net change in:
Trading assets	—			(265		)
Loans held for sale	37,794			(21,105		)
Other assets	41,059			(11,983		)
Other liabilities	(14,264		)	5,740
Total adjustments	75,364			(3,149		)
Net cash provided by operating activities	115,029			29,509
Cash flows used in investing activities
Proceeds from sales of securities available for sale	169			—
Proceeds from maturities and principal repayments of securities available for sale	69,732			74,524
Purchase of securities available for sale	(34,864		)	(83,384		)
Proceeds from maturities and principal repayments of securities held to maturity	39,713			41,620
Purchase of securities held to maturity	(179,226		)	(24,287		)
Redemption of Federal Home Loan Bank stock	3,093			2,290
Purchase of life insurance policies	(219		)	(219		)
Net increase in loans	(44,975		)	(280,861		)
Purchase of bank premises and equipment	(6,121		)	(4,951		)
Proceeds from the sale of bank premises and equipment	19			67
Proceeds resulting from early termination of hedging relationship	—			22
Proceeds from the sale of other real estate owned and foreclosed assets	7,119			4,451
Net cash used in investing activities	(145,560		)	(270,728		)

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Cash flows provided by financing activities
Net increase (decrease) in time deposits	(61,509		)	257
Net increase in other deposits	272,141			240,761
Net increase (decrease) in wholesale and customer repurchase agreements	10,821			(7,550		)
Repayment of short term Federal Home Loan Bank advances	(11,695		)	(40,000		)
Repayment of long term Federal Home Loan Bank advances	(79,946		)	—
Proceeds from exercise of stock options	1,994			953
Tax benefit related to equity award activity	412			153
Restricted stock awards issued, net of awards surrendered	(669		)	(344		)
Tax benefit from deferred compensation distribution	105			89
Proceeds from shares issued under direct stock purchase plan	656			953
Common dividends paid	(10,070		)	(13,164		)
Net cash provided by financing activities	122,240			182,108
Net increase (decrease) in cash and cash equivalents	91,709			(59,111		)
Cash and cash equivalents at beginning of year	215,474			237,504
Cash and cash equivalents at end of period	$	307,183		$	178,393
Supplemental schedule of noncash investing and financing activities
Transfer of loans to other real estate owned & foreclosed assets	$	2,346		$	5,429
Transfer of securities from trading to available for sale	$	—		$	8,505

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

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company, incorporated in 1985. The Company is the sole stockholder of Rockland Trust Company (“Rockland Trust” or the “Bank”), a Massachusetts trust company chartered in 1907.

All material intercompany balances and transactions have been eliminated in consolidation. Certain previously reported amounts may have been reclassified to conform to the current year’s presentation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Operating results for the quarter ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 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, 2012, filed with the Securities and Exchange Commission.

NOTE 2 – RECENT ACCOUNTING STANDARDS UPDATES

FASB ASC Topic No. 740 "Income Taxes" Update No. 2013-11. Update No. 2013-11 was issued in July 2013 to eliminate diversity in the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exists at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in the update should be applied prospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.

FASB ASC Topic No. 815 "Derivatives and Hedging" Update No. 2013-10. Update No. 2013-10 was issued in July 2013 to provide guidance on the risks that are permitted to be hedged in a fair value or cash flow hedge. Among those risks for financial assets and financial liabilities is the risk of changes in a hedged item's fair value or a hedged transaction's cash flows attributable to changes in the designated benchmark interest rate (referred to as interest rate risk). In the United States, currently only the interest rates on direct Treasury obligations of the U.S. government (UST) and, for practical reasons, the London Interbank Offered Rate (LIBOR) swap rate are considered benchmark interest rates. The amendments in this update permit the Fed Funds Effective Swap Rate (OIS) to now be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this standard did not have a material impact on the Company's consolidated financial position.

FASB ASC Topic No. 220 "Comprehensive Income" Update No. 2013-02. Update No. 2013-02 was issued in February 2013, stating that the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this standard did not have a material impact on the Company's consolidated financial position.

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FASB ASC Topic No. 210 "Balance Sheet" Update No. 2013-01. Update No. 2013-01 was issued in January of 2013, the amendments in this update affect entities that have derivatives accounted for in accordance with Topic 815 "Derivatives and Hedges," including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. As a result of these amendments, entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement are no longer subject to the disclosure requirements in Update No. 2011-11. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The amendments are effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those periods. The adoption of this standard did not have a material impact on the Company's consolidated financial position.

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NOTE 3 – SECURITIES

The following table presents a summary of the amortized cost, gross unrealized holding gains and losses, other-than-temporary impairment recorded in other comprehensive income and fair value of securities available for sale and securities held to maturity for the periods below:



	September 30, 2013												December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Unrealized Losses Other			Other-Than- Temporary (Impairment)/Recovery			Fair Value		Amortized Cost		Gross Unrealized Gains		Unrealized Losses Other			Other-Than- Temporary (Impairment)/Recovery			Fair Value
	(Dollars in thousands)
Available for sale securities
U.S. Government agency securities	$	20,048	$	—	$	(449	)	$	—		$	19,599	$	20,053	$	769	$	—		$	—		$	20,822
Agency mortgage-backed securities	179,366		6,996		(3,001		)	—			183,361		209,381		12,158		(114		)	—			221,425
Agency collateralized mortgage obligations	61,481		472		(698		)	—			61,255		67,412		1,001		(37		)	—			68,376
Private mortgage-backed securities	2,599		—		—			264			2,863		3,227		—		—			305			3,532
Single issuer trust preferred securities issued by banks	2,222		—		(49		)	—			2,173		2,255		—		(15		)	—			2,240
Pooled trust preferred securities issued by banks and insurers	8,113		—		(1,900		)	(2,242		)	3,971		8,353		—		(2,415		)	(2,957		)	2,981
Marketable securities	10,756		671		(251		)	—			11,176		9,875		92		(57		)	—			9,910
Total available for sale securities	$	284,585	$	8,139	$	(6,348	)	$	(1,978	)	$	284,398	$	320,556	$	14,020	$	(2,638	)	$	(2,652	)	$	329,286
Held to maturity securities
U.S. Treasury securities	$	1,012	$	57	$	—		$	—		$	1,069	$	1,013	$	121	$	—		$	—		$	1,134
Agency mortgage-backed securities	115,983		2,961		(114		)	—			118,830		72,360		4,233		—			—			76,593
Agency collateralized mortgage obligations	193,190		1,104		(5,038		)	—			189,256		97,507		2,875		(2		)	—			100,380
State, county, and municipal securities	676		11		—			—			687		915		11		—			—			926
Single issuer trust preferred securities issued by banks	1,507		22		—			—			1,529		1,516		10		—			—			1,526
Corporate debt securities	5,005		221		—			—			5,226		5,007		258		—			—			5,265
Total held to maturity securities	$	317,373	$	4,376	$	(5,152	)	$	—		$	316,597	$	178,318	$	7,508	$	(2	)	$	—		$	185,824
Total	$	601,958	$	12,515	$	(11,500	)	$	(1,978	)	$	600,995	$	498,874	$	21,528	$	(2,640	)	$	(2,652	)	$	515,110

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The Company did not realize any gain or loss on marketable securities classified as available for sale during the three month periods ending September 30, 2013 and 2012. The Company realized a net loss of $4,000 on marketable securities classified as available for sale during the nine month period ended September 30, 2013 and there were no realized gains or losses during the nine month period ended September 30, 2012.

The actual maturities of certain securities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. A schedule of the contractual maturities of securities available for sale and securities held to maturity as of September 30, 2013 is presented below:

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	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	3	$	3	$	254	$	256
Due after one year to five years	9,151		9,647		5,936		6,192
Due after five years to ten years	81,624		80,651		18,052		18,188
Due after ten years	183,051		182,921		293,131		291,961
Total debt securities	$	273,829	$	273,222	$	317,373	$	316,597
Marketable securities	$	10,756	$	11,176	$	—	$	—
Total	$	284,585	$	284,398	$	317,373	$	316,597

The securities portfolio includes $8.3 million and $7.7 million, respectively, of callable securities in the Company’s investment portfolio at September 30, 2013 and December 31, 2012.

At September 30, 2013 and December 31, 2012, investment securities carried at $361.9 million and $365.8 million, respectively, were pledged to secure public deposits, assets sold under repurchase agreements, letters of credit, and for other purposes.

At September 30, 2013 and December 31, 2012, the Company had no investments in obligations of individual states, counties, or municipalities, which exceeded 10% of Stockholders’ Equity.

Other-Than-Temporary Impairment ("OTTI")

The Company continually reviews investment securities for the existence of OTTI, taking into consideration current market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, the credit worthiness of the obligor of the security, volatility of earnings, current analysts’ evaluations, the Company’s intent to sell the security, or whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery, as well as other qualitative factors. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.

The following tables show the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position, which the Company has not deemed to be OTTI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:



	September 30, 2013
		Less than 12 months					12 months or longer					Total
	# of holdings	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
U.S. Government agency securities	2	$	19,599	$	(449	)	$	—	$	—		$	19,599	$	(449	)
Agency mortgage-backed securities	31	84,934		(2,893		)	3,431		(222		)	88,365		(3,115		)
Agency collateralized mortgage obligations	15	149,561		(5,736		)	—		—			149,561		(5,736		)
Single issuer trust preferred securities issued by banks and insurers	2	2,173		(49		)	—		—			2,173		(49		)
Pooled trust preferred securities issued by banks and insurers	2	—		—			2,343		(1,900		)	2,343		(1,900		)
Marketable securities	19	5,735		(232		)	146		(19		)	5,881		(251		)
Total temporarily impaired securities	71	$	262,002	$	(9,359	)	$	5,920	$	(2,141	)	$	267,922	$	(11,500	)

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	December 31, 2012
		Less than 12 months					12 months or longer					Total
	# of holdings	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
Agency mortgage-backed securities	17	$	23,814	$	(114	)	$	—	$	—		$	23,814	$	(114	)
Agency collateralized mortgage obligations	2	17,677		(39		)	—		—			17,677		(39		)
Single issuer trust preferred securities issued by banks and insurers	2	2,240		(15		)	—		—			2,240		(15		)
Pooled trust preferred securities issued by banks and insurers	2	—		—			2,069		(2,415		)	2,069		(2,415		)
Marketable securities	15	6,613		(57		)	—		—			6,613		(57		)
Total temporarily impaired securities	38	$	50,344	$	(225	)	$	2,069	$	(2,415	)	$	52,413	$	(2,640	)

The Company does not intend to sell these investments and has determined based upon available evidence that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost basis. As a result, the Company does not consider these investments to be OTTI. The Company made this determination by reviewing various qualitative and quantitative factors regarding each investment category, such as current market conditions, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, and current analysts’ evaluations.

As a result of the Company’s review of these qualitative and quantitative factors, the causes of the impairments listed in the table above by category are as follows at September 30, 2013:

•

U.S. Government Agency Securities: Government Agency bonds have historically been considered to be of high credit quality. The bonds in the Bank's portfolio consist of debt obligations of the Federal Home Loan Bank and the Federal Farm Credit Banks. Because these firms are owned by shareholders and not part of the federal government, these bonds are not backed by the government's “full faith and credit” guarantee and are therefore subject to credit and default risk. The risk of default on these entities are considered low and the credit quality is currently well above investment grade. As such, the decline in market value of these securities is attributable to changes in interest rates and not credit quality.

•

Agency Mortgage-Backed Securities and Collateralized Mortgage Obligations: This portfolio has contractual terms that generally do not permit the issuer to settle the securities at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. Government or one of its agencies.


•	Single Issuer Trust Preferred Securities: This portfolio consist of two securities, both of which are below investment grade. The unrealized loss on these securities is attributable to the illiquid nature of the trust preferred market in the current economic environment. Management evaluates various financial metrics for each of the issuers, including regulatory capital ratios of issuers.

•

Pooled Trust Preferred Securities: This portfolio consists of two securities, both of which are below investment grade. The unrealized loss on these securities is attributable to the illiquid nature of the trust preferred market 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.

•

Marketable Securities: This portfolio consists of mutual funds and other equity investments. During some periods, the mutual funds in the Company’s investment portfolio may have unrealized losses resulting from market fluctuations as well as the risk premium associated with that particular asset class. For example, emerging market equities tend to trade at a higher risk premium than U.S. government bonds and thus, will fluctuate to a greater degree on both the upside and the downside. In the context of a well-diversified portfolio, however, the correlation amongst the various asset classes represented by the funds serves to minimize downside risk. The Company evaluates each mutual fund in the portfolio regularly and measures performance on both an absolute and relative basis. A reasonable recovery period for positions with an unrealized loss is based on management’s assessment of general economic data, trends within a particular asset class, valuations, earnings forecasts and bond durations.

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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 these securities possess characteristics which in the current economic environment could lead to further credit related OTTI charges. The following tables summarize pertinent information as of September 30, 2013, that was considered by management in determining if OTTI existed:



	Class	Amortized Cost (1)		Gross Unrealized Gain/(Loss)			Non-Credit Related Other- Than-Temporary (Impairment)/Recovery			Fair Value		Total Cumulative Credit Related Other-Than- Temporary Impairment			Total Cumulative Other-Than- Temporary (Impairment)/Recovery to Date
	(Dollars in thousands)
Pooled trust preferred securities
Pooled trust preferred security A	C1	$	1,283	$	—		$	(757	)	$	526	$	(3,676	)	$	(4,433	)
Pooled trust preferred security B	D	—		—			—			—		(3,481		)	(3,481		)
Pooled trust preferred security C	C1	506		—			(307		)	199		(482		)	(789		)
Pooled trust preferred security D	D	—		—			—			—		(989		)	(989		)
Pooled trust preferred security E	C1	2,081		—			(1,178		)	903		(1,368		)	(2,546		)
Pooled trust preferred security F	B	1,833		(1,028		)	—			805		—			—
Pooled trust preferred security G	A1	2,410		(872		)	—			1,538		—			—
Total pooled trust preferred securities		$	8,113	$	(1,900	)	$	(2,242	)	$	3,971	$	(9,996	)	$	(12,238	)
Private mortgage-backed securities
Private mortgage-backed securities-one	2A1	$	1,835	$	—		$	165		$	2,000	$	(766	)	$	(601	)
Private mortgage-backed securities-two	A19	764		—			99			863		(85		)	14
Total private mortgage-backed securities		$	2,599	$	—		$	264		$	2,863	$	(851	)	$	(587	)
Total		$	10,712	$	(1,900	)	$	(1,978	)	$	6,834	$	(10,847	)	$	(12,825	)


(1)	The amortized cost reflects previously recorded OTTI charges recognized in earnings for the applicable securities.



	Class	Number of Performing Banks and Insurance Cos. in Issuances (Unique)	Current Deferrals/ Defaults/Losses (As a % of Original Collateral)	Total Projected Defaults/Losses (as a % of Performing Collateral)	Excess Subordination (After Taking into Account Best Estimate of Future Deferrals/ Defaults/Losses) (1)	Lowest credit Ratings to date (2)
Pooled trust preferred securities
Trust preferred security A	C1	56	33.08%	19.20%	—%	C (Fitch & Moody's)
Trust preferred security B	D	56	33.08%	19.20%	—%	C (Fitch)
Trust preferred security C	C1	47	29.29%	14.96%	—%	C (Fitch & Moody's)
Trust preferred security D	D	47	29.29%	14.96%	—%	C (Fitch)
Trust preferred security E	C1	46	26.86%	15.82%	1.10%	C (Fitch & Moody's)
Trust preferred security F	B	32	25.08%	17.98%	33.20%	CC (Fitch)
Trust preferred security G	A1	32	25.08%	17.98%	57.55%	CCC+ (S&P)
Private mortgage-backed securities
Private mortgage-backed securities-one	2A1	N/A	7.80%	12.72%	—%	D (Fitch)
Private mortgage-backed securities-two	A19	N/A	4.33%	7.54%	—%	C (Fitch)


(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.

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The following table shows the total OTTI that the Company recorded for the periods indicated:



	Three Months Ended						Nine Months Ended
	September 30						September 30
	2013			2012			2013			2012
	(Dollars in thousands)
Gross change in OTTI recorded on certain investments	$	303		$	403		$	674		$	571
Portion of OTTI recognized in OCI	(303		)	(403		)	(674		)	(647		)
Total credit related OTTI losses recognized in earnings	$	—		$	—		—			$	(76	)

The following table shows the cumulative credit related component of OTTI for the periods indicated:



	Three Months Ended						Nine Months Ended
	September 30						September 30
	2013			2012			2013			2012
	(Dollars in thousands)
Balance at beginning of period	$	(10,847	)	$	(10,847	)	$	(10,847	)	$	(10,771	)
Add
Incurred on securities not previously impaired	—			—			—			—
Incurred on securities previously impaired	—			—			—			(76		)
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	$	(10,847	)	$	(10,847	)	$	(10,847	)	$	(10,847	)

NOTE 4 – LOANS, ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

The following tables bifurcate the amount of allowance allocated to each loan category based on the type of impairment analysis as of the periods indicated:



	September 30, 2013
	(Dollars in thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Home Equity		Other Consumer		Total
Financing receivables
Ending balance: total loans by group	$	756,222	$	2,166,281	$	236,466	$	75,273	$	496,464	$	804,670	$	20,653	$	4,556,029	(1	)
Ending balance: individually evaluated for impairment	$	9,646	$	39,805	$	100	$	2,062	$	15,786	$	4,131	$	1,437	$	72,967
Ending balance: purchase credit impaired loans	$	—	$	18,114	$	—	$	—	$	8,888	$	330	$	—	$	27,332
Ending balance: collectively evaluated for impairment	$	746,576	$	2,108,362	$	236,366	$	73,211	$	471,790	$	800,209	$	19,216	$	4,455,730

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	December 31, 2012
	(Dollars in thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Home Equity		Other Consumer		Total
Financing receivables
Ending balance: total loans by group	$	687,511	$	2,122,153	$	188,768	$	78,594	$	612,881	$	802,149	$	26,955	$	4,519,011	(1	)
Ending balance: individually evaluated for impairment	$	8,575	$	33,868	$	—	$	2,279	$	15,373	$	4,435	$	2,129	$	66,659
Ending Balance: purchase credit impaired loans	$	—	$	21,853	$	—	$	—	$	9,821	$	380	$	—	$	32,054
Ending balance: collectively evaluated for impairment	$	678,936	$	2,066,432	$	188,768	$	76,315	$	587,687	$	797,334	$	24,826	$	4,420,298


(1)	The amount of deferred fees included in the ending balance was $2.4 million and $3.1 million at September 30, 2013 and December 31, 2012, respectively.

The following tables summarize changes in allowance for loan losses by loan category for the periods indicated:



	Three Months Ended September 30, 2013
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Home Equity			Other Consumer			Total
Allowance for loan losses
Beginning balance	$	14,325		$	23,029		$	3,422		$	1,295		$	2,959		$	7,267		$	679		$	52,976
Charge-offs	(866		)	(209		)	(308		)	(84		)	(210		)	(420		)	(273		)	(2,370		)
Recoveries	24			89			—			47			5			22			119			306
Provision	1,531			2,069			387			(43		)	141			(1,555		)	120			2,650
Ending balance	$	15,014		$	24,978		$	3,501		$	1,215		$	2,895		$	5,314		$	645		$	53,562



	Three Months Ended September 30, 2012
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction		Small Business			Residential Real Estate			Home Equity			Other Consumer			Total
Allowance for loan losses
Beginning balance	$	11,558		$	21,376		$	2,220	$	1,320		$	2,981		$	7,854		$	1,094		$	48,403
Charge-offs	(1,267		)	(621		)	—		(98		)	(227		)	(365		)	(247		)	(2,825		)
Recoveries	122			188			—		21			79			36			116			562
Provision	1,555			962			359		128			101			443			58			3,606
Ending balance	$	11,968		$	21,905		$	2,579	$	1,371		$	2,934		$	7,968		$	1,021		$	49,746

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	Nine Months Ended September 30, 2013
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Home Equity			Other Consumer			Total
Allowance for loan losses
Beginning balance	$	13,461		$	22,598		$	2,811		$	1,524		$	2,930		$	7,703		$	807		$	51,834
Charge-offs	(2,591		)	(812		)	(308		)	(505		)	(457		)	(954		)	(794		)	(6,421		)
Recoveries	263			97			—			123			91			73			452			1,099
Provision	3,881			3,095			998			73			331			(1,508		)	180			7,050
Ending balance	$	15,014		$	24,978		$	3,501		$	1,215		$	2,895		$	5,314		$	645		$	53,562
Ending balance: Individually evaluated for impairment	$	1,174		$	2,150		$	—		$	111		$	1,651		$	112		$	83		$	5,281
Ending balance: Collectively evaluated for impairment	$	13,840		$	22,828		$	3,501		$	1,104		$	1,244		$	5,202		$	562		$	48,281
	Nine Months Ended September 30, 2012
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Home Equity			Other Consumer			Total
Allowance for loan losses
Beginning balance	$	11,682		$	23,514		$	2,076		$	1,896		$	3,113		$	4,597		$	1,382		$	48,260
Charge-offs	(5,989		)	(3,358		)	—			(404		)	(441		)	(2,506		)	(840		)	(13,538		)
Recoveries	435			188			—			119			79			67			430			1,318
Provision	5,840			1,561			503			(240		)	183			5,810			49			13,706
Ending balance	$	11,968		$	21,905		$	2,579		$	1,371		$	2,934		$	7,968		$	1,021		$	49,746
Ending balance: Individually evaluated for impairment	$	281		$	737		$	—		$	201		$	1,326		$	36		$	174		$	2,755
Ending balance: Collectively evaluated for impairment	$	11,687		$	21,168		$	2,579		$	1,170		$	1,608		$	7,932		$	847		$	46,991

For the purpose of estimating the allowance for loan losses, management segregates the loan portfolio into the portfolio segments detailed in the above tables. Each of these loan categories possesses unique risk characteristics that are considered when determining the appropriate level of allowance for each segment. Some of the risk characteristics unique to each loan category include:

Commercial Portfolio:

Commercial & 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.

Commercial Real Estate—Loans in this category consist of mortgage loans to finance investment in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties. Loans are typically written with amortizing payment structures. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources consist of: primarily, cash flow from operating leases and rents, and secondarily, liquidation of assets.

Commercial Construction—Loans in this category consist of short-term construction loans, revolving and nonrevolving credit lines and construction/permanent loans to finance the acquisition, development and construction or rehabilitation of real property. Project types include: residential 1-4 family condominium and multi-family homes, commercial/retail, office, industrial,

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hotels, educational and healthcare facilities and other specific use properties. Loans may be written with nonamortizing or hybrid payment structures depending upon the type of project. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources vary depending upon the type of project and may consist of: sale or lease of units, operating cash flows or liquidation of other assets.

Small Business—Loans in this category consist of revolving, term loan and mortgage obligations extended to sole proprietors and small businesses for purposes of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant & equipment, or real estate if applicable. Repayment sources consist of: primarily, operating cash flows, and secondarily, liquidation of assets.

For the commercial portfolio it is the Bank’s policy to obtain personal guarantees for payment from individuals holding material ownership interests of the borrowing entities.

Consumer Portfolio:

Residential Real Estate—Residential mortgage loans held in the 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 loans.

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 nonowner occupied 1-4 family homes with more restrictive loan to value requirements. The home equity loan has a fixed rate and is billed equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed in interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan to value ratios within established policy guidelines.

Other Consumer—Other consumer loan products 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. These loans may be secured or unsecured.

Credit Quality:

The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as delinquent, impaired, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. If a restructured loan meets certain criteria, it may be categorized as a troubled debt restructuring (“TDR”).

The Company reviews numerous credit quality indicators when assessing the risk in its loan portfolio. For the commercial portfolio, the Company utilizes a 10-point commercial risk-rating system, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated with a commercial loan transaction. Factors considered include industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral, and other considerations. The risk-ratings categories are defined as follows:

1- 6 Rating — Pass

Risk-rating grades “1” through “6” comprise those loans ranging from ‘Substantially Risk Free’ which indicates borrowers are of unquestioned credit standing and the pinnacle of credit quality, well established companies with a very strong financial condition, and loans fully secured by cash collateral, through ‘Acceptable Risk’, which indicates borrowers may exhibit declining earnings, strained cash flow, increasing 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, currently these borrowers are marginally acceptable; no loss of principal or interest is envisioned.

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8 Rating — Definite Weakness

Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. Loan may be inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. However, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation.

9 Rating — Partial Loss Probable

Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt with the added provision that the weaknesses make collection of the debt in full, on the basis of currently existing facts, 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.

The following table details the internal risk-rating categories for the Company’s commercial portfolio:



		September 30, 2013
Category	Risk Rating	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Total
		(Dollars in thousands)
Pass	1 - 6	$	710,761	$	1,999,924	$	223,420	$	68,489	$	3,002,594
Potential weakness	7	24,668		71,371		7,881		2,940		106,860
Definite weakness-loss unlikely	8	20,403		93,899		5,065		3,780		123,147
Partial loss probable	9	390		1,087		100		64		1,641
Definite loss	10	—		—		—		—		—
Total		$	756,222	$	2,166,281	$	236,466	$	75,273	$	3,234,242



		December 31, 2012
Category	Risk Rating	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Total
		(Dollars in thousands)
Pass	1 - 6	$	647,984	$	1,928,148	$	177,693	$	71,231	$	2,825,056
Potential weakness	7	16,420		92,651		6,195		3,213		118,479
Definite weakness-loss unlikely	8	21,979		98,688		4,880		4,080		129,627
Partial loss probable	9	1,128		2,666		—		70		3,864
Definite loss	10	—		—		—		—		—
Total		$	687,511	$	2,122,153	$	188,768	$	78,594	$	3,077,026

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For the Company’s consumer portfolio, 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 and automated valuation services and broker opinions of value are used to supplement original value data for the residential and home equity portfolios, periodically. In addition, for all second position home equity loans, management reviews the performance of the first position lien, which is often held at another institution, when determining the accrual status of the loan. The following table shows the weighted average FICO scores and the weighted average combined LTV ratios as of the periods indicated below:



	September 30, 2013		December 31, 2012
Residential portfolio
FICO score (re-scored) (1)	739		727
LTV (re-valued) (2)	69.0	%	67.0	%
Home equity portfolio
FICO score (re-scored) (1)	763		763
LTV (re-valued) (2)	55.0	%	54.0	%


(1)	The average FICO scores for September 30, 2013 are based upon rescores available from August 2013 and actual score data for loans booked between September 1 and September 30, 2013. The average FICO scores for December 31, 2012 are based upon rescores available from November 2012 and actual score data for loans booked between December 1 and December 31, 2012.

(2)

The combined LTV ratios for September 30, 2013 are based upon updated automated valuations as of February 2013 and actual score data for loans booked between March 1 and September 30, 2013. The combined LTV ratios for December 31, 2012 are based upon updated automated valuations as of November 30, 2011 and actual score data for loans through December 31, 2012. For home equity loans and lines in a subordinate lien, the LTV data represents a combined LTV, taking into account the senior lien data for loans and lines.

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. Delinquent loans are managed by a team of seasoned collection specialists and 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 nonaccrual loans. 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. Set forth is information regarding the Company’s nonperforming loans at the period shown.

The following table shows nonaccrual loans at the dates indicated:



	September 30, 2013		December 31, 2012
	(Dollars in thousands)
Commercial and industrial	$	4,557	$	2,666
Commercial real estate	12,800		6,574
Commercial construction	100		—
Small business	615		570
Residential real estate	11,817		11,472
Home equity (1)	7,320		7,311
Other consumer	134		121
Total nonaccrual loans (2)	$	37,343	$	28,714


(1)	Includes home equity loans which are currently performing but have been placed on nonaccrual as a result of delinquency with respect to the first position, which is held by another financial institution.


(2)	Included in these amounts were $8.6 million and $6.6 million of nonaccruing TDRs at September 30, 2013 and December 31, 2012, respectively.

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The following table shows the age analysis of past due financing receivables as of the dates indicated:



	September 30, 2013
	30-59 days			60-89 days			90 days or more			Total Past Due					Total Financing Receivables		Recorded Investment >90 Days and Accruing
	Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Current		Total Financing Receivables		Recorded Investment >90 Days and Accruing
	(Dollars in thousands)
Loan Portfolio
Commercial and industrial	7	$	837	5	$	851	22	$	4,033	34	$	5,721	$	750,501	$	756,222	$	—
Commercial real estate	17	8,175		6	2,150		29	8,987		52	19,312		2,146,969		2,166,281		—
Commercial construction	—	—		—	—		1	100		1	100		236,366		236,466		—
Small business	14	328		8	295		18	278		40	901		74,372		75,273		—
Residential real estate	17	2,315		9	1,679		38	6,335		64	10,329		486,135		496,464		433
Home equity	19	1,558		7	646		23	1,598		49	3,802		800,868		804,670		—
Other consumer	114	554		28	96		31	231		173	881		19,772		20,653		111
Total	188	$	13,767	63	$	5,717	162	$	21,562	413	$	41,046	$	4,514,983	$	4,556,029	$	544



	December 31, 2012
	30-59 days			60-89 days			90 days or more			Total Past Due					Total Financing Receivables		Recorded Investment >90 Days and Accruing
	Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Current		Total Financing Receivables		Recorded Investment >90 Days and Accruing
	(Dollars in thousands)
Loan Portfolio
Commercial and industrial	14	$	1,305	7	$	336	23	$	1,875	44	$	3,516	$	683,995	$	687,511	$	—
Commercial real estate	19	5,028		8	2,316		31	6,054		58	13,398		2,108,755		2,122,153		—
Commercial construction	—	—		—	—		—	—		—	—		188,768		188,768		—
Small business	20	750		8	94		10	320		38	1,164		77,430		78,594		—
Residential real estate	17	3,053		7	1,848		40	7,501		64	12,402		600,479		612,881		—
Home equity	32	2,756		10	632		17	1,392		59	4,780		797,369		802,149		—
Other consumer	208	1,217		32	224		28	153		268	1,594		25,361		26,955		52
Total	310	$	14,109	72	$	5,450	149	$	17,295	531	$	36,854	$	4,482,157	$	4,519,011	$	52

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.

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The following table shows the Company’s total TDRs and other pertinent information as of the dates indicated:



	September 30, 2013		December 31, 2012
	(Dollars in thousands)
TDRs on accrual status	$	36,429	$	46,764
TDRs on nonaccrual	8,567		6,554
Total TDRs	$	44,996	$	53,318
Amount of specific reserves included in the allowance for loan losses associated with TDRs:	$	2,544	$	3,049
Additional commitments to lend to a borrower who has been a party to a TDR:	$	1,582	$	1,847

The Bank’s policy is to have any restructured loan which is on nonaccrual status prior to being modified remain on nonaccrual status for 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. Additionally, loans classified as TDRs are adjusted to reflect the changes in value of the recorded investment in the loan, if any, resulting from the granting of a concession. For all residential loan modifications, the borrower must perform during a 90 day trial period before the modification is finalized.

The following table shows the modifications which occurred during the periods indicated and the change in the recorded investment subsequent to the modifications occurring:



	Three Months Ended					Nine Months Ended
	September 30, 2013					September 30, 2013
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)
	(Dollars in thousands)
Troubled debt restructurings
Commercial & industrial	1	$	37	$	37	3	$	319	$	319
Commercial real estate	2	463		463		4	1,526		1,526
Small business	4	$	261	$	261	9	543		543
Residential real estate	1	228		228		7	2,128		2,154
Home equity	1	184		184		4	378		378
Other consumer	—	—		—		2	11		11
Total	9	$	1,173	$	1,173	29	$	4,905	$	4,931

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	Three Months Ended					Nine Months Ended
	September 30, 2012					September 30, 2012
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)
	(Dollars in thousands)
Troubled debt restructurings
Commercial & industrial	4	$	329	$	329	15	$	1,602	$	1,602
Commercial real estate	5	1,624		1,624		13	6,274		6,274
Small business	8	327		327		16	724		724
Residential real estate	5	889		893		9	1,539		1,543
Home equity	3	111		113		12	767		769
Other consumer	8	57		57		30	459		459
Total	33	$	3,337	$	3,343	95	$	11,365	$	11,371


(1)	The post-modification balances represent the balance of the loan on the date of modifications. These amounts may show an increase when modifications include a capitalization of interest.

The following table shows the Company’s post-modification balance of TDRs listed by type of modification as of the periods indicated:



	Three Months Ended September 30				Nine Months Ended September 30
	2013		2012		2013		2012
	(Dollars in thousands)				(Dollars in thousands)
Extended maturity	$	438	$	721	$	1,429	$	4,058
Adjusted interest rate	—		1,207		—		1,561
Combination rate & maturity	735		1,136		3,491		4,358
Court ordered concession	—		279		11		1,394
Total	$	1,173	$	3,343	$	4,931	$	11,371

The following table shows the loans that have been modified during the past twelve months which have subsequently defaulted during the periods indicated. The Company considers a loan to have defaulted when it reaches 90 days past due.

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	Three Months Ended September 30
	2013			2012
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Troubled debt restructurings that subsequently defaulted
Commercial real estate	—	—		1	202
Residential real estate	—	—		1	190
Total	—	$	—	2	$	392

	Nine Months Ended September 30
	2013			2012
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Troubled debt restructurings that subsequently defaulted
Commercial & industrial	1	$	1,614	—	$	—
Commercial real estate	—	—		1	202
Small business	1	231		—	—
Residential real estate	—	—		1	190
Total	2	$	1,845	2	$	392

All TDR loans are considered impaired and therefore are subject to a specific review for impairment. The impairment analysis appropriately discounts the present value of the anticipated cash flows by the loan’s contractual rate of interest in effect prior to the loan’s modification. The amount of impairment, if any, is recorded as a specific loss allocation to each individual loan in the allowance for loan losses. Commercial loans (commercial and industrial, commercial construction, commercial real estate and small business loans), residential loans, and home equity loans that have been classified as TDRs and which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. In such an instance, any shortfall between the value of the collateral and the book value of the loan is determined by measuring the recorded investment in the loan against the fair value of the collateral less estimated costs to sell. The Bank charges off the amount of any confirmed loan loss in the period when the loans, or portion of loans, are deemed uncollectible. Smaller balance consumer TDR loans are reviewed for performance to determine when a charge-off is appropriate.

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.

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The tables below set forth information regarding the Company’s impaired loans by loan portfolio as of the dates indicated:



	September 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded
Commercial & industrial	$	7,512	$	7,815	$	—
Commercial real estate	14,872		15,674		—
Commercial construction	100		408		—
Small business	1,446		1,611		—
Residential real estate	2,053		2,311		—
Home equity	3,559		3,614		—
Other consumer	485		486		—
Subtotal	30,027		31,919		—
With an allowance recorded
Commercial & industrial	$	2,134	$	2,154	$	1,174
Commercial real estate	24,933		25,007		2,150
Commercial construction	—		—		—
Small business	616		644		111
Residential real estate	13,733		14,678		1,651
Home equity	572		637		112
Other consumer	952		971		83
Subtotal	42,940		44,091		5,281
Total	$	72,967	$	76,010	$	5,281



	December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded
Commercial & industrial	$	5,849	$	7,343	$	—
Commercial real estate	12,999		13,698		—
Commercial construction	—		—		—
Small business	1,085		1,147		—
Residential real estate	2,545		2,630		—
Home equity	4,119		4,166		—
Other consumer	700		705		—
Subtotal	27,297		29,689		—
With an allowance recorded
Commercial & industrial	$	2,726	$	2,851	$	1,084
Commercial real estate	20,869		21,438		516
Commercial construction	—		—		—
Small business	1,194		1,228		353
Residential real estate	12,828		13,601		1,302
Home equity	316		389		35
Other consumer	1,429		1,453		130
Subtotal	39,362		40,960		3,420
Total	$	66,659	$	70,649	$	3,420

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The following tables set forth information regarding interest income recognized on impaired loans, by portfolio, for the periods indicated:



	Three Months Ended				Nine Months Ended
	September 30, 2013				September 30, 2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded
Commercial & industrial	$	7,553	$	91	$	7,762	$	275
Commercial real estate	15,175		262		15,638		788
Commercial construction	1,105		13		1,441		39
Small business	1,479		26		1,631		79
Residential real estate	2,159		24		2,221		68
Home equity	3,570		41		3,604		126
Other consumer	500		9		543		32
Subtotal	31,541		466		32,840		1,407
With an allowance recorded
Commercial & industrial	$	2,360	$	30	$	2,684	$	96
Commercial real estate	24,984		330		25,128		1,013
Commercial construction	—		—		—		—
Small business	624		10		652		30
Residential real estate	13,773		135		13,884		391
Home equity	575		6		585		18
Other consumer	973		9		1,041		27
Subtotal	43,289		520		43,974		1,575
Total	$	74,830	$	986	$	76,814	$	2,982

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	Three Months Ended				Nine Months Ended
	September 30, 2012				September 30, 2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded
Commercial & industrial	$	8,181	$	107	$	8,584	$	323
Commercial real estate	18,625		329		19,033		1,005
Commercial construction	—		—		—		—
Small business	1,461		25		1,543		79
Residential real estate	2,709		81		2,730		84
Home equity	3,527		39		3,571		117
Other consumer	81		1		78		3
Subtotal	34,584		582		35,539		1,611
With an allowance recorded
Commercial & industrial	$	1,077	$	23	$	1,487	$	74
Commercial real estate	17,444		255		18,103		790
Commercial construction	—		—		—		—
Small business	1,176		16		1,171		49
Residential real estate	13,592		168		13,720		434
Home equity	803		14		815		41
Other consumer	2,283		30		2,447		98
Subtotal	36,375		506		37,743		1,486
Total	$	70,959	$	1,088	$	73,282	$	3,097

Certain loans acquired by the Company may have shown evidence of deterioration of credit quality since origination and it was therefore deemed unlikely that the Bank would be able to collect all contractually required payments. As such, these loans were deemed to be Purchase Credit Impaired (“PCI”) loans and the carrying value and prospective income recognition are predicated upon future cash flows expected to be collected. The following table displays certain information pertaining to purchased credit impaired loans at the dated indicated:



	September 30, 2013		December 31, 2012
	(Dollars in thousands)
Outstanding balance	$	30,305	$	36,278
Carrying amount	$	27,333	$	32,054

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The following table summarizes activity in the accretable yield for the PCI loan portfolio:



	(Dollars in thousands)
Balance at January 1, 2012	$	—
Acquisition	3,095
Accretion	(903		)
Reclassification from nonaccretable difference for loans with improved cash flows (1)	272
Balance at December 31, 2012	2,464

Balance at January 1, 2013	$	2,464
Accretion	(1,453		)
Other change in expected cash flows (2)	1,142
Reclassification from nonaccretable difference for loans with improved cash flows (1)	335
Balance at September 30, 2013	$	2,488

(1) Results in increased interest income during the period in which the loan paid off.

(2) Represents changes in cash flows expected to be collected and resulting in increased interest income as a prospective yield adjustment over the remaining life of the loan(s).

NOTE 5 – EARNINGS PER SHARE

Earnings per share consisted of the following components for the periods indicated:



	Three Months Ended					Nine Months Ended
	September 30					September 30
	2013		2012			2013		2012
	(Dollars in thousands, except per share data)
Net income	$	14,655	$	11,601		$	39,665	$	32,658

Weighted Average Shares
Basic shares	22,946,308		21,654,188			22,886,521		21,613
Effect of diluted securities	100,806		52,116			72,799		31
Dilutive shares	23,047,114		21,706,304			22,959,320		21,644

Net income per share
Basic EPS	$	0.64	$	0.54		$	1.73	$	1.51
Effect of diluted securities	—		(0.01		)	—		—
Dilutive EPS	$	0.64	$	0.53		$	1.73	$	1.51

The following table illustrates the options to purchase common stock that were excluded from the calculation of diluted earnings per share because they were anti-dilutive:



	Three Months Ended		Nine Months Ended
	September 30		September 30
	2013	2012	2013	2012
Stock options	—	357,459	125,241	614,181

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NOTE 6 – STOCK BASED COMPENSATION

During 2013, the Company made the following awards of restricted stock:



Date	Shares Granted	Plan	Fair Value		Vesting Period
1/16/2013	2,000	2005 Employee Stock Plan	$	30.48	Ratably over 3 years from grant date
2/14/2013	93,800	2005 Employee Stock Plan	$	31.51	Ratably over 5 years from grant date
5/21/2013	14,700	2010 Non-Employee Director Stock Plan	$	33.17	At the end of 5 years from grant date

The fair value of the restricted stock awards is 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 restricted stock awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights.

The Company has not issued any awards of options to purchase shares of common stock during 2013.

NOTE 7 – DERIVATIVES AND HEDGING ACTIVITIES

The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally to manage the Company’s interest rate risk. Additionally, the Company enters into interest rate derivatives and foreign exchange contracts to accommodate the business requirements of its customers (“customer related positions”). The Company minimizes the market and liquidity risks of customer related positions by entering into similar offsetting positions with broker-dealers. Derivative instruments are carried at fair value in the Company’s financial statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship.

The Company does not enter into proprietary trading positions for any derivatives.

Interest Rate Positions

The Company 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 six years.

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The following table reflects the Company’s derivative positions for the periods indicated below for interest rate swaps which qualify as cash flow hedges for accounting purposes:



September 30, 2013
Notional Amount		Trade Date	Effective Date	Maturity Date	Receive (Variable) Index	Current Rate Received		Pay Fixed Swap Rate		Fair Value
(Dollars in thousands)
$	25,000	16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR	0.25	%	5.04	%	$	(3,429	)
25,000		16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR	0.25	%	5.04	%	(3,429		)
25,000		8-Dec-08	10-Dec-08	10-Dec-13	3 Month LIBOR	0.26	%	2.65	%	(116		)
25,000		9-Dec-08	10-Dec-08	10-Dec-13	3 Month LIBOR	0.26	%	2.59	%	(113		)
25,000		9-Dec-08	10-Dec-08	10-Dec-18	3 Month LIBOR	0.26	%	2.94	%	(1,771		)
50,000		17-Nov-09	20-Dec-10	20-Dec-14	3 Month LIBOR	0.25	%	3.04	%	(1,671		)
25,000		5-May-11	10-Jun-11	10-Jun-15	3 Month LIBOR	0.26	%	1.71	%	(562		)
$	200,000									$	(11,091	)
December 31, 2012
Notional Amount		Trade Date	Effective Date	Maturity Date	Receive (Variable) Index	Current Rate Received		Pay Fixed Swap Rate		Fair Value
				(Dollars in thousands)
$	25,000	16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR	0.31	%	5.04	%	$	(4,416	)
25,000		16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR	0.31	%	5.04	%	(4,417		)
25,000		8-Dec-08	10-Dec-08	10-Dec-13	3 Month LIBOR	0.31	%	2.65	%	(553		)
25,000		9-Dec-08	10-Dec-08	10-Dec-13	3 Month LIBOR	0.31	%	2.59	%	(539		)
25,000		9-Dec-08	10-Dec-08	10-Dec-18	3 Month LIBOR	0.31	%	2.94	%	(2,819		)
50,000		17-Nov-09	20-Dec-10	20-Dec-14	3 Month LIBOR	0.31	%	3.04	%	(2,647		)
25,000		5-May-11	10-Jun-11	10-Jun-15	3 Month LIBOR	0.31	%	1.71	%	(798		)
$	200,000									$	(16,189	)

For derivative instruments that are designated and qualify as cash flow 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 $4.8 million (pre-tax), to be reclassified to interest expense from OCI, 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 September 30, 2013.

The Company had no fair value hedges as of September 30, 2013 or December 31, 2012.

The table below presents the net amortization income recognized as an offset to interest expense related to previously terminated swaps for the periods indicated:



	Three Months Ended				Nine Months Ended
	September 30				September 30
	2013		2012		2013		2012
	(Dollars in thousands)				(Dollars in thousands)
Net amortization income	$	61	$	61	$	183	$	183

Customer Related Positions

Interest rate derivatives, primarily interest rate swaps, offered to commercial borrowers through the Bank’s loan level derivative program do not qualify 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.

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Foreign exchange contracts offered to commercial borrowers through the Bank’s derivative program do not qualify as hedges for accounting purposes. The Bank 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 Bank enters into similar offsetting positions.

The following table reflects the Company’s customer related derivative positions for the periods indicated below for those derivatives not designated as hedging:



		Notional Amount Maturing
	# of Positions (1)	2013		2014	2015	2016	Thereafter	Total		Fair Value
	September 30, 2013
	(Dollars in thousands)
Loan level swaps
Receive fixed, pay variable	164	$	4,003	54,724	99,271	49,875	379,553	$	587,426	$	15,053
Pay fixed, receive variable	158	$	4,003	54,724	99,271	49,875	379,553	$	587,426	$	(15,096	)
Foreign exchange contracts
Buys foreign currency, sells US currency	7	$	6,621	7,221	—	—	—	$	13,842	$	447
Buys US currency, sells foreign currency	7	$	6,621	7,221	—	—	—	$	13,842	$	(440	)
	December 31, 2012
	(Dollars in thousands)
Loan level swaps
Receive fixed, pay variable	143	$	16,766	65,344	105,939	45,267	268,932	$	502,248	$	28,678
Pay fixed, receive variable	137	$	16,766	65,344	105,939	45,267	268,932	$	502,248	$	(28,663	)
Foreign exchange contracts
Buys foreign currency, sells US currency	16	$	42,516	—	—	—	—	$	42,516	$	1,748
Buys US currency, sells foreign currency	16	$	42,516	—	—	—	—	$	42,516	$	(1,718	)


(1)	The Company may enter into one swap agreement which offsets multiple reverse swap agreements. The positions will offset and the terms will be identical.

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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:



	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	Fair Value at September 30, 2013		Fair Value at December 31, 2012		Balance Sheet Location	Fair Value at September 30, 2013		Fair Value at December 31, 2012
	(Dollars in thousands)
Derivatives designated as hedges
Interest rate swaps	Other assets	$	—	$	—	Other liabilities	$	11,091	$	16,189
Derivatives not designated as hedges
Customer Related Positions:
Loan level swaps	Other assets	$	19,093	$	28,678	Other liabilities	$	19,136	$	28,663
Foreign exchange contracts	Other assets	447		1,748		Other liabilities	440		1,718
Total		$	19,540	$	30,426		$	19,576	$	30,381

The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated:



	Three Months Ended						Nine Months Ended
	September 30						September 30
	2013			2012			2013			2012
	(Dollars in thousands)						(Dollars in thousands)
Derivatives designated as hedges
Gain (loss) in OCI on derivatives (effective portion), net of tax	$	(411	)	$	(929	)	$	350		$	(2,125	)
Loss reclassified from OCI into interest expense (effective portion)	$	(1,464	)	$	(1,370	)	$	(4,322	)	$	(4,008	)
Loss recognized in income on derivatives (ineffective portion & amount excluded from effectiveness testing)
Interest expense	$	—		$	—		$	—		$	—
Other expense	—			—			—			—
Total	$	—		$	—		$	—		$	—
Derivatives not designated as hedges
Changes in fair value of customer related positions
Other income	$	1		$	12		$	27		$	85
Other expense	(27		)	(4		)	(108		)	(23		)
Total	$	(26	)	$	8		$	(81	)	$	62

By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, 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 seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. Institutional counterparties must have an investment grade credit rating and be approved by the Company's Board of Directors. As such, management believes the risk of incurring credit losses on derivative contracts with those counterparties is remote and losses, if any, would be immaterial. The Company had exposure relating to interest rate swaps with institutional counterparties of $1.4 million at September 30, 2013 and had no such exposure at December 31, 2012, as all such swaps were in a liability position. The Company’s exposure relating to customer related positions was approximately $17.7 million and $31.0 million at September 30, 2013 and December 31, 2012, respectively. Credit exposure may be reduced by the amount of collateral pledged by the counterparty.

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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. 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 September 30, 2013 it was determined that no additional collateral would have to be posted to immediately settle these instruments.

The following tables present the Company's asset and liability derivative positions and the potential effect of netting arrangements on its financial position, as of the periods indicated:



							Gross Amounts Not Offset in the Statement of Financial Position
Description	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Position		Net Amounts Presented in the Statement of Financial Position		Financial Instruments (1)		Cash Collateral Received		Net Amount
	(Dollars in thousands)
Derivative Assets	September 30, 2013
Interest rate swaps	$	—	$	—	$	—	$	—	$	—	$	—
Loan level swaps	19,093		—		19,093		2,020		—		17,073
Customer foreign exchange contracts	447		—		447		—		—		447
	$	19,540	$	—	$	19,540	$	2,020	$	—	$	17,520

Derivative Liabilities	September 30, 2013
Interest rate swaps	$	11,091	$	—	$	11,091	$	—	$	15,483	$	(4,392	)
Loan level swaps	19,136		—		19,136		2,020		15,736		1,380
Customer foreign exchange contracts	440		—		440		—		—		440
	$	30,667	$	—	$	30,667	$	2,020	$	31,219	$	(2,572	)


(1)	Includes loan level swaps with customers which are not subject to a master netting arrangement and thus are not offset in the statement of financial position.



							Gross Amounts Not Offset in the Statement of Financial Position
Description	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Position		Net Amounts Presented in the Statement of Financial Position		Financial Instruments (1)		Cash Collateral Pledged		Net Amount
	(Dollars in thousands)
Derivative Assets	December 31, 2012
Interest rate swaps	$	—	$	—	$	—	$	—	$	—	$	—
Loan level swaps	28,678		—		28,678		—		—		28,678
Customer foreign exchange contracts	1,748		—		1,748		—		—		1,748
	$	30,426	$	—	$	30,426	$	—	$	—	$	30,426

Derivative Liabilities	December 31, 2012
Interest rate swaps	$	16,189	$	—	$	16,189	$	—	$	19,185	$	(2,996	)
Loan level swaps	28,663		—		28,663		—		31,772		(3,109		)
Customer foreign exchange contracts	1,718		—		1,718		—		—		1,718
	$	46,570	$	—	$	46,570	$	—	$	50,957	$	(4,387	)


(1)	Includes loan level swaps with customers which are not subject to a master netting arrangement and thus are not offset in the statement of financial position.

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The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well capitalized institution, then the Company could be required to terminate any outstanding derivatives with the counterparty. All liability position interest rate swap and customer loan level swap counterparties have credit-risk contingent instruments as of the dates indicated in the table above. In addition, derivative instruments that contain credit-risk related contingent features that are in a net liability position require the Company to assign collateral as noted in the table above.

Mortgage Derivatives

Prior to closing and funding certain one-to-four family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments are executed, under which the Company agrees to deliver whole mortgage loans to various investors. In addition, the Company may also enter into additional Forward TBA (To Be Announced) mortgage contracts, also considered derivative instruments, which are purchased by the company from a list of diversified counterparties in order to hedge customer rate locks. These forward contracts carry a market price that has a strong inverse relationship to that of mortgage prices. When the Company locks a rate to the customer, the rate can be held for the benefit of the customer for a certain period of time until the mortgage is sold. During that time, the Company may not have agreed on a price with a mortgage investor and fluctuations in market conditions may cause the mortgage to lose market value. Within a short period after the rate is locked with the customer, the Company may, depending upon the effectiveness of existing hedges, execute a Forward TBA trade with a counterparty to hedge that market risk. Certain assumptions, including pull through rates and rate lock periods, are used in managing the existing and future hedges. The effectiveness of the hedges rely on the accuracy of these assumptions.

The change in fair value on the interest rate lock commitments, forward delivery sale commitments, and forward TBA mortgage contracts are recorded in current period earnings as a component of mortgage banking income. In addition, the Company has elected the fair value option to carry loans held for sale at fair value. The change in fair value of loans held for sale is recorded in current period earnings as a component of mortgage banking income in accordance with the Company's fair value election.

The table below summarizes the fair value of residential mortgage loans commitments, forward sales agreements, and loans held for sale at the periods indicated:



	September 30, 2013			December 31, 2012
	(Dollars in thousands)
Interest rate lock commitments	$	587		$	102
Forward sales agreements	$	(461	)	$	(223	)
Loans held for sale fair value adjustments	$	395		$	121

The table below summarizes the changes in the fair value of residential mortgage loans commitments, forward sales agreements, and loans held for sale at the periods indicated:



	Three Months Ended						Nine Months Ended
	September 30						September 30
	2013			2012			2013			2012
	(Dollars in thousands)						(Dollars in thousands)
Interest rate lock commitments	$	1,453		$	465		$	485		$	566
Forward sales agreements	(2,553		)	(1,141		)	(238		)	(1,354		)
Loans held for sale fair value adjustments	1,609			676			274			788
Total change in fair value	$	509		$	—		$	521		$	—

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NOTE 8 – FAIR VALUE MEASUREMENTS

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. If there has been a significant decrease in the volume and level of activity for the asset or liability, regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The Company uses prices and inputs that are current as of the measurement date. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from one level to another.

The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the Fair Value Measurements and Disclosures Topic of the FASB ASC are described below:

Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Valuation Techniques

There have been no changes in the valuation techniques used during the current period.

Securities:

U.S. Government Agency 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. 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.

Marketable 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.

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Loans Held for Sale

The Company elects to account for new originations of loans held for sale at fair value, which 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 analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect 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. Additionally, in conjunction with fair value measurement guidance, the Company has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. 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 September 30, 2013 and December 31, 2012, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2.

Residential Mortgage Loan Commitments and Forward Sales Agreements

The fair value of the commitments and agreements are estimated using the anticipated market price based on pricing indications provided from syndicate banks. These commitments and agreements are categorized as Level 2.

Impaired Loans

Loans that are deemed to be impaired are valued based upon the lower of cost or fair value of the underlying collateral. 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.

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.

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, or more frequently if necessary, and other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. To estimate the fair value of goodwill and, if necessary, 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 the impaired goodwill and other intangible assets subjected to nonrecurring fair value adjustments as Level 3.

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Assets and liabilities measured at fair value at the periods indicated were as follows:



			Fair Value Measurements at Reporting Date Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	September 30, 2013
	(Dollars in thousands)
Recurring fair value measurements
Assets
Securities available for sale
U.S. Government agency securities	$	19,599	$	—	$	19,599	$	—
Agency mortgage-backed securities	183,361		—		183,361		—
Agency collateralized mortgage obligations	61,255		—		61,255		—
Private mortgage-backed securities	2,863		—		—		2,863
Single issuer trust preferred securities issued by banks	2,173		—		2,173		—
Pooled trust preferred securities issued by banks and insurers	3,971		—		—		3,971
Marketable securities	11,176		11,176		—		—
Loans held for sale	10,667		—		10,667		—
Derivative instruments	20,127		—		20,127		—
Liabilities
Derivative instruments	31,128		—		31,128		—
Total recurring fair value measurements	$	284,064	$	11,176	$	266,054	$	6,834

Nonrecurring fair value measurements
Assets
Collateral dependent impaired loans	$	13,085	$	—	$	—	$	13,085
Other real estate owned	9,188		—		—		9,188
Total nonrecurring fair value measurements	$	22,273	$	—	$	—	$	22,273

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	December 31, 2012
	(Dollars in thousands)
Recurring fair value measurements
Assets
Securities available for sale
U.S. government agency securities	$	20,822	$	—	$	20,822	$	—
Agency mortgage-backed securities	221,425		—		221,425		—
Agency collateralized mortgage obligations	68,376		—		68,376		—
Private mortgage-backed securities	3,532		—		—		3,532
Single issuer trust preferred securities issued by banks	2,240		—		2,240		—
Pooled trust preferred securities issued by banks and insurers	2,981		—		—		2,981
Marketable securities	9,910		9,910		—		—
Loans held for sale	48,187		—		48,187		—
Derivative instruments	30,528		—		30,528		—
Liabilities
Derivative instruments	46,793		—		46,793		—
Total recurring fair value measurements	$	361,208	$	9,910	$	344,785	$	6,513

Nonrecurring fair value measurements
Assets
Collateral dependent impaired loans	$	7,817	$	—	$	—	$	7,817
Other real estate owned	11,974		—		—		11,974
Total nonrecurring fair value measurements	$	19,791	$	—	$	—	$	19,791

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.

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	Securities Available for Sale:
	Pooled Trust Preferred Securities			Single Trust Preferred Securities			Private Mortgage- Backed Securities			Total
	(Dollars in thousands)
Balance at June 30, 2013	$	3,617		$	—		$	3,036		$	6,653
Gains and (losses) (realized/unrealized)
Included in other comprehensive income	399			—			46			445
Settlements	(45		)	—			(219		)	(264		)
Balance at September 30, 2013	$	3,971		$	—		$	2,863		$	6,834

Balance at January 1, 2012	$	2,820		$	4,210		$	6,110		$	13,140
Gains and (losses) (realized/unrealized)
Included in earnings	—			—			(76		)	(76		)
Included in other comprehensive income	313			703			411			1,427
Settlements	(152		)	—			(2,913		)	(3,065		)
Transfers into (out of) level 3	—			(4,913		)	—			(4,913		)
Balance at December 31, 2012	$	2,981		$	—		$	3,532		$	6,513
Gains and (losses) (realized/unrealized)
Included in other comprehensive income	1,230			—			(43		)	1,187
Settlements	(240		)	—			(626		)	(866		)
Balance at September 30, 2013	$	3,971		$	—		$	2,863		$	6,834

During the first quarter of 2012 the Company transferred the Single Issuer Trust Preferred Security from Level 3 to Level 2. The reason for this transfer was increased trading of the security, enabling the use of more observable inputs. It is the Company’s policy to recognize the transfers as of the end of the reporting period. There were no transfers between the Levels of the fair value hierarchy for any assets or liabilities measured at fair value on a recurring basis during the third quarter of 2013.

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The following table sets forth certain unobservable inputs regarding the Company’s investment in securities that are classified as Level 3 for the periods indicated:



	Fair Value		Valuation Technique(s)	Unobservable Inputs	Range	Weighted Average
	(Dollars in thousands)
	September 30, 2013
Pooled trust preferred securities	$	3,971	Discounted cash flow methodology	Cumulative Prepayment	0%-76.0%	7.2	%
				Cumulative Default	2.9%-100.0%	17.8	%
				Loss Given Default	85.0% - 100.0%	95.7	%
				Cure Given Default	0% - 75.0%	42.7	%
Private mortgage-backed securities	$	2,863	Multi-dimensional spread tables	Cumulative Prepayment Rate	14.4%-14.5%	14.5	%
				Constant Default Rate	0.8% -20.3%	4.1	%
				Severity	21.0% -50.0%	33.9	%
Impaired loans	$	13,085	Appraisals of collateral (1)
Other real estate owned	$	9,188	Appraisals of collateral (1)
	December 31, 2012
Pooled trust preferred securities	$	2,981	Discounted cash flow methodology	Cumulative Prepayment	0%-76.0%	7.5	%
				Cumulative Default	3.0%-100.0%	19.6	%
				Loss Given Default	85.0% - 100.0%	94.9	%
				Cure Given Default	0% - 75.0%	33.8	%
Private mortgage-backed securities	$	3,532	Multi-dimensional spread tables	Cumulative Prepayment Rate	10.3%-14.5%	13.9	%
				Constant Default Rate	0.9% -20.4%	4.0	%
				Severity	20.0% -55.0%	33.6	%
Impaired loans	$	7,817	Appraisals of collateral (1)
Other real estate owned	$	11,974	Appraisals of collateral (1)


(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments may vary.

For the fair value measurements in the table above, which are classified as Level 3 within the fair value hierarchy, the Company’s Treasury and Finance groups determine the valuation policies and procedures. For the pricing of the securities, the Company uses third-party pricing information, without adjustment. Depending on the type of the security, management employs various techniques to analyze the pricing it receives from third-parties, such as analyzing changes in market yields and in certain instances reviewing the underlying collateral of the security. Management reviews changes in fair value from period to period and performs testing to ensure that prices received from the third parties are consistent with their expectation of the market. For the securities categorized as Level 3 and the market is deemed to be inactive, the fair value models are calibrated and to the extent possible, significant inputs are back tested on a quarterly basis. This testing is done by the third party service provider, who performs this testing by comparing anticipated inputs to actual results. For example, modeled default and prepayment rates for private mortgage-backed securities will be compared to actual rates for the previous period. Significant changes in fair value from period to period are closely scrutinized to ensure fair value models are not flawed. The driver(s) of the respective change in fair value and the method for forecasting the driver(s) is closely considered by management.

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The significant unobservable inputs used in the fair value measurement of the Company’s pooled trust preferred securities are cumulative prepayment rates, cumulative defaults, loss given defaults and cure given defaults. Significant increases (decreases) in deferrals or defaults, in isolation, would result in a significantly lower (higher) fair value measurement. Alternatively, significant increases (decreases) in cure rates, in isolation, would result in a significantly higher (lower) fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s private mortgage-backed securities are constant prepayment rates, constant default rates, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

Additionally, the Company has financial instruments which are marked to fair value on a nonrecurring basis which are categorized within Level 3. These instruments include collateral dependent impaired loans and OREO. The determination of the fair value amount is derived from the use of independent third party appraisals and evaluations, prepared by firms from a predetermined list of qualified and approved appraisers or evaluators. Upon receipt of an appraisal or evaluation, the internal Commercial Real Estate Appraisal Department will review the report for compliance with regulatory and Bank standards, as well as reasonableness and acceptance of the value conclusions. Any issues or concerns regarding compliance or value conclusions will be addressed with the engaged firm and the report may be adjusted or revised. If a disagreement cannot be resolved, the Commercial Real Estate Appraisal Department will either address the key issues and modify the report for acceptance or reject the report and re-order a new report. Ultimately the Company’s Commercial Real Estate Appraisal Department will confirm the collateral value as part of its review process.

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The estimated fair values and related carrying amounts for assets and liabilities for which fair value is only disclosed are shown below as of the periods indicated:



					Fair Value Measurements at Reporting Date Using
	Book Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	September 30, 2013
	(Dollars in thousands)
Financial assets
Securities held to maturity (a)
U.S. Treasury securities	$	1,012	$	1,069	—		$	1,069	—
Agency mortgage-backed securities	115,983		118,830		—		118,830		—
Agency collateralized mortgage obligations	193,190		189,256		—		189,256		—
State, county, and municipal securities	676		687		—		687		—
Single issuer trust preferred securities issued by banks	1,507		1,529		—		1,529		—
Corporate debt securities	5,005		5,226		—		5,226		—
Loans, net of allowance for loan losses (b)	4,502,467		4,504,271		—		—		4,504,271
Financial liabilities
Time certificates of deposits (c)	$	691,616	$	695,350	—		$	695,350	—
Federal home loan bank advances and other borrowings (c)	189,539		188,238		—		188,238		—
Wholesale and customer repurchase agreements (c)	214,180		215,704		—		—		215,704
Junior subordinated debentures (d)	73,962		72,573		—		72,573		—
Subordinated debentures (c)	30,000		24,890		—		—		24,890
	December 31, 2012
	(Dollars in thousands)
Financial assets
Securities held to maturity (a)
U.S. Treasury securities	$	1,013	$	1,134	$	—	$	1,134	$	—
Agency mortgage-backed securities	72,360		76,593		—		76,593		—
Agency collateralized mortgage obligations	97,507		100,380		—		100,380		—
State, county, and municipal securities	915		926		—		926		—
Single issuer trust preferred securities issued by banks	1,516		1,526		—		1,526		—
Corporate debt securities	5,007		5,265		—		5,265		—
Loans, net of allowance for loan losses (b)	4,467,177		4,462,580		—		—		4,462,580
Financial liabilities
Time certificates of deposits (c)	$	753,125	$	759,516	$	—	$	759,516	$	—
Federal home loan bank advances and other borrowings (c)	283,569		293,580		—		293,580		—
Wholesale and customer repurchase agreements (c)	203,359		201,189		—		—		201,189
Junior subordinated debentures (d)	74,127		74,416		—		74,416		—
Subordinated debentures (c)	30,000		22,762		—		—		22,762


(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.

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(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 cash surrender value of life insurance policies. For financial liabilities, these include demand, savings, money market deposits, and federal funds purchased. The estimated fair value of demand, savings and money market deposits is the amount payable at the reporting date. These instruments would all be considered to be classified within Level 1 of the fair value hierarchy. Also excluded from the summary are financial instruments measured at fair value on a recurring and nonrecurring basis, as previously described.

The Company believes its financial instruments current use is considered to be the highest and best use of the instruments.

NOTE 9 – COMPREHENSIVE INCOME/LOSS

Information on the Company’s comprehensive income (loss), presented net of taxes, is set forth below for the periods indicated:



	Three Months Ended September 30, 2013									Nine Months Ended September 30, 2013
	Pre Tax Amount			Tax (Expense) Benefit			After Tax Amount			Pre Tax Amount			Tax (Expense) Benefit			After Tax Amount
	(Dollars in thousands)									(Dollars in thousands)
Change in fair value of securities available for sale	$	(190	)	$	42		$	(148	)	$	(8,924	)	$	3,407		$	(5,517	)
Less: net security losses reclassified into other noninterest income	—			—			—			4			(1		)	3
Change in fair value of securities available for sale	(190		)	42			(148		)	(8,920		)	3,406			(5,514		)
Change in fair value of cash flow hedges	(696		)	285			(411		)	592			(242		)	350
Less: net cash flow hedge losses reclassified into interest on borrowings expense (2)	1,464			(598		)	866			4,322			(1,765		)	2,557
Net change in fair value of cash flow hedges	768			(313		)	455			4,914			(2,007		)	2,907
Amortization of certain costs included in net periodic retirement costs (3)	51			(21		)	30			124			(51		)	73
Total other comprehensive income (loss)	$	629		$	(292	)	$	337		$	(3,882	)	$	1,348		$	(2,534	)

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	Three Months Ended September 30, 2012									Nine Months Ended September 30, 2012
	Pre Tax Amount			Tax (Expense) Benefit			After Tax Amount			Pre Tax Amount			Tax (Expense) Benefit			After Tax Amount
	(Dollars in thousands)									(Dollars in thousands)
Change in fair value of securities available for sale	$	1,419		$	(582	)	$	837		$	987		$	(450	)	$	537
Less: net security losses reclassified into other noninterest income (1)	—			—			—			76			(31		)	45
Change in fair value of securities available for sale	1,419			(582		)	837			1,063			(481		)	582
Change in fair value of cash flow hedges	(1,571		)	642			(929		)	(3,593		)	1,468			(2,125		)
Less: net cash flow hedge losses reclassified into interest on borrowings expense (2)	1,370			(560		)	810			4,008			(1,637		)	2,371
Net change in fair value of cash flow hedges	(201		)	82			(119		)	415			(169		)	246
Amortization of certain costs included in net periodic retirement costs (3)	39			(16		)	23			116			(47		)	69
Total other comprehensive income	$	1,257		$	(516	)	$	741		$	1,594		$	(697	)	$	897


(1)	Net security losses represent OTTI credit-related losses for the nine months ended September 30, 2012.


(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 $1.4 million, net of tax, is being recognized in earnings through December 2018, the original maturity date of the swap. The balance of this gain has amortized to $751,000 and $895,000 at September 30, 2013 and 2012, respectively.


(3)	The amortization of prior service costs is included in the computation of net periodic pension cost as disclosed in the Employee Benefit Plans footnote in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission.

Information on the Company’s accumulated other comprehensive income (loss), net of tax is comprised of the following components as of the periods indicated:



	Unrealized Gain on Securities			Unrealized Loss on Cash Flow Hedge			Deferred Gain on Hedge Transactions			Defined Benefit Pension Plans			Accumulated Other Comprehensive Loss
	2013
	(Dollars in thousands)
Beginning balance January 1, 2013	$	5,478		$	(9,577	)	$	859		$	(1,286	)	$	(4,526	)
Net change in other comprehensive income (loss)	$	(5,514	)	$	3,015		$	(108	)	$	73		$	(2,534	)
Ending balance September 30, 2013	(36		)	(6,562		)	751			(1,213		)	(7,060		)
	2012
Beginning balance January 1, 2012	$	6,574		$	(10,804	)	$	1,004		$	(1,260	)	$	(4,486	)
Net change in other comprehensive income (loss)	$	582		$	355		$	(109	)	$	69		$	897
Ending balance September 30, 2012	7,156			(10,449		)	895			(1,191		)	(3,589		)

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2012, 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, 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 the Company’s market area, continued uncertainty regarding the impact of the recent shutdown of the U.S. federal government or the occurence of another federal government shutdown 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 losses, as most of the Company’s loans are concentrated within the Bank’s primary market area, and a substantial portion of these loans have real estate as collateral;

•

a further deterioration of the credit rating for U.S. long-term sovereign debt could adversely impact the Company. Although the previous downgrade by Standard and Poor’s of U.S. long-term sovereign debt did not directly impact the financial position of the Company, an inability by the federal government to raise the U.S. debt limit or otherwise could result in further downgrades which in turn could cause a re-evaluation of the ‘risk-free’ rate used in many accounting models, other-than-temporary-impairment of securities and/or impairment of goodwill and other intangibles;


•	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;


•	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;


•	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;


•	competitive pressures could intensify and affect the Company’s profitability, including continued industry consolidation, the increased financial services provided by nonbanks 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;

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•	the risk of electronic fraudulent activity within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting bank accounts and other customer information, which could adversely impact the Company’s operations, damage its reputation and require increased capital spending;


•	changes in consumer spending and savings habits could negatively impact the Company’s financial results;


•	new laws and regulations regarding the financial services industry including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act, may have a significant effect on the financial services industry in general, and/or the Company in particular, the exact nature and extent of which is uncertain;


•	changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) generally applicable to the Company’s business could adversely affect the Company’s operations; and


•	changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters, could negatively impact the Company’s financial results.

If one or more of the factors affecting the Company’s forward-looking information and statements proves incorrect, then the Company’s actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-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.

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
	September 30, 2013			June 30, 2013			March 31, 2013			December 31, 2012			September 30, 2012
	(Dollars in thousands, except per share data)
Financial condition data
Securities available for sale	$	284,398		$	303,855		$	335,693		$	329,286		$	323,156
Securities held to maturity	317,373			225,278			209,090			178,318			186,842
Loans	4,556,029			4,530,111			4,487,478			4,519,011			4,056,135
Allowance for loan losses	(53,562		)	(52,976		)	(51,906		)	(51,834		)	(49,746		)
Goodwill and core deposit intangibles	160,562			161,089			161,616			162,144			137,293
Total assets	5,895,464			5,852,595			5,721,120			5,756,985			5,192,094
Total deposits	4,757,309			4,676,463			4,551,410			4,546,677			4,117,847
Total borrowings	507,681			557,300			550,782			591,055			489,899
Stockholders’ equity	555,744			543,605			537,575			529,320			492,965
Income statement
Interest income	$	51,027		$	51,495		$	50,820		$	51,414		$	48,555
Interest expense	5,831			5,880			5,958			5,935			5,717
Net interest income	45,196			45,615			44,862			45,479			42,838
Provision for loan losses	2,650			3,100			1,300			4,350			3,606
Noninterest income	18,130			16,692			15,724			17,016			16,108
Noninterest expenses	40,722			42,164			42,920			45,050			40,052
Net income	14,655			12,758			12,252			9,968			11,601

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Per share date
Net income—basic	$	0.64		$	0.56		$	0.54		$	0.45		$	0.54
Net income—diluted	0.64			0.56			0.54			0.45			0.53
Cash dividends declared	0.22			0.22			0.22			0.21			0.21
Book value	24.21			23.73			23.50			23.24			22.75
Performance ratios
Return on average assets	1.00		%	0.89		%	0.88		%	0.73		%	0.91		%
Return on average common equity	10.53		%	9.40		%	9.25		%	7.68		%	9.39		%
Net interest margin (on a fully tax equivalent basis)	3.43		%	3.57		%	3.58		%	3.68		%	3.72		%
Equity to assets	9.43		%	9.29		%	9.40		%	9.19		%	9.49		%
Dividend payout ratio	34.38		%	39.50		%	—		%	93.60		%	39.23		%
Asset quality
Nonperforming loans	37,887			36,549			33,091			28,766			31,081
Nonperforming assets	48,879			48,105			46,815			42,427			41,529
Nonperforming loans as a percent of gross loans	0.83		%	0.81		%	0.74		%	0.64		%	0.77		%
Nonperforming assets as a percent of total assets	0.83		%	0.82		%	0.82		%	0.74		%	0.80		%
Allowance for loan losses as a percent of total loans	1.18		%	1.17		%	1.16		%	1.15		%	1.23		%
Allowance for loan losses as a percent of nonperforming loans	141.37		%	144.95		%	156.86		%	180.19		%	160.05		%
Capital ratios
Tier 1 leverage capital ratio	8.64		%	8.56		%	8.51		%	8.65		%	8.73		%
Tier 1 risk-based capital ratio	10.82		%	10.62		%	10.57		%	10.36		%	10.72		%
Total risk-based capital ratio	12.69		%	12.49		%	12.43		%	12.23		%	12.71		%

Executive Level Overview

During the third quarter of 2013 the Company reported strong net income and earnings per share. Third quarter results reflected the Company's focus on noninterest income and good expense management. While the Company continued to experience strong loan originations, the rate of payoffs in the commercial portfolio and continued payoff trends in the residential portfolios suppressed overall loan growth. Deposit balances increased during the third quarter, with core deposits now comprising 85.3% of total deposits. Deposit growth followed advertising campaigns launched in the second quarter and reflects the Company’s continued success at strengthening existing customer relationships and adding new ones. Significant deposit growth, combined with modest loan growth, increased the Company’s overall liquidity position, but contributed to a net interest margin decrease for the quarter. Management worked to offset strain on the net interest margin by deploying a portion of the Company's excess liquidity to opportunistically prepay Federal Home Loan Bank Advances and purchasing additional securities.

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The following table illustrates key performance measures for the periods indicated, with the nine month period ended September 30, 2012 results affected by a loan fraud of approximately $4.0 million, or $0.11 per share.



	Three Months Ended September 30						Nine Months Ended September 30
	2013			2012			2013			2012
	(Dollars in thousands, except per share data)
Net income	$	14,655		$	11,601		$	39,665		$	32,658
Net income on an operating basis	$	14,420		$	11,963		$	40,937		$	33,417
Noninterest income	$	18,130		$	16,108		$	50,545		$	45,000
Diluted earnings per share	$	0.64		$	0.53		$	1.73		$	1.51
Return on average assets on an operating basis	0.98		%	0.93		%	0.96		%	0.89		%
Return on common average equity on an operating basis	10.36		%	9.68		%	10.05		%	9.22		%
Net interest margin	3.43		%	3.72		%	3.53		%	3.78		%

The Company is focused on growing noninterest income and management continues to emphasize its importance in this prolonged low interest rate environment. The following chart shows the steady increase in noninterest income as a percentage of total revenue over the past five years:

The Company's focus on both personal and business checking accounts, as well as increased debit card usage, has led to increased interchange revenues and higher overall deposit account fees. Investment management income continues to be an increasingly important contributor to the noninterest income category as assets under administration have grown to $2.2 billion. In addition, commercial loan closings have resulted in significant loan level derivative income for the quarter and year to date.

The net interest margin for the quarter decreased to 3.43%, down 14 basis point from the prior quarter, as excess liquidity from strong deposit growth was not deployed quickly and the reduced yield on loans was unable to be offset by a lower cost of funds. The Company is focused on maintaining a relatively stable net interest margin while continuing to position itself to take advantage of future rate increases, as shown in the chart below, which reflects the estimated impact on the Company's net interest income, assuming a static balance sheet, under the following four gradual (12 to 24 month) shifts in interest rates:

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1.Down 100 basis points over 12 months (parallel yield curve shift)

2.Up 200 basis points over 12 months (parallel yield curve shift)

3.Up 400 basis points over 24 months (parallel yield curve shift)


4.	Flat up 500 basis points over 12 months (asymmetrical yield curve shift with short-term rates rising 500 basis points and overall flatting of the yield curve)

The Company is fundamentally positioned for a rising rate environment. Management's balance sheet strategy continues to favor short duration assets, such as commercial loans and home equity lines of credit, funded by core deposits. The following tables show trends over the past five years in the Company's interest-earning assets and funding mixes:

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Asset quality remains strong, as net charge-offs decreased to $5.3 million during the nine months ended September 30, 2013, or 0.16% on an annualized basis of average loans, as compared to $12.2 million, or 0.42% annualized, for the nine months ended September 30, 2012. The prior year was negatively impacted by an isolated loan fraud of $4.0 million, inflating the prior year metrics. Accordingly, the provision for loan losses decreased to $7.1 million, as compared to $13.7 million in the first nine months of 2012. The allowance for loan losses as a percentage of loans was 1.18% and 1.15% as of September 30, 2013 and December 31, 2012, respectively. Nonperforming loans were $37.9 million, or 0.83% of total loans, at September 30, 2013, an increase from the year ago period's nonperforming loans of $31.1 million, or 0.77%. The increase in nonperforming loans is driven by an increase in the commercial and industrial and commercial real estate category. Delinquency as a percentage of loans remains low at 0.90% at September 30, 2013, a slight increase when compared to 0.79% at September 30, 2012.

Non-GAAP Measures

When management assesses the Company’s financial performance for purposes of making day-to-day and strategic decisions, it does so based upon the performance of its core banking business, which is primarily derived from the combination of net interest income and noninterest or fee income, reduced by operating expenses, the provision for loan losses, and the impact of income taxes. The Company’s financial performance is determined in accordance with Generally Accepted Accounting Principles (“GAAP”) which sometimes includes gains or losses due to items that management believes are unrelated to its core banking business and will not have a material financial impact on operating results in future periods, such as gains or losses on the sales of securities, merger and acquisition expenses, and other items. Management, therefore, also computes the Company’s non-GAAP operating earnings, which excludes these items, to measure the strength of the Company’s core banking business and to identify trends that may to some extent be obscured by such gains or losses.

Management’s computation of the Company’s non-GAAP operating earnings information is set forth because management believes it may be useful for investors to have access to the same analytical tool used by management to evaluate the Company’s core operational performance so that investors may assess the Company’s overall financial health and identify business and performance trends that may be more difficult to identify and evaluate when noncore items are included. Management also believes that the computation of non-GAAP operating earnings may facilitate the comparison of the Company to other companies in the financial services industry.

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Non-GAAP operating earnings should not be considered a substitute for GAAP results. An item which management deems to be noncore and excludes when computing non-GAAP operating earnings can be of substantial importance to the Company’s results for any particular quarter or year. The Company’s non-GAAP operating earning information set forth is not necessarily comparable to non-GAAP information which may be presented by other companies.

The following tables summarizes the impact of noncore items recorded for the time periods indicated below and reconciles them in accordance with GAAP:



	Three Months Ended September 30
	Net Income						Diluted Earnings Per Share
	2013			2012			2013			2012
	(Dollars in thousands)
As reported (GAAP)
Net income available to common shareholders (GAAP)	$	14,655		$	11,601		$	0.64		$	0.53
Non-GAAP measures
Noninterest income components
Proceeds from life insurance policies, tax exempt	—			(1,307		)	—			(0.06		)
Gain on extinguishment of debt, net of tax	(451		)	—			(0.02		)	—
Noninterest expense components
Merger and acquisition expenses, net of tax	216			352			0.01			0.02
Goodwill impairment, net of tax	—			1,317			—			0.06
Total impact of noncore items	(235		)	362			(0.01		)	0.02
As adjusted (NON-GAAP)	$	14,420		$	11,963		$	0.63		$	0.55

	Nine Months Ended September 30
	Net Income						Diluted Earnings Per Share
	2013			2012			2013			2012
	(Dollars in thousands)
As reported (GAAP)
Net income available to common shareholders (GAAP)	$	39,665		$	32,658		1.73			$	1.51
Non-GAAP measures
Noninterest income components
Proceeds from life insurance policies, tax exempt	—			(1,307		)	—			(0.06		)
Gain on extinguishment of debt, net of tax	$	(451	)	$	—		(0.02		)	—
Noninterest expense components
Severance, net of tax	192			—			0.01			—
Merger and acquisition expenses, net of tax	1,531			749			0.06			0.03
Goodwill impairment, net of tax	—			1,317			—			0.06
Total impact of noncore items	1,272			759			0.05			0.03
As adjusted (NON-GAAP)	$	40,937		$	33,417		1.78			$	1.54

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.

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There have been no material changes in critical accounting policies during the first nine months of 2013. Please refer to the 2012 Form 10-K for a complete listing of critical accounting policies.

FINANCIAL POSITION

Securities Portfolio The Company’s securities portfolio consists of securities available for sale and securities which management intends to hold until maturity. Securities increased by $94.2 million, or 18.6%, at September 30, 2013 as compared to December 31, 2012, as management has deployed excess cash by purchasing additional securities in 2013. The ratio of securities to total assets as of September 30, 2013 was 10.2%, compared to 8.8% at December 31, 2012.

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.

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 2013 and 2012, the Bank originated residential loans with the intention of selling them in the secondary market. Loans may be sold with servicing rights released or with servicing rights retained. A mortgage servicing asset is recognized when a loan is sold with servicing rights retained. During the three and nine months ended September 30, 2013 the Company sold $71.9 million and $259.4 million of mortgage loans compared to $83.5 million and $222.8 million for the three and nine months ended September 30, 2012.

When a loan is sold, 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 incurred no material losses during the three and nine months ended September 30, 2013 or 2012, and therefore at this time, has not established a reserve for loan repurchases as future material losses are not expected to be probable.

Forward sale contracts of mortgage loans, considered derivative instruments for accounting purposes, are utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. See Note 7, “Derivative and Hedging Activities” within Notes to Consolidated Financial statements included in Item 1 hereof for more information on mortgage loan commitments and forward sales agreements.

Loan Portfolio Management continues to focus on growth in the commercial and home equity lending categories, while placing less emphasis on the other lending categories. Management believes this emphasis is prudent, given the prevailing interest rate and economic environment, as well as strategic priorities. At September 30, 2013, the Bank’s loan portfolio increased slightly to $4.6 billion. Loans grew in the commercial portfolio by $157.2 million from December 31, 2012, or 6.8% on an annualized basis. Offsetting the growth in commercial, the residential portfolio decreased by $116.4 million compared to December 31, 2012, or 25.4% on an annualized basis, as prepayment activity increased in the consumer real estate portfolio during the year, due to the low interest rate environment.

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The Bank’s commercial and industrial portfolio has shown growth of 10.0% for the nine months ended September 30, 2013. This portfolio is well-diversified with loans to various types of industries. The following pie chart shows the diversification of the commercial and industrial portfolio as of September 30, 2013:



	(Dollars in thousands)
Average loan size	$	216
Largest individual commercial and industrial loan	$	17,155
Commercial and industrial nonperforming loans/commercial and industrial loans	0.60		%

The Bank’s commercial real estate portfolio, inclusive of commercial construction, is the Bank’s largest loan type concentration and has grown by 4.0% for the nine months ended September 30, 2013. This portfolio is also well-diversified with loans secured by a variety of property types, such as owner-occupied and nonowner-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 September 30, 2013:

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	(Dollars in thousands)
Average loan size	$	734
Largest individual commercial real estate mortgage	$	18,000
Commercial real estate nonperforming loans/commercial real estate loans	0.56		%
Owner occupied commercial real estate loans/commercial real estate loans	17.8		%

In addition to the commercial portfolios, the Bank also originates both fixed-rate and adjustable-rate residential real estate loans as well as residential construction lending related to single-home residential development within the Bank's market area. The Bank also provides home equity loans and lines that may be made as a fixed rate term loan or under a variable rate revolving line of credit secured by a first or second mortgage on the borrower's residence or second home. Additionally, the Bank makes loans for a wide variety of other personal needs. Consumer loans primarily consist of installment loans and overdraft protections. The residential and consumer portfolios have decreased by $120.2 million for the nine months ended September 30, 2013.

Asset Quality The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this assessment, loans demonstrating certain payment issues or other weaknesses may be categorized as delinquent, impaired, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. If a restructured loan meets certain criteria, it may be categorized as a troubled debt restructuring (TDR).

Delinquency The Bank’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. The Bank considers a loan to have defaulted when it reaches 90 days past due. 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 contact 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 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. As permitted by banking regulations, certain consumer loans past due 90 days or more continue to accrue interest. Certain commercial and real estate loans that are more than 90 days past due may be kept on an accruing status if the loans are well secured and in the process of collection. Additionally, a junior lien mortgage may be placed on nonaccrual as a result of delinquency with respect to the first position, which is held by another financial institution, while the loan in second position is currently performing. 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 problem 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 or cure a default. 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 adjustments to interest rates, extensions of maturity, consumer loans where the borrower's obligations have been effectively discharged through Chapter 7 Bankruptcy and the borrower has not reaffirmed the debt to the Bank, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. If such efforts by the Bank do not result in satisfactory performance, 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 six months, subsequent to being modified, before management considers its return to accrual status. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. Loans that are considered TDRs are classified as performing, unless they are on nonaccrual status or greater than 90 days delinquent. Loans classified as TDRs remain classified as such for the life of the loan, except in limited circumstances, when it may be determined that the borrower is performing under modified terms and the restructuring agreement specified an interest rate greater than or equal to an acceptable market rate for a comparable new loan at the time of the restructuring.

Purchased Credit Impaired Loans Purchased Credit Impaired (“PCI”) loans are acquired loans which had evidence of deterioration in credit quality since origination and for which it is probable that all contractually required payments will not be collected. The PCI loans are recorded at fair value without any carryover of the allowance for loan losses. The excess cash flows expected to be collected over the carrying amount of the loans, referred to as the "accretable yield", is accreted into interest income over the life of the loans using the effective yield method. Accordingly, PCI loans are not subject to classification as nonaccrual in the same manner as originated loans, rather they are generally considered to be accruing loans to the extent there is a reasonable expectation about the timing and amount of cash flows expected to be collected, however, PCI loans can be placed on nonaccrual in limited circumstances. The carrying amount of these purchased credit impaired loans was $27.3 million as of September 30, 2013 as compared to $32.1 million as of December 31, 2012. See Note 4, "Loans, Allowance for Loan Losses and Credit Quality" within Notes to Consolidated Financial Statements included in Item 1 hereof for more information.

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 nonaccrual loans and loans that are more than 90 days past due but still accruing interest.

Nonperforming securities consist of securities that are on nonaccrual status. The Company holds five collateralized debt obligation securities (“CDOs”) comprised of pools of trust preferred securities issued by banks and insurance companies, which are currently deferring interest payments on certain tranches within the bonds’ structures including the tranches held by the Company. The bonds are anticipated to continue to defer interest until cash flows are sufficient to satisfy certain collateralization levels designed to protect more senior tranches. As a result the Company has placed the five securities on nonaccrual status and has reversed any previously accrued but unpaid income related to these securities.

OREO consists of real estate properties, which have served as collateral to secure loans, that are controlled or owned by the Bank. These properties are 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 valuation allowance, but not below zero. All costs incurred thereafter in maintaining the property are charged to

noninterest expense. In the event the real estate is utilized as a rental property, rental income and expenses are recorded as incurred and included in noninterest income and noninterest expense, respectively.

Other assets in possession primarily consist of foreclosed assets and other non real estate assets deemed to be in control of the Company.

The following table sets forth information regarding nonperforming assets held by the Bank at the dates indicated:

Table 1—Nonperforming Assets



	September 30, 2013			December 31, 2012			September 30, 2012
	(Dollars in thousands)
Loans Accounted for on a nonaccrual basis
Commercial and industrial	$	4,557		$	2,666		$	2,981
Commercial real estate	12,900			6,574			9,249
Small business	615			570			604
Residential real estate	11,817			11,472			10,383
Home equity	7,320			7,311			7,608
Other consumer	134			121			181
Total (1)	$	37,343		$	28,714		$	31,006
Loans past due 90 days or more but still accruing
Residential real estate (2)	433			—			—
Home equity	—			—			35
Other consumer	111			52			40
Total	$	544		$	52		$	75
Total nonperforming loans	$	37,887		$	28,766		$	31,081
Nonaccrual securities (3)	1,628			1,511			1,521
Other real estate owned	9,188			11,974			8,751
Other assets in possession	176			176			176
Total nonperforming assets	$	48,879		$	42,427		$	41,529
Nonperforming loans as a percent of gross loans	0.83		%	0.64		%	0.77		%
Nonperforming assets as a percent of total assets	0.83		%	0.74		%	0.80		%


(1)	Inclusive of TDRs on nonaccrual of $8.6 million, $6.6 million, and $6.0 million, at September 30, 2013, December 31, 2012, and September 30, 2012, respectively.


(2)	Represents purchased credit impaired loans that are accruing interest due to expectations of future cash collections.


(3)	Amounts represent the fair value of five nonaccrual securities at September 30, 2013 and six nonaccrual securities at December 31, 2012 and September 30, 2012.

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The following table shows the roll-forward of nonperforming assets for the periods indicated:

Table 2—Activity in Nonperforming Assets



	Three Months Ended						Nine Months Ended
	September 30, 2013						September 30, 2013
	(Dollars in thousands)
Nonperforming assets beginning balance				$	48,105					$	42,427
New to nonperforming				21,863						44,013
Loans charged-off				(2,368		)				(6,421		)
Loans paid-off				(12,599		)				(19,544		)
Loans transferred to other real estate owned and foreclosed assets				(1,207		)				(2,346		)
Loans restored to accrual status				(4,374		)				(6,557		)
Change to other real estate owned
New to other real estate owned	$	1,207					$	2,346
Valuation write down	(45		)				(698		)
Sale of Other Real Estate Owned	(1,757		)				(6,468		)
Development of other real estate owned	572						2,034
Total change to other real estate owned	(23		)	(23		)	(2,786		)	(2,786		)
Change in nonaccrual securities				(541		)				117
Other				23						(24		)
Nonperforming assets ending balance				$	48,879					$	48,879

The following table sets forth information regarding troubled debt restructured loans as of the dates indicated:

Table 3—Troubled Debt Restructurings



	September 30, 2013			December 31, 2012
	(Dollars in thousands)
Performing troubled debt restructurings	$	36,429		$	46,764
Nonaccrual troubled debt restructurings	8,567			6,554
Total	$	44,996		$	53,318
Performing troubled debt restructurings as a % of total loans	0.80		%	1.03		%
Nonaccrual troubled debt restructurings as a % of total loans	0.19		%	0.15		%
Total troubled debt restructurings as a % of total loans	0.99		%	1.18		%

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The following table shows the roll-forward of TDRs for the periods indicated:

Table 4—Activity in Troubled Debt Restructurings



	Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013
	(Dollars in thousands)
TDRs beginning balance	$	48,675		$	53,318
New to TDR status	756			4,023
Paydowns	(4,320		)	(11,554		)
Charge-offs	(115		)	(791		)
TDRs ending balance	$	44,996		$	44,996

The table below shows interest income on all nonaccrual loans and performing TDRs as of the dates indicated:

Table 5 - Interest Income on

Nonaccrual Loans and Troubled Debt Restructurings



	Three Months Ended				Nine Months Ended
	September 30				September 30
	2013		2012		2013		2012
	(Dollars in thousands)
The amount of incremental gross interest income that would have been recorded if nonaccrual loans had been current in accordance with their original terms	$	406	$	431	$	1,262	$	1,221
The amount of interest income on those loans that was included in net income	$	916	$	746	$	2,373	$	2,439

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, commercial construction, and small business categories and for all loans identified as a troubled debt restructuring by comparing the loan’s value to 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 September 30, 2013, impaired loans included all commercial and industrial loans, commercial real estate loans, commercial construction, and small business loans that are on nonaccrual status, TDRs, and other loans that have been categorized as impaired. Total impaired loans at September 30, 2013 and December 31, 2012 were $73.0 million and $66.7 million, respectively. For additional information regarding the Bank’s asset quality, including delinquent loans, nonaccruals, TDRs, and impaired loans, see Note 4, “Loans, Allowance for Loan Losses, and Credit Quality” within Notes to Consolidated Financial Statements included in Item 1 hereof.

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Potential problem loans are any loans which are not included in nonaccrual or nonperforming loans, 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 6 - Potential Problem Commercial Loans



	September 30, 2013		December 31, 2012
	(Dollars in thousands)
Number of loan relationships	64		70
Aggregate outstanding balance	$	77,755	$	110,624

At September 30, 2013, 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.

Allowance for Loan Losses The allowance for loan losses is maintained at a level that management considers adequate to provide for probable loan losses based upon evaluation of known and inherent risks in the loan portfolio. The allowance is increased by providing for loan losses through a charge to expense and by recoveries of loans previously charged-off and is reduced by loans being charged-off.

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on increases in nonperforming loans, changes in economic conditions, or for other reasons. Additionally, various regulatory agencies, as an integral part of the Bank's examination process, periodically assess the adequacy of the allowance for loan losses and may require it to increase its provision for loan losses or recognize further loan charge-offs.

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The following table summarizes changes in the allowance for loan losses and other selected statistics for the periods presented:

Table 7—Summary of Changes in the Allowance for Loan Losses



	Three Months Ended
	September 30, 2013			June 30, 2013			March 31, 2013			December 31, 2012			September 30, 2012
	(Dollars in thousands)
Average loans	$	4,535,596		$	4,540,997		$	4,495,804		$	4,303,254		$	4,008,238
Allowance for loan losses, beginning of period	$	52,976		$	51,906		$	51,834		$	49,746		$	48,403
Charged-off loans
Commercial and industrial	866			1,302			423			202			1,267
Commercial real estate	209			196			407			990			621
Commercial construction	308			—			—			—			—
Small business	84			276			145			212			98
Residential real estate	210			186			61			653			227
Home equity	420			257			277			672			365
Other consumer	273			260			261			325			247
Total charged-off loans	2,370			2,477			1,574			3,054			2,825
Recoveries on loans previously charged-off
Commercial and industrial	24			103			136			528			122
Commercial real estate	89			8			—			—			188
Commercial construction	—			—			—			—			—
Small business	47			37			39			15			21
Residential real estate	5			86			—			72			79
Home equity	22			30			21			26			36
Other consumer	119			183			150			151			116
Total recoveries	306			447			346			792			562
Net loans Charged-off (Recovered)
Commercial and industrial	842			1,199			287			(326		)	1,145
Commercial real estate	120			188			407			990			433
Commercial construction	308			—			—			—			—
Small business	37			239			106			197			77
Residential real estate	205			100			61			581			148
Home equity	398			227			256			646			329
Other consumer	154			77			111			174			131
Total net loans charged-off	2,064			2,030			1,228			2,262			2,263
Provision for loan losses	2,650			3,100			1,300			4,350			3,606
Total allowances for loan losses, end of period	$	53,562		$	52,976		$	51,906		$	51,834		$	49,746
Net loans charged-off as a percent of average total loans (annualized)	0.18		%	0.18		%	0.11		%	0.21		%	0.22		%
Total allowance for loan losses as a percent of total loans	1.18		%	1.17		%	1.16		%	1.15		%	1.23		%
Total allowance for loan losses as a percent of nonperforming loans	141.37		%	144.95		%	156.86		%	180.19		%	160.05		%
Net loans charged-off as a percent of allowance for loan losses (annualized)	15.29		%	15.37		%	9.59		%	17.36		%	18.10		%
Recoveries as a percent of charge-offs	12.91		%	18.05		%	21.98		%	25.93		%	19.89		%

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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.

The following table sets forth the allocation of the allowance for loan losses by loan category at the dates indicated:

Table 8—Summary of Allocation of Allowance for Loan Losses



	September 30, 2013				December 31, 2012
	Allowance Amount		Percent of Loans In Category To Total Loans		Allowance Amount		Percent of Loans In Category To Total Loans
	(Dollars in thousands)
Commercial and industrial	$	15,014	16.6	%	$	13,461	15.2	%
Commercial real estate	24,978		47.5	%	22,598		46.9	%
Commercial construction	3,501		5.2	%	2,811		4.2	%
Small business	1,215		1.7	%	1,524		1.7	%
Residential real estate	2,895		10.9	%	2,930		13.6	%
Home equity	5,314		17.7	%	7,703		17.8	%
Other consumer	645		0.4	%	807		0.6	%
Total allowance for loan losses	$	53,562	100.0	%	$	51,834	100.0	%

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. When available information confirms that specific loans or portions thereof are uncollectible, these amounts are promptly charged-off against the allowance for loan losses and any recoveries of such previously charged-off amounts are credited to the allowance.

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.

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 1hereof.

Federal Home Loan Bank Stock The Bank held an investment in Federal Home Loan Bank (“FHLB”) of Boston of $38.7 million and $41.8 million at September 30, 2013 and December 31, 2012, respectively, as the FHLB repurchased excess capital stock in 2013. The FHLB is a cooperative that provides services to its member banking institutions. The primary reason for the FHLB of Boston 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 FHLB is a requirement for a member to gain access to funding. The Company purchases FHLB 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.

Goodwill and Identifiable Intangible Assets Goodwill and identifiable intangible assets were $160.6 million and $162.1 million at September 30, 2013 and December 31, 2012, respectively.

The Company typically performs its annual goodwill impairment testing during the third quarter of the year, unless certain indicators suggest earlier testing to be warranted. The Company performed its annual goodwill impairment testing during the third quarter of 2013 and determined that the Company's goodwill was not impaired. Identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. There were no events or changes that indicated impairment of identifiable intangible assets.

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Cash Surrender Value of Life Insurance Policies The Bank holds life insurance policies for the purpose of offsetting its future obligations to its employees under its retirement and benefits plans. The cash surrender value of life insurance policies was $99.8 million and $97.3 million at September 30, 2013 and December 31, 2012, respectively. The Bank recorded tax exempt income from the life insurance policies of $793,000 and $2.3 million for the three and nine months ended September 30, 2013, respectively, an increase of 4.8% and 5.2%, respectively, compared to the year ago periods.

Deposits As of September 30, 2013, deposits increased by 4.6% to $4.8 billion when compared to $4.5 billion at December 31, 2012, with core deposits representing 85.3% of total deposits. Total cost of deposits was 0.23% for the quarter, reflecting management's continued emphasis on core deposits and profitable relationships.

The Bank also participates in the Certificate of Deposit Registry Service (“CDARS”) program, allowing the Bank to provide easy access to multi-million dollar FDIC deposit insurance protection on certificate of deposits investments for consumers, businesses and public entities. The economic downturn and subsequent flight to safety makes the CDARS an attractive product for customers. In addition, the Bank may occasionally raise funds through brokered certificates of deposit. This channel allows the Bank to seek additional funding in potentially large quantities by attracting deposits from outside the Bank’s core market. At September 30, 2013 and December 31, 2012, the Company had $78.0 million and $96.0 million, respectively, of brokered deposits of which $54.3 million and $72.2 million, respectively, were part of the CDARS.

Borrowings The Company’s borrowings consist of both short-term and long-term borrowings and provide the Bank with one of its primary sources of funding. The borrowings also serve the Bank by providing a contingent source of liquidity.

The Company’s borrowings consisted of the following as of the periods indicated:

Table 9—Borrowings



	September 30, 2013		December 31, 2012
	(Dollars in thousands)
Short-term borrowings - one year and under (1)
Federal Home Loan Bank and other borrowings (2) (3)	$	150,305	$	175,245
Customer repurchase agreements	164,180		153,359
Total short-term borrowings	$	314,485	$	328,604
Long-term borrowings - over one year (1)
Federal Home Loan Bank borrowings	$	39,234	$	108,324
Wholesale repurchase agreements	50,000		50,000
Junior subordinated debentures:
Capital Trust V	51,547		51,547
Slades Ferry Trust I	10,310		10,310
Central Trust I	5,258		5,258
Central Trust II	6,847		7,012
Subordinated debentures	30,000		30,000
Total long-term borrowings	$	193,196	$	262,451
Total borrowings	$	507,681	$	591,055

(1) Classification is based upon duration at origination and not predicated upon remaining time to maturity.

(2) Includes a $12.0 million, Parent Company outstanding line of credit as of December 31, 2012.

(3) The Company has entered into interest rate swaps to effectively hedge the $150.0 million of the short-term FHLB advances, which the Company intends to continue to roll, to fix the interest rates. These interest rate swaps have maturity dates ranging from December 2013 through December 2018.

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During the third quarter of 2013, management deployed a portion of the Company's excess liquidity by prepaying the $60.0 million of Federal Home Loan Bank Advances assumed as part of the Central Bancorp., Inc. ("Central') acquisition. The difference between the exit price and the net carrying amount of the debt resulted in a gain on extinguishment of debt of $763,000.

As of September 30, 2013 and December 31, 2012, the Bank had $2.8 billion and $3.0 billion, respectively, of assets pledged as collateral against borrowings. These assets are primarily pledged to the FHLB of Boston, the Federal Reserve Bank of Boston, and serve as collateral for customer repurchase agreements.

Capital Resources On September 19, 2013, the Company’s Board of Directors declared a cash dividend of $0.22 per share to stockholders of record as of the close of business on September 30, 2013. This dividend was paid on October 11, 2013.

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 September 30, 2013 and December 31, 2012, the Company and the Bank exceeded the minimum requirements for Tier 1 risk-based, total risk-based capital, and Tier 1 leverage capital.

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The Company’s and the Bank’s actual capital amounts and ratios are also presented in the following table:

Table 10—Company and Bank's Capital Amounts and Ratios



	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio
	September 30, 2013
	(Dollars in thousands)
Company (consolidated)
Total capital (to risk weighted assets)	$	574,462	12.69	%	362,167		≥	8.00	%	N/A			N/A
Tier 1 capital (to risk weighted assets)	490,053		10.82	%	181,084		≥	4.00	%	N/A			N/A
Tier 1 capital (to average assets)	490,053		8.64	%	226,817		≥	4.00	%	N/A			N/A
Bank
Total capital (to risk weighted assets)	$	558,597	12.34	%	$	362,015	≥	8.00	%	$	452,519	≥	10.00	%
Tier 1 capital (to risk weighted assets)	474,188		10.48	%	181,008		≥	4.00	%	271,512		≥	6.00	%
Tier 1 capital (to average assets)	474,188		8.36	%	226,838		≥	4.00	%	283,548		≥	5.00	%
	December 31, 2012
	(Dollars in thousands)
Company (consolidated)
Total capital (to risk weighted assets)	$	541,119	12.23	%	$	354,086	≥	8.00	%	N/A			N/A
Tier 1 capital (to risk weighted assets)	458,638		10.36	%	177,043		≥	4.00	%	N/A			N/A
Tier 1 capital (to average assets)	458,638		8.65	%	212,015		≥	4.00	%	N/A			N/A
Bank
Total capital (to risk weighted assets)	$	534,182	12.07	%	$	353,965	≥	8.00	%	$	442,456	≥	10.00	%
Tier 1 capital (to risk weighted assets)	451,701		10.21	%	176,983		≥	4.00	%	265,474		≥	6.00	%
Tier 1 capital (to average assets)	451,701		8.52	%	212,074		≥	4.00	%	265,093		≥	5.00	%

In July 2013, the U.S. federal banking agencies approved an interim final rule which consolidates and adopts, with revisions, the three Notices of Proposed Rulemaking (“NPR's”) that were previously issued to implement the Basel III capital standards, along with changes required by the Dodd-Frank Act. The Basel III standards are now scheduled to be phased-in beginning January 1, 2014 for advanced approaches FDIC-supervised institutions, and beginning on January 1, 2015 for all other institutions, including the Company.

The interim final rule will strengthen both the quality and quantity of risk-based capital for all banks, including placing greater emphasis on tier 1 common equity capital, and creates a new regulatory minimum capital level for common equity tier 1 ("CET1"). The new rules redefine regulatory capital, increase existing minimum amounts, and introduce a capital conservation buffer to be held in excess of minimum amounts. Additionally, the rules attempt to harmonize the agencies' rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses identified over recent years, by incorporating certain international capital standards of the Basel Committee of Banking Supervision. The revisions to the originally issued NPRs do not change the current risk-weighting approach for residential mortgages, include an opt-out option from the recognition of accumulated other comprehensive income as regulatory capital, and grandfather the treatment of Trust Preferred Securities as regulatory capital. Based on preliminary assessments of the proposed framework, management believes that the Company will continue to exceed all estimated well-capitalized regulatory requirements over the course of the proposed phase-in period.

Investment Management As of September 30, 2013, the Rockland Trust Investment Management Group had assets under administration of $2.2 billion, representing approximately 4,336 trust, fiduciary, and agency accounts. At December 31, 2012, assets under administration were also $2.2 billion, representing approximately 4,051 trust, fiduciary, and agency accounts. Included in these amounts as of September 30, 2013 and December 31, 2012 are assets under administration of $179.8 million and $139.8 million, respectively, relating to the Company’s registered investment advisor, Bright Rock Capital Management, LLC, which

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provides institutional quality investment management services to institutional and high net worth clients. Revenue from the Investment Management Group amounted to $3.8 million and $11.3 million for the three and nine months ended September 30, 2013, respectively compared to $3.4 million and $9.9 million for the three and nine months ended September 30, 2012, respectively.

Additionally, for the three and nine months ended September 30, 2013 retail investments and insurance revenue was $353,000 and $1.1 million, respectively, compared to $356,000 and $1.2 million for the three and nine months ended September 30, 2012, respectively. Retail investments and insurance includes commission revenue from LPL Financial and its affiliates, LPL Insurance Associates, Inc., Savings Bank Life Insurance of Massachusetts, and Smith Companies LTD, a division of Capitas Financial, LLC.

Mortgage Banking The Bank originates residential loans for both its portfolio and 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, gains and losses on sold mortgages less related commission expense, and changes in the value of the mortgage servicing asset. The following table shows detail relating to the total closed mortgage loans during the periods indicated:

Table 11—Closed Residential Real Estate Loans



	Three Months Ended September 30				Nine Months Ended September 30
	2013		2012		2013		2012
	(Dollars in thousands)
Held in portfolio	$	11,173	$	7,014	$	23,140	$	39,604
Sold/held for sale in secondary market	55,835		104,278		227,479		246,148
Total closed loans	$	67,008	$	111,292	250,619		285,752

Included in mortgage banking income 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. The principal balance of loans serviced by the Bank on behalf of investors amounted to $197.8 million at September 30, 2013 and $198.8 million at December 31, 2012. Upon sale, the mortgage servicing asset 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. Servicing rights are recorded in other assets in the consolidated balance sheets, 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. 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. The following table shows the adjusted cost of the servicing rights associated with these loans and the changes for the periods indicated:

Table 12—Mortgage Servicing Asset



	Three Months Ended September 30						Nine Months Ended September 30
	2013			2012			2013			2012
	(Dollars in thousands)
Balance at beginning of period	$	1,264		$	904		$	899		$	1,098
Additions	160			47			508			124
Amortization	(101		)	(132		)	(331		)	(388		)
Change in valuation allowance	49			24			296			9
Balance at end of period	$	1,372		$	843		$	1,372		$	843

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RESULTS OF OPERATIONS

The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and the interest paid on deposits and borrowings. The results of operations are also affected by the level of income/fees from loans, deposits, mortgage banking and investment management, as well as the level of operating expenses, provision for loan losses, provision for income taxes, and the relative levels of interest rates and economic activity. The following table provides a summary of results of operations:

Table 13—Summary of Results of Operations



	Three Months Ended September 30						Nine Months Ended September 30
	2013			2012			2013			2012
	(Dollars in thousands)
Net Income	$	14,655		$	11,601		$	39,665		$	32,658
Diluted earnings per share	$	0.64		$	0.53		$	1.73		$	1.51
Return on average assets	1.00		%	0.91		%	0.93		%	0.87		%
Return on average equity	10.53		%	9.39		%	9.74		%	9.01		%
Net interest margin	3.43		%	3.72		%	3.53		%	3.78		%

The variances between these periods are impacted by the Central acquisition which took place in the fourth quarter of 2012.

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 third quarter of 2013 increased $2.3 million, or 5.4%, to $45.4 million, when compared to the third quarter of 2012. The Company’s net interest margin was 3.43% for the quarter ended September 30, 2013 as compared to 3.72% for the quarter ended September 30, 2012. The Company’s interest rate spread was 3.28% and 3.55% for the third quarters of 2013 and 2012, respectively. The decline in the net interest margin is primarily the result of excess liquidity and assets re-pricing in a lower rate environment without the ability to fully offset this impact through further reductions in funding costs. The margin has been further impacted during 2013 as a result of purchase accounting adjustments and high loan payoff activity.

The following tables present the Company’s daily average balances, net interest income, interest rate spread, and net interest margin for the three and nine months ending September 30, 2013 and 2012. 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 ("FTE") was calculated using the federal statutory tax rate.

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Table 14—Average Balance, Interest Earned/Paid & Average Yields



	Three Months Ended September 30
	2013						2012
	Average Balance		Interest Earned/ Paid		Yield/ Rate		Average Balance		Interest Earned/ Paid		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets
Interest-earning deposits with banks, federal funds sold, and short term investments	$	128,027	$	79	0.24	%	$	53,650	$	34	0.25	%
Securities
Taxable investment securities	561,678		3,763		2.66	%	513,712		3,995		3.09	%
Nontaxable investment securities (1)	844		15		7.05	%	1,649		34		8.20	%
Total securities	562,522		3,778		2.66	%	515,361		4,029		3.11	%
Loans held for sale	20,784		156		2.98	%	34,106		255		2.97	%
Loans (2)
Commercial and industrial	746,767		7,358		3.91	%	636,533		6,447		4.03	%
Commercial real estate (1)	2,159,869		23,812		4.37	%	1,920,905		23,173		4.80	%
Commercial construction	230,446		2,409		4.15	%	162,150		1,695		4.16	%
Small business	75,791		1,048		5.49	%	78,629		1,121		5.67	%
Total commercial	3,212,873		34,627		4.28	%	2,798,217		32,436		4.61	%
Residential real estate	503,313		4,899		3.86	%	392,814		4,165		4.22	%
Home equity	798,381		7,228		3.59	%	787,052		7,236		3.66	%
Total consumer real estate	1,301,694		12,127		3.70	%	1,179,866		11,401		3.84	%
Other consumer	21,029		488		9.21	%	30,155		669		8.83	%
Total loans	4,535,596		47,242		4.13	%	4,008,238		44,506		4.42	%
Total interest-earning assets	$	5,246,929	$	51,255	3.88	%	$	4,611,355	$	48,824	4.21	%
Cash and due from banks	141,923						75,876
Federal Home Loan Bank stock	38,674						33,564
Other assets	384,144						374,208
Total assets	$	5,811,670					$	5,095,003
Interest-bearing liabilities
Deposits
Savings and interest checking accounts	$	1,760,508	$	811	0.18	%	$	1,482,213	$	707	0.19	%
Money market	891,601		561		0.25	%	801,921		615		0.31	%
Time deposits	699,865		1,277		0.72	%	635,729		1,297		0.81	%
Total interest-bearing deposits	$	3,351,974	$	2,649	0.31	%	$	2,919,863	$	2,619	0.36	%
Borrowings
Federal Home Loan Bank and other borrowings	$	225,749	$	1,377	2.42	%	$	198,212	$	1,255	2.52	%
Wholesale repurchase agreements	50,000		292		2.32	%	50,000		292		2.32	%
Customer repurchase agreements	149,364		49		0.13	%	161,097		76		0.19	%
Junior subordinated debentures	73,990		1,021		5.47	%	61,857		928		5.97	%
Subordinated debentures	30,000		443		5.86	%	30,000		547		7.25	%

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Total borrowings	$	529,103	$	3,182	2.39	%	$	501,166	$	3,098	2.46	%
Total interest-bearing liabilities	$	3,881,077	$	5,831	0.60	%	$	3,421,029	$	5,717	0.66	%
Demand deposits	1,303,181						1,093,387
Other liabilities	75,134						89,157
Total liabilities	$	5,259,392					$	4,603,573
Stockholders' equity	552,278						491,430
Total liabilities and stockholders' equity	$	5,811,670					$	5,095,003
Net interest income (1)			$	45,424					$	43,107
Interest rate spread (3)					3.28	%					3.55	%
Net interest margin (4)					3.43	%					3.72	%
Supplemental information
Total deposits, including demand deposits	$	4,655,155	$	2,649			$	4,013,250	$	2,619
Cost of total deposits					0.23	%					0.26	%
Total funding liabilities, including demand deposits	$	5,184,258	$	5,831			$	4,514,416	$	5,717
Cost of total funding liabilities					0.45	%					0.50	%

(1)

The total amount of adjustment to present interest income and yield on a FTE basis is $228,000 and $268,000 for the three months ended September 30, 2013 and 2012, respectively. The FTE adjustment relates to nontaxable investment securities of $5,000 and $14,000 and nontaxable industrial development bonds recorded within commercial real estate of $223,000 and $254,000, for the three months ended September 30, 2013 and 2012, respectively.


(2)	Average nonaccruing loans are included in loans.


(3)	Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.


(4)	Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

Table 15—Average Balance, Interest Earned/Paid & Average Yields



	Nine Months Ended September 30
	2013						2012
	Average Balance		Interest Earned/ Paid		Yield/ Rate		Average Balance		Interest Earned/ Paid		Yield/ Rate
	(Dollars in Thousands)
Interest-earning assets
Interest-earning deposits with banks, federal funds sold, and short-term investments	$	72,126	$	134	0.25	%	$	45,951	$	85	0.25	%
Securities
Trading assets	—		—		—		1,823		38		2.78	%
Taxable investment securities	539,823		10,798		2.67	%	529,560		12,900		3.25	%
Nontaxable investment securities (1)	892		52		7.79	%	2,026		121		7.98	%
Total securities	540,715		10,850		2.68	%	533,409		13,059		3.27	%
Loans held for sale	32,796		661		2.69	%	23,829		541		3.03	%
Loans (2)
Commercial and industrial	725,385		21,534		3.97	%	612,084		18,642		4.07	%
Commercial real estate (1)	2,143,925		71,780		4.48	%	1,888,773		68,881		4.87	%
Commercial construction	218,181		6,732		4.13	%	151,541		4,816		4.25	%
Small business	77,068		3,200		5.55	%	79,218		3,390		5.72	%
Total commercial	3,164,559		103,246		4.36	%	2,731,616		95,729		4.68	%
Residential real estate	540,073		16,206		4.01	%	407,765		13,188		4.32	%
Home equity	796,326		21,391		3.59	%	754,294		20,835		3.69	%

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Total consumer real estate	1,336,399		37,597		3.76	%	1,162,059		34,023		3.91	%
Other consumer	23,320		1,568		8.99	%	34,355		2,168		8.43	%
Total loans	4,524,278		142,411		4.21	%	3,928,030		131,920		4.49	%
Total interest-earning assets	$	5,169,915	$	154,056	3.98	%	$	4,531,219	$	145,605	4.29	%
Cash and due from banks	114,199						65,972
Federal home loan bank stock	39,455						34,133
Other assets	403,311						368,140
Total assets	$	5,726,880					$	4,999,464
Interest-bearing liabilities
Deposits
Savings and interest checking accounts	$	1,685,398	$	2,192	0.17	%	$	1,463,255	$	2,091	0.19	%
Money market	877,891		1,689		0.26	%	790,589		1,875		0.32	%
Time deposits	726,737		3,976		0.73	%	629,840		4,079		0.87	%
Total interest-bearing deposits	$	3,290,026	$	7,857	0.32	%	$	2,883,684	$	8,045	0.37	%
Borrowings
Federal home loan bank and other borrowings	$	270,236	$	4,250	2.10	%	$	214,747	$	3,879	2.41	%
Wholesale repurchase agreements	50,000		866		2.32	%	50,000		870		2.32	%
Customer repurchase agreements	144,151		143		0.13	%	155,205		268		0.23	%
Junior subordinated debentures	74,046		3,029		5.47	%	61,857		2,766		5.97	%
Subordinated debentures	30,000		1,524		6.79	%	30,000		1,630		7.26	%
Total borrowings	$	568,433	$	9,812	2.31	%	$	511,809	$	9,413	2.46	%
Total interest-bearing liabilities	$	3,858,459	$	17,669	0.61	%	$	3,395,493	$	17,458	0.69	%
Demand Deposits	1,244,138						1,034,180
Other liabilities	79,650						85,410
Total liabilities	$	5,182,247					$	4,515,083
Stockholders' equity	544,633						484,381
Total liabilities and stockholders' equity	$	5,726,880					$	4,999,464
Net interest income (1)			$	136,387					$	128,147
Interest rate spread (3)					3.37	%					3.60	%
Net interest margin (4)					3.53	%					3.78	%
Supplemental information
Total deposit, including demand deposits	$	4,534,164	$	7,857			$	3,917,864	$	8,045
Cost of total deposits					0.23	%					0.27	%
Total funding liabilities, including demand deposits	$	5,102,597	$	17,669			$	4,429,673	$	17,458
Cost of total funding liabilities					0.46	%					0.53	%

(1)

The total amount of adjustment to present interest income and yield on a FTE basis is $714,000 and $827,000 for the nine months ended September 30, 2013 and 2012, respectively. The FTE adjustment relates to nontaxable investment securities of $20,000 and $49,000 and nontaxable industrial development bonds recorded within commercial real estate of $694,000 and $778,000 for the nine months ended September 30, 2013 and 2012, respectively.


(2)	Average nonaccruing loans are included in loans.


(3)	Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.


(4)	Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

The following table presents certain information on a fully tax-equivalent basis regarding changes in the Company’s interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to: (1) changes in rate (change in rate multiplied by old volume),

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(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:

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Table 16—Volume Rate Analysis



	Three Months Ended September 30									Nine Months Ended September 30
	2013 Compared To 2012									2013 Compared To 2012
	Change Due to Rate (1)			Change Due to Volume			Total Change			Change Due to Rate (1)			Change Due to Volume			Total Change
	(Dollars in thousands)
Income on interest-earning assets
Interest earning deposit, federal funds sold and short term investments	$	(2	)	$	47		$	45		$	—		$	49		$	49
Securities
Trading assets	—			—			—			—			(38		)	(38		)
Taxable securities	(605		)	373			(232		)	(2,352		)	250			(2,102		)
Nontaxable securities (2)	(2		)	(17		)	(19		)	(1		)	(68		)	(69		)
Total securities							(251		)							(2,209		)
Loans held for sale	1			(100		)	(99		)	(84		)	204			120
Loans
Commercial and industrial	(205		)	1,116			911			(559		)	3,451			2,892
Commercial real estate (2)	(2,244		)	2,883			639			(6,406		)	9,305			2,899
Commercial construction	—			714			714			(202		)	2,118			1,916
Small business	(33		)	(40		)	(73		)	(98		)	(92		)	(190		)
Total commercial							2,191									7,517
Residential real estate	(438		)	1,172			734			(1,261		)	4,279			3,018
Home equity	(112		)	104			(8		)	(605		)	1,161			556
Total consumer real estate							726									3,574
Other consumer	21			(202		)	(181		)	96			(696		)	(600		)
Total loans (2)(3)							2,736									10,491
Total income of interest-earning assets							2,431									8,451
Expense of interest-bearing liabilities
Deposits
Savings and interest checking accounts	$	(29	)	$	133		$	104		$	(216	)	$	317		$	101
Money market	(123		)	69			(54		)	(393		)	207			(186		)
Time certificates of deposits	(151		)	131			(20		)	(731		)	628			(103		)
Total interest bearing deposits							30									(188		)
Borrowings
Federal Home Loan Bank and other borrowings	(52		)	174			122			(631		)	1,002			371
Wholesale repurchase agreements	—			—			—			(4		)	—			(4		)
Customer repurchase agreements	(21		)	(6		)	(27		)	(106		)	(19		)	(125		)
Junior subordinated debentures	(89		)	182			93			(282		)	545			263
Subordinated debt	(104		)	—			(104		)	(106		)	—			(106		)
Total borrowings							84									399
Total expense of interest-bearing liabilities							114									211
Change in net interest income							$	2,317								$	8,240

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(1)	The changes for each category of interest income and expense are divided between the portion of change attributable to the variance in volume and the portion of the change attributable to the variances in rate for that category. The unallocated change in rate or volume variance has been allocated to the rate variances.

(2)

The total amount of adjustment to present interest income and yield on a FTE basis is $228,000 and $268,000 for the three months ended September 30, 2013 and 2012, respectively, and $714,000 and $827,000 for the nine months ended September 30, 2013 and 2012, respectively. The FTE adjustment relates to nontaxable investment securities of $5,000 and $14,000 and nontaxable industrial development bonds recorded within commercial real estate of $223,000 and $254,000, for the three months ended September 30, 2013 and 2012, respectively. The FTE adjustment relates to income earned on nontaxable investment securities of $20,000 and $49,000 and nontaxable industrial development bonds recorded within commercial real estate of $694,000 and $778,000, for the nine months ended September 30, 2013 and 2012, respectively.


(3)	Loans include portfolio loans and nonaccrual 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 $2.7 million and $7.1 million for the three and nine months ended September 30, 2013, compared with $3.6 million and $13.7 million for the comparable year-ago period. The Company’s allowance for loan losses, as a percentage of total loans, was 1.18% at September 30, 2013, as compared to 1.15% at December 31, 2012 and 1.23% at September 30, 2012. For the three and nine months ended September 30, 2013, net loan charge-offs totaled $2.1 million and $5.3 million, a decrease of $199,000 and $6.9 million from the year ago comparative period. The fluctuations in the provision and net charge offs from the year ago periods are mainly driven by a $4.0 million fraud related loan loss that was recognized in the second quarter of 2012. Aside from the prior year fraud loss, the decrease is also a result of an improved economic outlook.

Regional and local general economic conditions continued to show improvement during the first nine months of 2013, as measured in terms of employment levels, statewide economic activity, and other regional economic indicators. However, economic growth in Massachusetts has slowed and lagged behind the national economy during 2013. Local residential real estate market fundamentals continued to improve during the third quarter of 2013 characterized by a higher level of home sales, lower inventory levels, and higher prices compared to the same period in 2012. Additionally, foreclosure activity continued to decline during the first nine months of 2013. Regional commercial real estate market conditions were improved during the year in most sub-markets, experiencing improving vacancy, absorption, and leasing rates. Leading economic indicators signal continued economic improvement through the end of 2013; however, economic uncertainty persists, both domestically and abroad.

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 economic conditions. Substantial portions of the Bank’s loans are secured by real estate in Massachusetts and Rhode Island. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio is susceptible to changes in property values within those states.

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Noninterest Income The following table sets forth information regarding noninterest income for the periods shown:

Table 17—Noninterest Income - Three and Nine Months Ended



	Three Months Ended
	September 30				Change
	2013		2012		Amount			%
	(Dollars in thousands)
Deposit account fees	$	4,604	$	3,959	$	645		16.29	%
Interchange and ATM fees	2,845		2,422		423			17.46	%
Investment management	4,175		3,723		452			12.14	%
Mortgage banking	1,843		1,445		398			27.54	%
Loan level derivative income	1,331		1,047		284			27.13	%
Increase in cash surrender value of life insurance policies	793		757		36			4.76	%
Gain on extinguishment of debt	763		—		763			100.00	%
Proceeds from life insurance policies	—		1,307		(1,307		)	(100.00	)%
Other noninterest income	1,776		1,448		328			22.65	%
Total	$	18,130	$	16,108	$	2,022		12.55	%

	Nine Months Ended
	September 30				Change
	2013		2012		Amount			%
	(Dollars in thousands)
Deposit account fees	$	13,164	$	11,771	$	1,393		11.83	%
Interchange and ATM fees	7,934		7,189		745			10.36	%
Investment management	12,417		11,113		1,304			11.73	%
Mortgage banking	5,794		4,238		1,556			36.72	%
Loan level derivative income	2,679		2,747		(68		)	(2.48	)%
Increase in cash surrender value of life insurance policies	2,325		2,211		114			5.16	%
Gain on extinguishment of debt	763		—		763			100.00	%
Proceeds from life insurance policies	—		1,307		(1,307		)	(100.00	)%
Other noninterest income	5,469		4,424		1,045			23.62	%
Total	$	50,545	$	45,000	$	5,545		12.32	%

Noninterest income amounted to $18.1 million and $50.5 million during the three and nine months ended September 30, 2013, respectively, a $2.0 million, or 12.6%, increase and a $5.5 million, or 12.3%, increase, respectively, from the same periods in the prior year. Fluctuations in these categories shown in the preceding table are noted below:

Deposit account fees increased for both periods primarily due to increased overdraft and nonsufficient fund fees.

Interchange and ATM fees for both periods increased due to the Company's focus on core checking accounts and increased debit card usage.

Although total assets under administration have remained relatively consistent, and increase of approximately 8.1% in higher yielding managed money products has resulted in an overall increase in investment management revenue when compared to the same prior period. Assets under administration, which were $2.2 billion at September 30, 2013, an increase of $26.4 million, or 1.2%, as compared to the same period in the prior year.

Mortgage banking income increased for the three months ended September 30, 2013 as compared to the year ago period, due primarily to a positive income impact from management's focus on selling loans under a mandatory delivery process. The increase for the nine months ended September 30, 2013 as compared to the year ago period is driven mainly by increased volume.

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During the third quarter of 2012 the Company received net proceeds on life insurance policies in the amount of $1.3 million, which represented tax-exempt income to the Company.

During the third quarter of 2013 the Company recognized a gain on the extinguishment of debt of $763,000 related to the prepayment of $60.0 million of Federal Home Loan Bank Advances, which were assumed as part of the Central acquisition.

Other noninterest income increased by $328,000, or 22.7%, and increased by $1.0 million, or 23.6% for the three and nine months ended September 30, 2013, respectively compared to prior periods. The increases are mainly due to the gain on sale of other real estate owned which increased by $95,000 and $591,000 for the three ands nine month periods, respectively. The remaining increases for the nine months ended September 2013 were due to increases in asset based lending fee income of $243,000, and merchant processing income of $128,000.

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Noninterest Expense The following table sets forth information regarding non-interest expense for the periods shown:

Table 18—Noninterest Expense - Three and Nine Months Ended



	Three Months Ended
	September 30				Change
	2013		2012		Amount			%
	(Dollars in thousands)
Salaries and employee benefits	$	22,654	$	20,704	$	1,950		9.42	%
Occupancy and equipment expense	4,573		4,218		$	355		8.42	%
Data processing & facilities management	1,179		1,144		$	35		3.06	%
Consulting expense	914		691		$	223		32.27	%
FDIC Assessment	898		775		$	123		15.87	%
Debit card expense	766		648		$	118		18.21	%
Advertising expense	759		1,267		$	(508	)	(40.09	)%
Software maintenance	599		491		$	108		22.00	%
Telecommunication expense	523		479		$	44		9.19	%
Merger and acquisition expense	366		595		$	(229	)	(38.49	)%
Goodwill impairment	—		2,227		$	(2,227	)	(100.00	)%
Other noninterest expenses	7,491		6,813		$	678		9.95	%
Total	$	40,722	$	40,052	$	670		1.67	%

	Nine Months Ended
	September 30				Change
	2013		2012		Amount			%
	(Dollars in thousands)
Salaries and employee benefits	66,963		61,915		$	5,048		8.15	%
Occupancy and equipment expense	14,742		12,752		1,990			15.61	%
Data processing & facilities management	3,564		3,418		146			4.27	%
Advertising expense	3,410		3,478		(68		)	(1.96	)%
FDIC assessment	2,653		2,354		299			12.70	%
Merger and acquisition expense	2,465		1,267		1,198			94.55	%
Consulting expenses	2,291		1,900		391			20.58	%
Debit card expense	2,209		1,844		365			19.79	%
Software maintenance	1,878		1,467		411			28.02	%
Telecommunication expense	1,726		1,763		(37		)	(2.10	)%
Goodwill impairment	—		2,227		(2,227		)	(100.00	)%
Other noninterest expenses	23,904		20,025		3,879			19.37	%
Total	$	125,805	$	114,410	$	11,395		9.96	%

Noninterest expense increased by $670,000, or 1.7%, and $11.4 million, or 10.0%, during the three and nine months ended September 30, 2013, respectively, as compared to the same period in the prior year. Fluctuations in these categories shown in the preceding table are noted below:

Salaries and employee benefits increased in both the three and nine month periods ending September 30, 2013 driven by an increase in incentive compensation and an overall increase in base salaries and commissions earned. The increase is also impacted by the inclusion of Central's employee base following the acquisition of Central.

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Occupancy and equipment expense increases were attributable primarily to the impact of the acquired Central facilities, additionally the increase for the nine month periods was impacted by an increase in snow removal cost during 2013.

Merger and acquisition expense relates to the Central and Mayflower acquisitions. The Central acquisition closed in November of 2012, with a full system conversion in 2013 and, as previously announced, the Company has reached a definitive agreement to acquire Mayflower Bancorp, Inc. which is expected to close in the fourth quarter of 2013.

During the third quarter of 2012, the Company recorded a $2.2 million goodwill impairment charge, which represented the total amount of goodwill relating to Compass. Compass is a wholly-owned subsidiary of the Bank that provides like-kind exchange services pursuant to section 1031 of the Internal Revenue Code. While Compass remains in business and continues to operate, the Company determined the goodwill associated with the Compass purchase to be impaired due in part to the prolonged low rate environment and the Federal Reserve Bank's stated intent to maintain low rates for the foreseeable future.

Other noninterest expense increased by $678,000, or 10.0%, and by $3.9 million, or 19.4%, for the three and nine months ended September 30, 2013 compared to prior periods. The increases are driven by an increase in mortgage operations expense of $546,000 and $1.5 million for the three and nine month periods, associated with the recent outsourcing of mortgage operations, which is somewhat offset by a decrease within salaries and benefits. Additionally, the increases in the nine month period ending September 30, 2013 is also due to increases in loan workout cost of $581,000, internet banking expense of $445,000, and intangible amortization of $374,000, driven primarily from intangibles acquired in the Central acquisition.

Income Taxes 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 sets forth information regarding the Company’s tax provision and applicable tax rates for the periods indicated:

Table 19 - Tax Provision and Applicable Tax Rates



	Three Months Ended						Nine Months Ended
	September 30						September 30
	2013			2012			2013			2012
	(Dollars in thousands)						(Dollars in thousands)
Combined federal and state income tax provisions	$	5,299		$	3,687		$	13,698		$	11,546
Effective income tax rates	26.56		%	24.12		%	25.67		%	26.12		%

The effective income tax rates are lower than the blended statutory tax rate of 40.85% for the three and nine months ended September 30, 2013 and 2012, due to certain tax preference assets such as life insurance policies and tax exempt bonds, as well as federal tax credits recognized primarily in connection with the New Markets Tax Credit program.

As of September 30, 2013, the Company has been awarded a total of $191.0 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 39.0% of the total award, as capital is invested into a subsidiary which will lend to qualifying businesses in low income communities. The following table details the remaining tax credit recognition by year associated with this program:

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Table 20—New Markets Tax Credit Recognition Schedule



Investment		2013		2014		2015		2016		2017		Thereafter		Total Remaining Credits

2007	$38.2 M	$	2,292	$	—	$	—	$	—	$	—	$	—	$	2,292
2008	6.8 M	408		408		—		—		—		—		816
2009	10.0 M	600		600		600		—		—		—		1,800
2010	40.0 M	2,400		2,400		2,400		2,400		—		—		9,600
2012	21.4 M	1,071		1,071		1,285		1,285		1,285		1,285		7,282
2013*	44.6 M	2,229		2,229		2,229		2,675		2,675		5,350		17,387
Total	161.0 M	$	9,000	$	6,708	$	6,514	$	6,360	$	3,960	$	6,635	$	39,177

* $15.9 million has been invested through September 30, 2013 and $28.7 million is anticipated to be invested in the last quarter of 2013.

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. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect of a change in enacted tax rates on the deferred tax assets is recognized in income in the period that includes the enactment date. The Company had no recorded tax valuation allowance as of September 30, 2013 and 2012.

Risk Management

The Company’s Board of Directors and Executive Management have identified significant risk categories which affect the Company. The risk categories include: credit risk, operations risk, compliance risk, reputation risk, strategic risk, market risk and liquidity risk. The Board of Directors has approved a Risk Management Policy that addresses each category of risk. The Chief Executive Officer, Chief Financial Officer, Chief Information Officer, Director of Residential Lending and Compliance Officer, Executive Vice President of Commercial Lending and other members of management provide regular reports to the Board of Directors, identifying key risk issues and plans to address these issues. The Board of Directors will ensure the level of risk is within limits established by both the Risk Management Policy and other previously approved policies.

Credit Risk Credit risk represents the possibility that customers may not repay loans or other contractual obligations according to their terms due to a decline in their credit quality. In some cases, the collateral securing the payment of the loans may be sufficient to assure repayment, but in other cases the Company may experience significant credit losses which could have an adverse effect on its operating results. The Company makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. For further discussion regarding the credit risk and the credit quality of the Company’s loan portfolio, see Note 4, “Loans, Allowance for Loan Losses, and Credit Quality” within Notes to Consolidated Financial Statements included in Item 1 hereof.

Operations Risk Operations risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, disasters and security risks. The Company continuously strives to strengthen its system of internal controls, operating processes and employee awareness. The Bank has an Operations Risk Management Committee that meets monthly and reports to the Board quarterly or more frequently if events occur that warrant reporting to the Board more frequently. The committee is chaired by the Director of Residential Lending and Compliance and members of the Committee include representatives from Audit, Finance, Technology, Compliance, Information Security and periodic attendance from business units throughout the organization. An operations risk management dashboard is updated quarterly and reviewed with the Board.

Compliance Risk Compliance risk represents the risk of regulatory sanctions or financial loss resulting from the Company’s failure to comply with rules and regulations issued by the various banking agencies, the U.S. Securities and Exchange Commission,

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and the NASDAQ Stock Market, and standards of good banking practice. Activities which may expose the Company to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, adherence to all applicable laws and regulations, community reinvestment initiatives and employment and tax matters. Compliance risk is mitigated through the use of written policies and procedures, training of staff, and monitoring of activities for adherence to those procedures.

Strategic and Reputation Risk Strategic and reputation risk represent the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, and failure to assess current and new opportunities in business, markets and products. Mitigation of strategic and/or reputational risk is achieved through robust annual strategic planning and frequent executive strategic reviews, ongoing competitive and technological observation, rigorous assessment processes of new product, new branch, and new business initiatives, adherence to ethical standards and a philosophy of customer advocacy, a structured process of customer complaint resolution, and ongoing reputational monitoring and management tools.

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. Interest rate sensitivity is the most significant market 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 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. 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 Company quantifies its interest rate exposures using net interest income simulation models, as well as simpler gap analysis, and Economic Value of Equity 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 nonmaturity deposits (e.g. DDA, NOW, savings and money market). In the case of prepayment of mortgage assets, assumptions are derived from published dealer median prepayment estimates for comparable mortgage loans. 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 loans cannot be determined exactly.

The Company’s policy on interest-rate risk simulation specifies that for all "core" interest rate scenarios, estimated net interest income for the subsequent one-year period should not decline by more than 10%. The Company's core scenarios for September 30, 2013 included five instantaneous parallel shifts (“shocks”) to market interest rates and four gradual shifts (12 to 24 months):

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Table 21—Interest Rate Sensitivity



	Impact on Net Interest Income
	September 30
	2013		2012
Parallel rate shocks (basis points)
-100	—	%	(0.3	)%
+100	3.6	%	3.9	%
+200	7.3	%	8.0	%
+300	11.1	%	12.0	%
+400	14.7	%	15.9	%

Gradual rate shifts (basis points)
-100 over 12 months	0.3	%	0.3	%
+200 over 12 months	3.2	%	3.1	%
+400 over 24 months	3.2	%	3.1	%
Flat +500 over 12 months	3.9	%	4.0	%

The Company's policy on interest rate risk simulation also specifies that estimated net interest income for the second year of all “core scenarios” should decline by less than 15.0%. The Company was within policy limits at September 30, 2013 and 2012. 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 nine months ended September 30, 2013 were (i) the shape of the U.S. Government securities and interest rate swap yield curve, (ii) the level of U.S. prime interest rate and LIBOR rates, and (iii) the level of interest rates being offered on long-term fixed rate loans.

The Company manages the interest rate risk inherent in both its loan and borrowing portfolios by utilizing interest rate swap agreements and interest rate caps and floors. 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 8, “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 loans anticipated to close and 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, if any. (See Note 3, “Securities” within the Notes to the Consolidated Financial Statements included in Item 1 hereof).

Liquidity Risk Liquidity risk is the risk that the Company will not have 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, service borrowings, 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,

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savings accounts, and money market accounts. Deposit levels are greatly influenced by interest rates, economic conditions, and competitive factors.

The Company actively manages its liquidity position under the direction of the Asset/ Liability Committee (ALCO). The Company’s primary measure of short-term liquidity is the Basic Surplus/Deficit as a percentage of assets. This ratio, which is an analysis of the relationship between liquid assets and short-term liabilities relative to total assets, was within policy limits at September 30, 2013. The Basic Surplus measure is affected primarily by changes in deposits, securities and short-term investments, loans and borrowings. An increase in deposits, without a corresponding increase in nonliquid assets, will improve the Basic Surplus measure, whereas, an increase in loans, with no increase in deposits, will decrease the measure. Other factors affecting the Basic Surplus measure include collateral requirements at the FHLB, changes in the securities portfolio, and the mix of deposits.

The Bank is careful to increase deposits without adversely impacting the weighted average cost of those funds. As part of a prudent liquidity risk management practice, the Company maintains various liquidity sources, some of which are only accessed on a contingency basis. Accordingly, management has implemented funding strategies that include FHLB advances, Federal Reserve Bank borrowing capacity and repurchase agreement lines. These nondeposit 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.

Borrowing capacity at the FHLB and the Federal Reserve is impacted by the amount and type of assets available to be pledged. For example, a prime, one-to-four family, residential loan, may provide 75 cents of borrowing capacity for every $1.00 pledged, whereas, a commercial loan may provide a lower amount. As a result, the Company’s strategic lending decisions can also affect its liquidity position.

The Company can raise additional liquidity through the issuance of equity or unsecured debt privately or publicly. Additionally, the Company is able to enter into additional repurchase agreements or acquire brokered deposits at its discretion. The availability and cost of equity or debt on an unsecured basis is dependent on many factors. Some factors that will impact this source of liquidity are the Company’s financial position, the market environment, and the Company’s credit rating. As such, the Company is careful to monitor the various factors that could impact its ability to raise liquidity through these channels.

The table below shows current and unused liquidity capacity from various sources as of the dated indicated:

Table 22—Sources of Liquidity



	September 30, 2013						December 31, 2012
	Outstanding		Additional Borrowing Capacity				Outstanding		Additional Borrowing Capacity
	(Dollars in thousands)
Federal Home Loan Bank of Boston (3)	$	189,539	$	628,727			$	271,569	$	661,922
Federal Reserve Bank of Boston	—		836,660				—		766,195
Unpledged Securities	—		157,792				—		114,953
Wholesale repurchase agreements	50,000		—		(1	)	50,000		—		(1	)
Customer repurchase agreements	164,180		—		(1	)	153,359		—		(1	)
Junior subordinated debentures (3)	73,962		—		(1	)	74,127		—		(1	)
Subordinated debt	30,000		—		(1	)	30,000		—		(1	)
Parent Company line of credit	—		20,000				12,000		8,000
Brokered deposits (2)	78,014		—		(1	)	96,033		—		(1	)
	$	585,695	1,643,179				$	687,088	$	1,551,070


(1)	The additional borrowing capacity has not been assessed for these categories.


(2)	Inclusive of $54.3 million and $72.2 million of brokered deposits acquired through participation in the Certificate of Deposit Account Registry Service program as of September 30, 2013 and December 31, 2012, respectively.


(3)	Amounts shown are inclusive of fair value marks.

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In addition to policies used for managing operational liquidity, the Board of Directors and the Asset/Liability Committee of the Bank recognize the need to establish reasonable guidelines for managing through an environment of heightened liquidity risk. Catalysts for elevated liquidity risk can be Bank-specific issues and/or systemic industry-wide events. It is therefore, the responsibility of the Board and ALCO to institute systems and controls to provide advanced detection of potentially significant funding shortages, establish methods for assessing and monitoring risk levels, and institute prompt responses that may alleviate/circumvent a potential liquidity crisis. As such, the Board of Directors and the ALCO have put a Liquidity Contingency Plan in place. The overall goal of this plan is to provide a framework for the Bank to help detect liquidity problems promptly and appropriately address potential liquidity problems in a timely manner. In a period of perceived heightened liquidity risk, the Liquidity Contingency Plan provides for the establishment of a Liquidity Crisis Task Force. The Liquidity Crisis Task Force is responsible for monitoring the potential for a liquidity crisis and for establishing and executing an appropriate response.

Off-Balance Sheet Arrangements There have been no material changes in off-balance sheet financial instruments during the three months ended September 30, 2013. Please refer to the 2012 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 three months ended September 30, 2013. Please refer to the 2012 Form 10-K for a complete table of contractual obligations, commitments, contingencies, and off-balance sheet financial instruments.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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.”

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the 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 third quarter of 2013 that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business or other matters not considered to be material. Management believes that those legal proceedings involve, in the aggregate, amounts that are immaterial to the Company’s financial condition and results of operations.

Item 1A. Risk Factors

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 2012 Annual Report on Form 10-K, which are incorporated herein by reference.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable.

(b) Not applicable.

(c) The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended September 30, 2013:

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	Issuer Purchases of Equity Securities
	Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan or Program (2)	Maximum Number of Shares That May Yet Be Purchased Under the Plan or Program
Period
July 1 to July 31, 2013	2,827	$	37.05	—	—
August 1 to August 31, 2013	8,458	$	37.44	—	—
September 1 to September 31, 2013	—	$	—	—	—
Total	11,285			—


(1)	Shares repurchased relate to the surrendering of mature shares for the exercise of stock compensation grants.


(2)	The Company does not currently have a stock repurchase program or plan in place.

Item 3. Defaults Upon Senior Securities—None

Item 4. Mine Safety Disclosures - Not Applicable

Item 5. Other Information—None

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Item 6. Exhibits

Exhibits Index



No.	Exhibit
2.1	Agreement and Plan of Merger dated April 30, 2012 with Central Bancorp, Inc. is incorporated by reference to Form 8-K filed on May 3, 2012.
2.2	Agreement and Plan of Merger dated May 14, 2013 with Mayflower Bancorp, Inc. is incorporated by reference to Form 8-K filed on May 20, 2013.
3.(i)	Restated Articles of Organization, as adopted May 20, 2010, incorporated by reference to Form 8-K filed on May 24, 2010.



3.(ii)	Amended and Restated Bylaws of the Company, incorporated by reference to Form 8-K filed on May 24, 2010.
4.1	Specimen Common Stock Certificate, incorporated by reference to Form 10-K for the year ended December 31, 1992.
4.2	Specimen preferred Stock Purchase Rights Certificate, incorporated by reference to Form 8-A Registration Statement filed on November 5, 2001.
4.3	Indenture of Registrant relating the Junior Subordinated Debt Securities issued to Independent Capital Trust V is incorporated by reference to Form 10-K for the year ended December 31, 2006 filed on February 28, 2007.
4.4	Form of Certificate of Junior Subordinated Debt Security for Independent Capital Trust V (included as Exhibit A to Exhibit 4.9)
4.5	Amended and Restated Declaration of Trust for Independent Capital Trust V is incorporated by reference to Form 10-K for the year ended December 31, 2006 filed on February 28, 2007.
4.6	Form of Capital Security Certificate for Independent Capital Trust V (included as Exhibit A-1 to Exhibit 4.9).
4.7	Guarantee Agreement relating to Independent Capital Trust V is incorporated by reference to Form 10-K for the year ended December 31, 2006 filed on February 28, 2007.
4.8	Forms of Capital Securities Purchase Agreements for Independent Capital Trust V is incorporated by reference to Form 10-K for the year ended December 31, 2006 filed on February 28, 2007.
4.9	Subordinated Debt Purchase Agreement between USB Capital Resources and Rockland Trust Company dated as of August 27, 2008 is incorporated by reference to Form 8-K filed on September 2, 2008.
4.10	Rockland Trust Company Employee Savings, Profit Sharing and Stock Ownership Plan incorporated by reference to Form S-8 filed on April 16, 2010.
4.11	Independent Bank Corp. 2010 Dividend Reinvestment and Stock Purchase Plan incorporated by reference to Form S-3 filed on August 24, 2010.
10.1	Independent Bank Corp. 1996 Nonemployee 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.

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10.3	Independent Bank Corp. Amended and Restated 2005 Employee Stock Plan incorporated by reference to Form S-8 filed on June 17, 2011.
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, Jane L. Lundquist, Gerard F. Nadeau, and Edward H. Seksay 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	Revised employment agreements between Denis K. Sheahan and Edward F. Jankowski and new employment agreements between Barry H. Jensen and Robert D. Cozzone and the Company and/or Rockland Trust dated September 5, 2013 are filed herewith.
10.9	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.
10.10	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.
10.11	Independent Bank Corp. entered into a revolving credit facility with PNC Bank NA allowing the Company to borrow, repay and reborrow up to $20 million on or prior to October 18, 2013. The letter agreement is incorporated by reference to Form 8-K filed on October 25, 2012.
10.12	Independent Bank Corp. 2006 Nonemployee Director Stock Plan incorporated by reference to Form S-8 filed on April 17, 2006.
10.13	Independent Bank Corp. 2006 Stock Option Agreement for Nonemployee Director is incorporated by reference to Form 10-Q filed on May 9, 2006.
10.14	Independent Bank Corp. 2006 Restricted Stock Agreement for Nonemployee Director is incorporated by reference to Form 10-Q filed on May 9, 2006.

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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 September 22, 2004 is incorporated by reference to Form 8-K filed on October 14, 2004.
10.16	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.
10.17	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.
10.18	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 April 17, 2012 is incorporated by reference to form 8-K filed on April 26, 2012.
10.19	Item Processing and Other Services Agreement dated and effective as of May 11, 2012 by and between Fidelity Information Services, Inc. and Independent Bank Corp. is incorporated by reference to Form 8-K/A filed on July 24, 2012.
10.20	Independent Bank Corp. 2010 Nonemployee Director Stock Plan, incorporated by reference to Form 8-K filed May 24, 2010.
10.21	Independent Bank Corp. 2010 Stock Option Agreement for Nonemployee Director, incorporated by reference to Form 8-K filed May 24, 2010.
10.22	Independent Bank Corp. 2010 Restricted Stock Agreement for Nonemployee Director, incorporated by reference to Form 8-K filed May 24, 2010.
10.23	Master Data Processing Services Agreement dated and effective as of May 15, 2012 between Rockland Trust Company and Q2 Software, Inc., incorporated by reference to Form 8-K/A filed July 18, 2012.
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.+
101.INS	XBRL Instance Document +
101.SCH	XBRL Taxonomy Extension Schema Document +
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document +



101.DEF	XBRL Taxonomy Extension Definition Linkbase Document +
101. LAB	XBRL Taxonomy Extension Label Linkbase Documents +
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document +



*	Filed herewith



+	Furnished herewith

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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: November 6, 2013		/s/ Christopher Oddleifson
		Christopher Oddleifson President and Chief Executive Officer (Principal Executive Officer)



Date: November 6, 2013		/s/ Robert Cozzone
		Robert Cozzone Chief Financial Officer and Treasurer (Principal Financial Officer)

INDEPENDENT BANK CORP.

(registrant)