0000776901 us-gaap:CommitmentsToExtendCreditMember 2019-06-30
Table of Contents

 
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
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JuneSeptember 30, 2019
Commission File Number:1-9047

Independent Bank Corp.
(Exact name of registrant as specified in its charter)
 ___________________________________________________
Massachusetts04-2870273
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Office Address:2036 Washington Street,Hanover,Massachusetts02339
Mailing Address:288 Union Street,Rockland,Massachusetts02370
(Address of principal executive offices, including zip code)
(781) 878-6100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each ClassTrading SymbolName of each exchange on which registered
Common Stock, $01$0.01 par value per shareINDBNASDAQ Global Select Market

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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 
Large Accelerated FilerxAccelerated Filero☐
    
Non-accelerated Filero☐Smaller Reporting Company☐
    
  Emerging Growth Company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.    Yes  ☐     No  x
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act.Yes☐No☒
As of August 5,November 4, 2019, there were 34,366,57334,373,762 shares of the issuer’s common stock outstanding, par value $0.01 per share.
 



 
Table of Contents
 PAGE
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements (unaudited)
 
Consolidated Balance Sheets - JuneSeptember 30, 2019 and December 31, 2018
5
Consolidated Statements of Income - Three and SixNine months ended JuneSeptember 30, 2019 and 2018
7
Consolidated Statements of Comprehensive Income -Three and SixNine months ended JuneSeptember 30, 2019 and 2018
8
Consolidated Statements of Stockholders’ Equity - Three and SixNine months ended JuneSeptember 30, 2019 and 2018
9
Consolidated Statements of Cash Flows - SixNine months ended JuneSeptember 30, 2019 and 2018
11
  
Condensed Notes to Consolidated Financial Statements - JuneSeptember 30, 2019 
Note 1 - Basis of Presentation
13
Note 2 - Recent Accounting Standards Updates
13
Note 3 - Acquisitions
1314
Note 4 - Securities
16
Note 5 - Loans, Allowance for Loan Losses, and Credit Quality
21
Note 6 - Borrowings
33
Note 7 - Earnings Per Share
33
Note 8 - Stock Based Compensation
34
Note 9 - Derivative and Hedging Activities
3534
Note 10 - Balance Sheet Offsetting
4039
Note 11 - Fair Value Measurements
4140
Note 12 - Revenue Recognition
5049
Note 13 - Comprehensive Income (Loss)
5352
Note 14 - Leases
5554
Note 15 - Commitments and Contingencies
5655
Note 16 - Low Income Housing Project Investments
56
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
56
Table 1 - Closed Residential Real Estate Loans
6768
Table 2 - Residential Mortgage Loan Sales
6768
Table 3 - Mortgage Servicing Asset
6869
Table 4 - Components of Loan Growth/(Decline)
6970
Table 5 - Nonperforming Assets
7375
Table 6 - Activity in Nonperforming Assets
7375
Table 7 - Troubled Debt Restructurings
7476
Table 8 - Activity in Troubled Debt Restructurings
7476
Table 9 - Interest Income - Nonaccrual Loans and Troubled Debt Restructurings
7476
Table 10 - Summary of Changes in the Allowance for Loan Losses
7678
Table 11 - Summary of Allocation of the Allowance for Loan Losses
7779
Table 12 - Components of Deposit Growth/(Decline)
7880
Table 13 - Components of Borrowings
81
Table 14 - Company and Bank’s Capital Amounts and Ratios
80
Table 14 - Summary of Results of Operations
82
Table 15 - Average Balance, Interest Earned/Paid & Average Yields Quarter-to-Date
83
Table 16 - Average Balance, Interest Earned/Paid & Average Yields Year-to-Date
85

Table of Contents
Table 15 - Summary of Results of Operations
84
Table 16 - Average Balance, Interest Earned/Paid & Average Yields Quarter-to-Date
85
Table 17 - Volume Rate AnalysisAverage Balance, Interest Earned/Paid & Average Yields Year-to-Date
87
Table 18 - Noninterest Income - Three and Six Months EndedVolume Rate Analysis
9089
Table 19 - Noninterest Income - Three and Nine Months Ended
92
Table 20 - Noninterest Expense - Three and SixNine Months Ended 
9193
Table 2021 - Tax Provision and Applicable Tax Rates
9294
Table 2122 - Interest Rate Sensitivity
9596
Table 2223 - Sources of Liquidity
9798
Item 3. Quantitative and Qualitative Disclosures About Market Risk
9798
Item 4. Controls and Procedures
9899
  
PART II. OTHER INFORMATION
9899
Item 1. Legal Proceedings
9899
Item 1A. Risk Factors
9899
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
9899
Item 3. Defaults Upon Senior Securities
9899
Item 4. Mine Safety Disclosures
9899
Item 5. Other Information
9899
Item 6. Exhibits
99100
Signatures
100101
  
Exhibit 31.1 – Certification 302 
Exhibit 31.2 – Certification 302 
Exhibit 32.1 – Certification 906 
Exhibit 32.2 – Certification 906 

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT BANK CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited—Dollars in thousands)
 
June 30,
2019		 December 31
2018		September 30
2019		 December 31
2018
Assets
Cash and due from banks$121,001
 $127,503
$153,000
 $127,503
Interest-earning deposits with banks73,013
 122,952
66,272
 122,952
Securities      
Trading1,939
 1,504
1,963
 1,504
Equities20,807
 19,477
Equity21,021
 19,477
Available for sale393,148
 442,752
391,975
 442,752
Held to maturity (fair value $808,656 and $603,640)797,359
 611,490
Held to maturity (fair value $792,163 and $603,640)777,270
 611,490
Total securities1,213,253
 1,075,223
1,192,229
 1,075,223
Loans held for sale (inclusive of loans at fair value of $37,571 and $6,431)123,557
 6,431
Loans held for sale (at fair value)55,937
 6,431
Loans      
Commercial and industrial1,400,924
 1,093,629
1,411,516
 1,093,629
Commercial real estate4,058,066
 3,251,248
4,000,487
 3,251,248
Commercial construction491,598
 365,165
520,585
 365,165
Small business173,927
 164,676
172,038
 164,676
Residential real estate1,655,182
 923,294
1,644,758
 923,294
Home equity - first position656,515
 654,083
644,675
 654,083
Home equity - subordinate positions487,984
 438,001
492,434
 438,001
Other consumer26,591
 16,098
27,008
 16,098
Total loans8,950,787
 6,906,194
8,913,501
 6,906,194
Less: allowance for loan losses(65,960) (64,293)(66,942) (64,293)
Net loans8,884,827
 6,841,901
8,846,559
 6,841,901
Federal Home Loan Bank stock26,085
 15,683
14,976
 15,683
Bank premises and equipment, net123,374
 97,581
125,026
 97,581
Goodwill504,562
 256,105
504,562
 256,105
Other intangible assets33,334
 15,250
31,307
 15,250
Cash surrender value of life insurance policies197,292
 160,456
195,883
 160,456
Other real estate owned and other foreclosed assets2,889
 —
Other assets300,012
 132,507
352,888
 132,507
Total assets$11,603,199
 $8,851,592
$11,538,639
 $8,851,592
Liabilities and Stockholders' Equity
Deposits      
Demand deposits$2,738,420
 $2,450,907
Noninterest-bearing demand deposits$2,752,150
 $2,450,907
Savings and interest checking accounts3,196,639
 2,865,349
3,199,182
 2,865,349
Money market1,927,797
 1,399,761
1,904,643
 1,399,761
Time certificates of deposit of $100,000 and over720,213
 351,629
705,578
 351,629
Other time certificates of deposits724,846
 359,474
764,538
 359,474
Total deposits9,307,915
 7,427,120
9,326,091
 7,427,120
Borrowings      
Federal Home Loan Bank borrowings70,708
 147,806

Federal Home Loan Bank borrowings277,671
 147,806
Long-term borrowings (less unamortized debt issuance costs of $121)74,879
 —
Junior subordinated debentures (less unamortized debt issuance costs of $41 and $118)62,847
 76,173
Subordinated debentures (less unamortized debt issuance costs of $695 and $272)84,305
 34,728
Long-term borrowings (less unamortized debt issuance costs of $106)74,894
 —
Junior subordinated debentures (less unamortized debt issuance costs of $40 and $118)62,848
 76,173
Subordinated debentures (less unamortized debt issuance costs of $659 and $272)84,341
 34,728
Total borrowings499,702
 258,707
292,791
 258,707
Other liabilities159,579
 92,275
237,433
 92,275
Total liabilities9,967,196
 7,778,102
9,856,315
 7,778,102
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: 34,321,061 shares at June 30, 2019 and 28,080,408 shares at December 31, 2018 (includes 148,756 and 153,459 shares of unvested participating restricted stock awards, respectively)		342
 279
Value of shares held in rabbi trust at cost: 144,086 shares at June 30, 2019 and 153,226 shares at December 31, 2018(4,648) (4,718)
Common stock, $.01 par value, authorized: 75,000,000 shares,
issued and outstanding: 34,366,781 shares at September 30, 2019 and 28,080,408 shares at December 31, 2018 (includes 148,596 and 153,459 shares of unvested participating restricted stock awards, respectively)		342
 279
Value of shares held in rabbi trust at cost: 144,967 shares at September 30, 2019 and 153,226 shares at December 31, 2018(4,713) (4,718)
Deferred compensation and other retirement benefit obligations4,648
 4,718
4,713
 4,718
Additional paid in capital1,029,594
 527,648
1,033,949
 527,648
Retained earnings585,111
 546,736
621,831
 546,736
Accumulated other comprehensive income (loss), net of tax20,956
 (1,173)26,202
 (1,173)
Total stockholders’ equity1,636,003
 1,073,490
1,682,324
 1,073,490
Total liabilities and stockholders' equity$11,603,199
 $8,851,592
$11,538,639
 $8,851,592
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.


INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited—Dollars in thousands, except per share data)
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30 June 30September 30 September 30
2019 2018 2019 20182019 2018 2019 2018
Interest income              
Interest and fees on loans$112,923
 $72,082
 $196,531
 $139,266
$110,205
 $75,220
 $306,736
 $214,486
Taxable interest and dividends on securities8,521
 6,498
 15,986
 12,717
8,269
 6,664
 24,255
 19,381
Nontaxable interest and dividends on securities13
 16
 26
 32
14
 14
 40
 46
Interest on loans held for sale40
 30
 71
 49
456
 61
 527
 110
Interest on federal funds sold and short-term investments647
 541
 1,073
 852
680
 916
 1,753
 1,768
Total interest and dividend income122,144
 79,167
 213,687
 152,916
119,624
 82,875
 333,311
 235,791
Interest expense              
Interest on deposits11,178
 4,587
 18,206
 8,522
11,846
 5,251
 30,052
 13,773
Interest on borrowings4,947
 1,412
 6,937
 2,755
3,180
 1,390
 10,117
 4,145
Total interest expense16,125
 5,999
 25,143
 11,277
15,026
 6,641
 40,169
 17,918
Net interest income106,019
 73,168
 188,544
 141,639
104,598
 76,234
 293,142
 217,873
Provision for loan losses1,000
 2,000
 2,000
 2,500
—
 1,075
 2,000
 3,575
Net interest income after provision for loan losses105,019
 71,168
 186,544
 139,139
104,598
 75,159
 291,142
 214,298
Noninterest income              
Deposit account fees5,080
 4,551
 9,486
 8,982
5,299
 4,658
 14,785
 13,640
Interchange and ATM fees5,794
 4,769
 10,310
 8,942
6,137
 4,947
 16,447
 13,889
Investment management7,153
 6,822
 13,901
 12,964
7,188
 6,564
 21,089
 19,528
Mortgage banking income3,410
 1,038
 4,216
 1,908
3,968
 1,222
 8,184
 3,130
Gain on life insurance benefits434
 1,463
 434
 1,463
Increase in cash surrender value of life insurance policies1,296
 998
 2,268
 1,945
1,304
 984
 3,572
 2,929
Loan level derivative income932
 708
 1,573
 1,155
2,739
 392
 4,312
 1,547
Other noninterest income4,983
 3,001
 8,427
 5,854
4,747
 3,034
 13,174
 8,888
Total noninterest income28,648
 21,887
 50,181
 41,750
31,816
 23,264
 81,997
 65,014
Noninterest expenses              
Salaries and employee benefits38,852
 30,288
 71,969
 61,388
39,432
 31,095
 111,401
 92,483
Occupancy and equipment expenses8,424
 6,497
 15,554
 13,905
8,555
 6,310
 24,109
 20,215
Data processing and facilities management2,042
 1,264
 3,368
 2,550
1,515
 1,287
 4,883
 3,837
FDIC assessment778
 691
 1,394
 1,489
—
 725
 1,394
 2,214
Advertising expense1,282
 1,166
 2,495
 2,289
1,417
 1,395
 3,912
 3,684
Consulting expense1,384
 1,089
 2,148
 1,845
1,338
 1,128
 3,486
 2,973
Core deposit amortization1,572
 512
 2,429
 1,162
1,567
 507
 3,996
 1,670
Loss on sale of securities1,462
 —
 1,462
 —
—
 —
 1,462
 —
Merger and acquisition expense24,696
 434
 25,728
 434
705
 2,688
 26,433
 3,122
Software maintenance1,363
 997
 2,528
 1,969
1,385
 1,079
 3,913
 3,048
Other noninterest expenses11,177
 9,750
 20,268
 19,108
11,619
 9,225
 31,887
 28,332
Total noninterest expenses93,032
 52,688
 149,343
 106,139
67,533
 55,439
 216,876
 161,578
Income before income taxes40,635
 40,367
 87,382
 74,750
68,881
 42,984
 156,263
 117,734
Provision for income taxes10,007
 9,249
 21,529
 16,077
17,036
 9,969
 38,565
 26,046
Net income$30,628
 $31,118
 $65,853
 $58,673
$51,845
 $33,015
 $117,698
 $91,688
Basic earnings per share$0.89
 $1.13
 $2.11
 $2.13
$1.51
 $1.20
 $3.65
 $3.33
Diluted earnings per share$0.89
 $1.13
 $2.11
 $2.13
$1.51
 $1.20
 $3.64
 $3.32
Weighted average common shares (basic)34,313,492
 27,526,653
 31,226,985
 27,506,724
34,361,176
 27,537,841
 32,283,196
 27,517,210
Common share equivalents41,878
 54,525
 48,381
 61,480
39,390
 63,499
 45,416
 62,596
Weighted average common shares (diluted)34,355,370
 27,581,178
 31,275,366
 27,568,204
34,400,566
 27,601,340
 32,328,612
 27,579,806
Cash dividends declared per common share$0.44
 $0.38
 $0.88
 $0.76
$0.44
 $0.38
 $1.32
 $1.14
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.

INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited—Dollars in thousands)
 
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30 June 30September 30 September 30
2019 2018 2019 20182019 2018 2019 2018
Net income$30,628
 $31,118
 $65,853
 $58,673
$51,845
 $33,015
 $117,698
 $91,688
Other comprehensive income (loss), net of tax              
Net change in fair value of securities available for sale5,445
 (1,924) 10,174
 (7,392)2,175
 (2,262) 12,349
 (9,654)
Net change in fair value of cash flow hedges8,590
 (112) 11,875
 103
3,030
 (405) 14,905
 (302)
Net change in other comprehensive income for defined benefit postretirement plans40
 117
 80
 234
41
 117
 121
 351
Total other comprehensive income (loss)14,075
 (1,919) 22,129
 (7,055)5,246
 (2,550) 27,375
 (9,605)
Total comprehensive income$44,703
 $29,199
 $87,982
 $51,618
$57,091
 $30,465
 $145,073
 $82,083
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.


INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended September 30, 2019 and 2018
(Unaudited—Dollars in thousands, except per share data)
Common Stock Outstanding Common Stock Value of Shares Held in Rabbi Trust at Cost Deferred Compensation and Other Retirement Benefit Obligations Additional Paid in Capital Retained Earnings Accumulated Other
Comprehensive Income/(Loss)		 TotalCommon Stock Outstanding Common Stock Value of Shares Held in Rabbi Trust at Cost Deferred Compensation and Other Retirement Benefit Obligations Additional Paid in Capital Retained Earnings Accumulated Other
Comprehensive Income/(Loss)		 Total
Balance December 31, 201828,080,408
 $279
 $(4,718) $4,718
 $527,648
 $546,736
 $(1,173) $1,073,490
Balance June 30, 201934,321,061
 $342
 $(4,648) $4,648
 $1,029,594
 $585,111
 $20,956
 $1,636,003
Net income—
 —
 —
 —
 —
 35,225
 —
 35,225
—
 —
 —
 —
 —
 51,845
 —
 51,845
Other comprehensive income—
 —
 —
 —
 —
 —
 8,054
 8,054
—
 —
 —
 —
 —
 —
 5,246
 5,246
Common dividend declared ($0.44 per share)—
 —
 —
 —
 —
 (12,379) —
 (12,379)—
 —
 —
 —
 —
 (15,125) —
 (15,125)
Common stock issued for acquisition—
 —
 —
 —
 —
 —
 —
 —
Proceeds from exercise of stock options, net of cash paid6,000
 —
 —
 —
 165
 —
 —
 165
Stock based compensation—
 —
 —
 —
 915
 —
 —
 915
—
 —
 —
 —
 981
 —
 —
 981
Restricted stock awards issued, net of awards surrendered44,407
 1
 —
 —
 (1,420) —
 —
 (1,419)(43) (1) —
 —
 (3) —
 —
 (4)
Shares issued under direct stock purchase plan6,689
 —
 —
 —
 487
 —
 —
 487
45,763
 1
 —
 —
 3,377
 —
 —
 3,378
Deferred compensation and other retirement benefit obligations—
 —
 119
 (119) —
 —
 —
 —
—
 —
 (65) 65
 —
 —
 —
 —
Balance March 31, 201928,137,504
 $280
 $(4,599) $4,599

$527,795
 $569,582
 $6,881
 $1,104,538
Balance September 30, 201934,366,781
 $342
 $(4,713) $4,713

$1,033,949
 $621,831
 $26,202
 $1,682,324
                              
Balance June 30, 201827,532,524
 $274
 $(4,653) $4,653
 $481,979
 $504,926
 $(10,114) $977,065
Net income—
 —
 —
 —
 —
 30,628
 —
 30,628
—
 —
 —
 —
 —
 33,015
 —
 33,015
Other comprehensive income—
 —
 —
 —
 —
 —
 14,075
 14,075
Common dividend declared ($0.44 per share)—
 —
 —
 —
 —
 (15,099) —
 (15,099)
Common stock issued for acquisition6,166,010
 61
 —
 —
 499,632
 —
 —
 499,693
Proceeds from exercise of stock options, net of cash paid5,000
 —
 —
 —
 116
 —
 —
 116
Other comprehensive loss—
 —
 —
 —
 —
 —
 (2,550) (2,550)
Common dividend declared ($0.38 per share)—
 —
 —
 —
 —
 (10,468) —
 (10,468)
Stock based compensation—
 —
 —
 —
 1,517
 —
 —
 1,517
—
 —
 —
 —
 769
 —
 —
 769
Restricted stock awards issued, net of awards surrendered6,067
 1
 —
 —
 (13) —
 —
 (12)(43) —
 —
 —
 (6) —
 —
 (6)
Shares issued under direct stock purchase plan6,480
 —
 —
 —
 547
 —
 —
 547
5,923
 —
 —
 —
 480
 —
 —
 480
Deferred compensation and other retirement benefit obligations—
 —
 (49) 49
 —
 —
 —
 —
—
 —
 (131) 131
 —
 —
 —
 —
Balance June 30, 201934,321,061
 $342
 $(4,648) $4,648
 $1,029,594
 $585,111
 $20,956
 $1,636,003
Balance September 30, 201827,540,843
 $274
 $(4,784) $4,784
 $483,222
 $527,473
 $(12,664) $998,305
























INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2019 and 2018
(Unaudited—Dollars in thousands, except per share data)
Common Stock Outstanding Common Stock Value of Shares Held in Rabbi Trust at Cost Deferred Compensation and Other Retirement Benefit Obligations Additional Paid in Capital Retained Earnings Accumulated Other
Comprehensive Income/(Loss)		 Total
Balance December 31, 201828,080,408
 $279
 $(4,718) $4,718
 $527,648
 $546,736
 $(1,173) $1,073,490
Net income—
 —
 —
 —
 —
 117,698
 —
 117,698
Other comprehensive income—
 —
 —
 —
 —
 —
 27,375
 27,375
Common dividend declared ($1.32 per share)—
 —
 —
 —
 —
 (42,603) —
 (42,603)
Common stock issued for acquisition6,166,010
 61
 —
 —
 499,632
 —
 —
 499,693
Proceeds from exercise of stock options, net of cash paid11,000
 —
 —
 —
 281
 —
 —
 281
Stock based compensation—
 —
 —
 —
 3,413
 —
 —
 3,413
Restricted stock awards issued, net of awards surrendered50,431
 1
 —
 —
 (1,436) —
 —
 (1,435)
Shares issued under direct stock purchase plan58,932
 1
 —
 —
 4,411
 —
 —
 4,412
Deferred compensation and other retirement benefit obligations—
 —
 5
 (5) —
 —
 —
 —
Balance September 30, 201934,366,781
 $342
 $(4,713) $4,713
 $1,033,949
 $621,831
 $26,202
 $1,682,324
Common Stock Outstanding Common Stock Value of Shares Held in Rabbi Trust at Cost Deferred Compensation and Other Retirement Benefit Obligations Additional Paid in Capital Retained Earnings Accumulated Other
Comprehensive Income/(Loss)		 Total               
Balance December 31, 201727,450,190
 $273
 $(4,590) $4,590
 $479,430
 $465,937
 $(1,831) $943,809
27,450,190
 $273
 $(4,590) $4,590
 $479,430
 $465,937
 $(1,831) $943,809
Opening balance reclassification (1)—
 —
 —
 —
 —
 397
 (397) —
—
 —
 —
 —
 —
 397
 (397) —
Cumulative effect accounting adjustment (2)—
 —
 —
 —
 —
 831
 (831) —
—
 —
 —
 —
 —
 831
 (831) —
Net income—
 —
 —
 —
 —
 27,555
   27,555
—
 —
 —
 —
 —
 91,688
 —
 91,688
Other comprehensive loss—
 —
 —
 —
 —
 —
 (5,136) (5,136)—
 —
 —
 —
 —
 —
 (9,605) (9,605)
Common dividend declared ($0.38 per share)—
 —
 —
 —
 —
 (10,454) —
 (10,454)
Common dividend declared ($1.14 per share)—
 —
 —
 —
 —
 (31,380) —
 (31,380)
Proceeds from exercise of stock options, net of cash paid19,256
 —
 —
 —
 143
 —
 —
 143
23,195
 —
 —
 —
 184
 —
 —
 184
Stock based compensation—
 —
 —
 —
 1,041
 —
 —
 1,041
—
 —
 —
 —
 3,161
 —
 —
 3,161
Restricted stock awards issued, net of awards surrendered36,961
 —
 —
 —
 (1,318) ���
 —
 (1,318)43,174
 1
 —
 —
 (1,345) —
 —
 (1,344)
Shares issued under direct stock purchase plan5,921
 —
 —
 —
 419
 —
 —
 419
24,284
 —
 —
 —
 1,792
 —
 —
 1,792
Deferred compensation and other retirement benefit obligations—
 —
 (1) 1
 —
 —
 —
 —
—
 —
 (194) 194
 —
 —
 —
 —
Balance March 31, 201827,512,328
 $273
 $(4,591) $4,591
 $479,715
 $484,266
 $(8,195) $956,059
               
Net income—
 —
 —
 —
 —
 31,118
   31,118
Other comprehensive loss—
 —
 —
 —
 —
 —
 (1,919) (1,919)
Common dividend declared ($0.38 per share)—
 —
 —
 —
 —
 (10,458) —
 (10,458)
Proceeds from exercise of stock options, net of cash paid1,500
 —
 —
 —
 41
 —
 —
 41
Stock based compensation—
 —
 —
 —
 1,351
 —
 —
 1,351
Restricted stock awards issued, net of awards surrendered6,256
 1
 —
 —
 (21) —
 —
 (20)
Shares issued under direct stock purchase plan12,440
 —
 —
 —
 893
 —
 —
 893
Deferred compensation and other retirement benefit obligations—
 —
 (62) 62
 —
 —
 —
 —
Balance June 30, 201827,532,524
 $274
 $(4,653) $4,653
 $481,979
 $504,926
 $(10,114) $977,065
Balance September 30, 201827,540,843
 $274
 $(4,784) $4,784
 $483,222
 $527,473
 $(12,664) $998,305
(1)Represents adjustment needed to reflect the cumulative impact on retained earnings for reclassification of the income tax effects attributable to accumulated other comprehensive income, as a result of the Tax Cuts and Jobs Act (the "Tax Act"). Pursuant to the Company's adoption of Accounting Standards Update 2018-02, the Company has elected to reclassify amounts stranded in other comprehensive income to retained earnings.
(2)Represents adjustment needed to reflect the cumulative impact on retained earnings for the classification and measurement of investments in equity securities. Pursuant to the Company's adoption of Accounting Standards Update 2016-01, the Company's investments in equity securities will no longer be classified as available for sale, therefore the Company was required to reclassify the net unrealized gain recognized on the change in fair value of these equity securities from other comprehensive income to retained earnings.
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.

INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited—Dollars in thousands)
 
Six Months EndedNine Months Ended
June 30September 30
2019 20182019 2018
Cash flow from operating activities      
Net income$65,853
 $58,673
$117,698
 $91,688
Adjustments to reconcile net income to net cash provided by operating activities      
Depreciation and amortization5,022
 8,021
13,919
 11,696
Change in unamortized net loan costs and premiums(7,262) 392
Provision for loan losses2,000
 2,500
2,000
 3,575
Deferred income tax expense399
 283
171
 176
Net (gain) loss on equity securities(1,351) 431
(1,562) 107
Net (gain) loss on sale of securities1,462
 —
Net (gain) loss on bank premises and equipment39
 (4)
Net loss on sale of securities1,462
 —
Net loss on bank premises and equipment180
 8
Net loss on other real estate owned and foreclosed assets—
 1
389
 1
Realized gain on sale leaseback transaction(289) (441)(433) (585)
Stock based compensation2,432
 2,392
3,413
 3,161
Increase in cash surrender value of life insurance policies(2,268) (1,945)(3,572) (2,929)
Gain on life insurance benefits(434) (1,463)
Operating lease payments(4,970) —
(7,798) —
Change in fair value on loans held for sale(920) (44)(1,192) (147)
Net change in:      
Trading assets(435) (274)(459) (257)
Loans held for sale(30,220) (4,802)37,672
 (5,516)
Other assets(27,048) (1,591)(57,624) (12,179)
Other liabilities(24,566) 4,444
40,668
 16,066
Total adjustments(80,713) 8,971
19,538
 12,106
Net cash provided by (used in) operating activities(14,860) 67,644
Net cash provided by operating activities137,236
 103,794
Cash flows used in investing activities      
Proceeds from sales of equity securities1,461
 10
1,461
 30
Purchases of equity securities(233) (202)(356) (305)
Proceeds from sales of securities available for sale45,863
 —
45,863
 —
Proceeds from maturities and principal repayments of securities available for sale24,594
 27,625
35,770
 41,964
Purchases of securities available for sale(9,058) (53,559)(16,230) (63,844)
Proceeds from maturities and principal repayments of securities held to maturity52,414
 42,716
87,313
 62,650
Purchases of securities held to maturity(42,341) (83,047)(56,937) (118,256)
Net redemption (purchases) of Federal Home Loan Bank stock7,235
 (1,510)18,344
 (1,510)
Investments in low income housing projects(683) (2,132)(3,549) (2,598)
Purchases of life insurance policies(100) (101)(115) (116)
Proceeds from life insurance policies3,162
 2,850
Net increase in loans(53,175) (124,355)(11,668) (173,224)
Net cash paid in business combinations(105,264) —
(105,264) —
Purchases of bank premises and equipment(6,957) (5,707)(11,753) (8,123)
Proceeds from the sale of bank premises and equipment13
 63
17
 96
Proceeds from the sale of other real estate owned and foreclosed assets—
 253
Net cash used in investing activities(86,231) (199,946)
Cash flows provided by financing activities   

Proceeds from the sale of other real estate owned and foreclosed assets—
 308
Net cash used in investing activities(13,942) (260,078)
Cash flows provided by (used in) financing activities   
Net increase in time deposits1,632
 15,522
28,113
 19,226
Net increase (decrease) in other deposits(49,833) 268,770
(56,714) 227,836
Net proceeds from short-term Federal Home Loan Bank borrowings24,954
 —
Net repayments of short-term Federal Home Loan Bank borrowings(177,046) —
Repayments of long-term Federal Home Loan Bank borrowings(20,000) (2,475)(25,000) (2,475)
Net decrease in customer repurchase agreements—
 (20,444)—
 (21,503)
Proceeds from line of credit, net of issuance costs49,980
 —
49,980
 —
Repayment of line of credit, net of issuance costs(49,980) —
(49,980) —
Proceeds from long-term debt, net of issuance costs74,867
 —
74,867
 —
Repayments of junior subordinated debentures, net of issuance costs(13,329) —
(13,329) —
Proceeds from subordinated debentures, net of issuance costs49,526
 —
49,526
 —
Net proceeds from exercise of stock options281
 184
281
 184
Restricted stock awards issued, net of awards surrendered(1,431) (1,338)(1,435) (1,344)
Proceeds from shares issued under direct stock purchase plan1,034
 1,312
4,412
 1,792
Common dividends paid(23,051) (19,239)(38,152) (29,701)
Net cash provided by financing activities44,650
 242,292
Net cash provided by (used in) financing activities(154,477) 194,015
Net increase (decrease) in cash and cash equivalents(56,441) 109,990
(31,183) 37,731
Cash and cash equivalents at beginning of year250,455
 213,116
250,455
 213,116
Cash and cash equivalents at end of period$194,014
 $323,106
$219,272
 $250,847
Supplemental schedule of noncash activities      
Net increase in capital commitments relating to low income housing project investments$18
 $4
$15,740
 $65
Initial recognition of operating leases upon adoption of Accounting Standards Update 2016-02 (1)$32,777
 $—
$32,777
 $—
Initial recognition of operating lease at commencement$4,824
 $—
$7,593
 $—
In conjunction with the Company's acquisitions, assets were acquired and liabilities were assumed as follows      
Common stock issued for acquisition$499,693
 $—
$499,693
 $—
Fair value of assets acquired, net of cash acquired$2,711,067
 $—
$2,711,067
 $—
Fair value of liabilities assumed$2,106,110
 $—
$2,106,110
 $—
(1) Represents adjustment needed to reflect the opening balance of the Company's ROU assets and lease liabilities pursuant to the adoption of Accounting Standards Update 2016-02 effective January 1, 2019. Upon adoption, the Company recognized on its balance sheet Right of Use ("ROU") assets of approximately $32.8 million, with a corresponding operating lease liability of approximately $34.1 million, with an adjustment to remove the Company's existing deferred rent liability of approximately $1.3 million.
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.

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 have been reclassified to conform to the current year’s presentation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Results for the quarter ended JuneSeptember 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any other interim period.
For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission.

NOTE 2 - RECENT ACCOUNTING STANDARDS UPDATES

Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 326 "Financial Instruments - Credit Losses" Update No. 2016-13. Update No. 2016-13 was issued in June 2016 to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, this update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company will adopt the update on January 1, 2020 and is currently assessing the impact of the adoption of this standard on the Company's consolidated financial position. To date, the Company has been assessing the key differences and gaps between its current allowance methodologies and models with those it is considering to use upon adoption.  In particular, the Company has completed the development and validation of historical loss and recovery data and is working on identification and layering of varioushas identified significant key assumptions needed to translate the data into a life of loan estimate. During the fourth quarter of 2019, the Company expects to perform a full parallel run of the current expected credit loss estimate.("CECL") model in tandem with the current incurred loss model, using September 30, 2019 balances, the results of which will allow the Company to finalize and document its CECL model and processes. In addition, the Company has also begun developing accounting policies, as well as considering the need for new internal controls relevant to the updated methodologies and models.  Since the Update No. 2016-13, the FASB has issued amendments intended on improving the clarification of the amendment, FASB ASC Topic 326 "Financial Instruments - Credit Losses" Update No. 2018-19 and Update No 2019-04. The amendment in Update No. 2018-19 was issued in November 2018 and was intended to clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The amendment in Update No. 2019-04 was issued in April 2019 and was intended to clarify stakeholders' specific issues about certain aspects of the amendments in Update No. 2016-13. Update No. 2019-05 on FASB ASC Topic 326 "Financial Instruments - Credit Losses" was also issued in May 2019. This update provides entities the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized costs basis. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement - Overall. The amendments in this update should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the statement of financial position as of the date that an entity early adopted the amendments in update 2016-13.

NOTE 3 - ACQUISITIONS

Blue Hills Bancorp, Inc.

On April 1, 2019, the Company completed the acquisition of Blue Hills Bancorp, Inc., parent of Blue Hills Bank (collectively "BHB"). The transaction qualified as a tax-free reorganization for federal income tax purposes and to provide a tax-free exchange for Blue Hills Bancorp stockholders for the Company's common stock portion of consideration received. For each share of BHB common stock, stockholders had the right to receive 0.2308 shares of the Company's stock and $5.25 in cash, per

share, with cash paid in lieu of fractional shares. Total consideration of $661.3 million consisted of 6,166,010 shares of the Company's common stock issued, as well as $161.6 million in cash, inclusive of cash in lieu of fractional shares. In addition to increasing its loan and deposit base, the Company will be able to provide a deeper product set to BHB's customers, as well as benefit from increased operating synergies, improving the long-term operating and financial results of the Company.
 
The Company accounted for the BHB acquisition using the acquisition method pursuant to the Business Combinations Topic of the FASB ASC. Accordingly, the Company recorded merger and acquisition expenses of $25.3$26.0 million during the sixnine months ended JuneSeptember 30, 2019 related to the BHB acquisition. Additionally, the acquisition method requires the acquirer to recognize the assets acquired and the liabilities assumed at their fair values as of the acquisition date. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the date of the acquisition:

 Net Assets Acquired at Fair Value
 (Dollars in thousands)
Assets 
Cash$56,331
Investments196,937
Loans2,073,714
Premises and equipment24,253
Goodwill248,457
Core deposit and other intangibles19,870
Other assets147,836
Total assets acquired2,767,398
Liabilities 
Deposits1,930,436
Borrowings124,817
Other liabilities50,857
Total liabilities assumed2,106,110
     Purchase price$661,288


Fair value adjustments to assets acquired and liabilities assumed are generally amortized using either an effective yield or straight-line basis over periods consistent with the average life, useful life and/or contractual term of the related assets and liabilities.
Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:
Cash and Cash Equivalents
The fair values of cash and cash equivalents approximate the respective carrying amounts because the instruments are payable on demand or have short-term maturities.
Investments
The fair values of securities were based on quoted market prices for identical securities received from an independent, nationally-recognized, third party pricing service. Prices provided by the independent pricing service were based on recent trading activity and other observable information including, but not limited to, market interest rate curves, referenced credit spreads and estimated prepayment rates where applicable.

Loans

The loans acquired were recorded at fair value without a carryover of the allowance for loan losses. Fair value of the loans is determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected, as adjusted for an estimate of future credit losses and prepayments, and then applying a market-based discount rate to those cash flows. The $23.2 million discount on the loans acquired in this transaction was due to anticipated credit loss, as well as considerations for liquidity and market interest rates. In addition, the acquired loans were reviewed to determine if any loans would be deemed purchased credit impaired ("PCI"), as determined by identifying evidence of deterioration of credit quality at the purchase date combined with an assumption that all contractually required payments will not be collected.  The following is a summary of these PCI loans associated with the acquisition as of the date acquired:

  As of April 1, 2019
  (Dollars in thousands)
Contractually required principal and interest at acquisition 14,849
Contractual cash flows not expected to be collected (5,717)
Expected cash flows at acquisition 9,132
Interest component of expected cash flows (1,464)
Basis in PCI loans at acquisition - estimated fair value 7,668


Premises and Equipment
The fair value of the premises, including land, buildings and improvements, was determined based upon appraisals by licensed real estate appraisers. The appraisals were based upon the best and highest use of the property with final values determined based upon an analysis of the cost, sales comparison and income capitalization approaches for each property appraised.
Core Deposit Intangible
The fair value of the core deposit intangible is derived by comparing the interest rate and servicing costs that the financial institution pays on the core deposit liability versus the current market rate for alternative sources of financing, while factoring in estimates over the remaining life and attrition rate of the deposit accounts. The intangible asset represents the stable and relatively low cost source of funds that the deposits and accompanying relationships provide the Company, when compared to alternative funding sources.
Deposits
The fair value of acquired savings and transaction deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was determined based on the present value of the contractual cash flows over the remaining period to maturity using a market interest rate.
Borrowings
The fair values of borrowings were derived based upon the present value of the principal and interest payments using a current market discount rate.

Selected Pro Forma Results
The following summarizes the unaudited pro forma results of operations as if the Company acquired BHB on January 1, 2019 (2018 amounts represent combined results for the Company and BHB). The selected pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the acquisition actually been completed at the beginning of the period presented, nor does it indicate future results for any other interim or full-year period.
 Three Months Ended Six Months Ended Three Months Ended Nine Months Ended
 June 30 June 30 September 30 September 30
 2019 2018 2019 2018 2019 2018 2019 2018
  (Dollars in thousands)  (Dollars in thousands)
Net interest income after provision for loan losses $105,019
 $90,050
 $208,327
 $176,840
 $104,598
 $94,804
 $312,925
 $271,644
Net income 30,628
 37,575
 30,062
 71,713
 $51,845
 $38,804
 $81,907
 $110,517

Included in the pro forma net income results for the three and sixnine months ended JuneSeptember 30, 2019 are merger-related costs of $18.1 million$505,000 and $56.8$57.3 million, net of tax, recognized by both the Company and BHB in the aggregate, respectively. These costs were primarily made up of severance, contract terminations due to the change in control, Employee stock ownership plan termination expenses, stock compensation and integration costs.

NOTE 4 - SECURITIES
Trading Securities
The Company had trading securities of $1.9$2.0 million and $1.5 million as of JuneSeptember 30, 2019 and December 31, 2018, respectively. These securities are held in a rabbi trust and will be used for future payments associated with the Company’s nonqualified 401(k) Restoration Plan and Nonqualified Deferred Compensation Plan.
Equity Securities
The Company had equity securities of $20.8$21.0 million and $19.5 million as of JuneSeptember 30, 2019 and December 31, 2018, respectively. These securities consist primarily of mutual funds held in a rabbi trust and will be used for future payments associated with the Company’s supplemental executive retirement plans.
The following table represents a summary of the gains and losses that relate to equity securities for the periods indicated:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30 June 30September 30 September 30
2019 2018 2019 20182019 2018 2019 2018
Net gains (losses) recognized during the period on equity securities$444
 $54
 1,351
 (431)$211
 $324
 1,562
 (107)
Less: net gains recognized during the period on equity securities sold during the period3
 2
 6
 4
—
 4
 6
 8
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date$441
 $52
 1,345
 (435)$211
 $320
 1,556
 (115)


Available for Sale and Held to Maturity Securities
The following table presents a summary of the amortized cost, gross unrealized gains and losses, and fair value of securities available for sale and securities held to maturity for the periods indicated:
June 30, 2019 December 31, 2018September 30, 2019 December 31, 2018
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
(Dollars in thousands)(Dollars in thousands)
Available for sale securities                              
U.S. government agency securities$32,476
 $453
 $(6) $32,923
 $32,477
 $—
 $(439) $32,038
$32,475
 $827
 $—
 $33,302
 $32,477
 $—
 $(439) $32,038
Agency mortgage-backed securities194,682
 3,024
 (41) 197,665
 222,491
 1,020
 (3,406) 220,105
196,278
 4,330
 (5) 200,603
 222,491
 1,020
 (3,406) 220,105
Agency collateralized mortgage obligations97,299
 1,420
 (76) 98,643
 138,149
 197
 (3,435) 134,911
92,574
 1,964
 —
 94,538
 138,149
 197
 (3,435) 134,911
State, county, and municipal securities1,715
 23
 —
 1,738
 1,719
 16
 —
 1,735
1,713
 23
 —
 1,736
 1,719
 16
 —
 1,735
Single issuer trust preferred securities issued by banks717
 —
 —
 717
 717
 —
 (10) 707
717
 3
 —
 720
 717
 —
 (10) 707
Pooled trust preferred securities issued by banks and insurers1,653
 —
 (372) 1,281
 1,678
 —
 (349) 1,329
1,493
 —
 (387) 1,106
 1,678
 —
 (349) 1,329
Small business administration pooled securities59,099
 1,082
 —
 60,181
 53,317
 —
 (1,390) 51,927
58,360
 1,610
 —
 59,970
 53,317
 —
 (1,390) 51,927
Total available for sale securities$387,641
 $6,002
 $(495) $393,148
 $450,548
 $1,233
 $(9,029) $442,752
$383,610
 $8,757
 $(392) $391,975
 $450,548
 $1,233
 $(9,029) $442,752
Held to maturity securities                              
U.S. government agency securities$12,833
 $130
 $—
 $12,963
 $—
 $—
 $—
 $—
$12,853
 $146
 $—
 $12,999
 $—
 $—
 $—
 $—
U.S. Treasury securities1,003
 21
 —
 1,024
 1,004
 11
 —
 1,015
1,003
 19
 —
 1,022
 1,004
 11
 —
 1,015
Agency mortgage-backed securities423,825
 7,488
 (46) 431,267
 252,484
 1,548
 (3,104) 250,928
418,350
 8,900
 (39) 427,211
 252,484
 1,548
 (3,104) 250,928
Agency collateralized mortgage obligations324,441
 4,627
 (1,350) 327,718
 332,775
 869
 (6,920) 326,724
310,352
 5,857
 (687) 315,522
 332,775
 869
 (6,920) 326,724
Single issuer trust preferred securities issued by banks1,500
 —
 (10) 1,490
 1,500
 —
 (10) 1,490
1,500
 —
 (10) 1,490
 1,500
 —
 (10) 1,490
Small business administration pooled securities33,757
 467
 (30) 34,194
 23,727
 105
 (349) 23,483
33,212
 707
 —
 33,919
 23,727
 105
 (349) 23,483
Total held to maturity securities$797,359
 $12,733
 $(1,436) $808,656
 $611,490
 $2,533
 $(10,383) $603,640
$777,270
 $15,629
 $(736) $792,163
 $611,490
 $2,533
 $(10,383) $603,640
Total$1,185,000
 $18,735
 $(1,931) $1,201,804
 $1,062,038
 $3,766
 $(19,412) $1,046,392
$1,160,880
 $24,386
 $(1,128) $1,184,138
 $1,062,038
 $3,766
 $(19,412) $1,046,392

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale.
 

The actual maturities of certain securities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. A schedule of the contractual maturities of securities available for sale and securities held to maturity as of JuneSeptember 30, 2019 is presented below:
Due in one year or less Due after one year to five years Due after five to ten years Due after ten years TotalDue in one year or less Due after one year to five years Due after five to ten years Due after ten years Total
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
(Dollars in thousands)(Dollars in thousands)
Available for sale securities                                      
U.S. government agency securities$10,004
 $9,998
 $10,003
 $10,148
 $12,469
 $12,777
 $—
 $—
 $32,476
 $32,923
$10,002
 $10,003
 $10,003
 $10,154
 $12,470
 $13,145
 $—
 $—
 $32,475
 $33,302
Agency mortgage-backed securities—
 —
 57,520
 57,850
 64,505
 65,938
 72,657
 73,877
 194,682
 197,665
—
 —
 71,277
 72,138
 56,084
 58,039
 68,917
 70,426
 196,278
 200,603
Agency collateralized mortgage obligations—
 —
 —
 —
 —
 —
 97,299
 98,643
 97,299
 98,643
—
 —
 —
 —
 —
 —
 92,574
 94,538
 92,574
 94,538
State, county, and municipal securities—
 —
 1,022
 1,026
 693
 712
 —
 —
 1,715
 1,738
—
 —
 1,021
 1,024
 692
 712
 —
 —
 1,713
 1,736
Single issuer trust preferred securities issued by banks—
 —
 —
 —
 —
 —
 717
 717
 717
 717
—
 —
 —
 —
 —
 —
 717
 720
 717
 720
Pooled trust preferred securities issued by banks and insurers—
 —
 —
 —
 —
 —
 1,653
 1,281
 1,653
 1,281
—
 —
 —
 —
 —
 —
 1,493
 1,106
 1,493
 1,106
Small business administration pooled securities—
 —
 —
 —
 —
 —
 59,099
 60,181
 59,099
 60,181
—
 —
 —
 —
 —
 —
 58,360
 59,970
 58,360
 59,970
Total available for sale securities$10,004
 $9,998
 $68,545
 $69,024
 $77,667
 $79,427
 $231,425
 $234,699
 $387,641
 $393,148
$10,002
 $10,003
 $82,301
 $83,316
 $69,246
 $71,896
 $222,061
 $226,760
 $383,610
 $391,975
Held to maturity securities                                      
U.S. government agency securities$—
 $—
 $12,833
 $12,963
 $—
 $—
 $—
 $—
 $12,833
 $12,963
$—
 $—
 $12,853
 $12,999
 $—
 $—
 $—
 $—
 $12,853
 $12,999
U.S. Treasury securities—
 —
 1,003
 1,024
 —
 —
 —
 —
 1,003
 1,024
—
 —
 1,003
 1,022
 —
 —
 —
 —
 1,003
 1,022
Agency mortgage-backed securities—
 —
 11,456
 11,479
 37,434
 37,887
 374,935
 381,901
 423,825
 431,267
—
 —
 11,128
 11,153
 37,012
 37,523
 370,210
 378,535
 418,350
 427,211
Agency collateralized mortgage obligations—
 —
 —
 —
 335
 334
 324,106
 327,384
 324,441
 327,718
—
 —
 154
 154
 —
 —
 310,198
 315,368
 310,352
 315,522
Single issuer trust preferred securities issued by banks—
 —
 —
 —
 1,500
 1,490
 —
 —
 1,500
 1,490
—
 —
 —
 —
 1,500
 1,490
 —
 —
 1,500
 1,490
Small business administration pooled securities—
 —
 —
 —
 —
 —
 33,757
 34,194
 33,757
 34,194
—
 —
 —
 —
 —
 —
 33,212
 33,919
 33,212
 33,919
Total held to maturity securities$—
 $—
 $25,292
 $25,466
 $39,269
 $39,711
 $732,798
 $743,479
 $797,359
 $808,656
$—
 $—
 $25,138
 $25,328
 $38,512
 $39,013
 $713,620
 $727,822
 $777,270
 $792,163
Total$10,004
 $9,998
 $93,837
 $94,490
 $116,936
 $119,138
 $964,223
 $978,178
 $1,185,000
 $1,201,804
$10,002
 $10,003
 $107,439
 $108,644
 $107,758
 $110,909
 $935,681
 $954,582
 $1,160,880
 $1,184,138
Inclusive in the table above is $18.1$17.9 million of callable securities at JuneSeptember 30, 2019.
The carrying value of securities pledged to secure public funds, trust deposits, and for other purposes, as required or permitted by law, was $355.0$340.6 million and $361.1 million at JuneSeptember 30, 2019 and December 31, 2018, respectively.
At JuneSeptember 30, 2019 and December 31, 2018, the Company had no0 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, whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery, as well as other qualitative factors. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.

The following tables show the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position, which the Company has not deemed to be OTTI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
June 30, 2019September 30, 2019
  Less than 12 months 12 months or longer Total  Less than 12 months 12 months or longer Total
# of 
holdings
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
# of 
holdings
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
(Dollars in thousands)(Dollars in thousands)
U.S. government agency securities1
 $9,998
 $(6) $—
 $—
 $9,998
 $(6)
Agency mortgage-backed securities11
 —
 —
 16,365
 (87) 16,365
 (87)6
 10,155
 (39) 1,054
 (5) 11,209
 (44)
Agency collateralized mortgage obligations19
 25,527
 (85) 82,547
 (1,341) 108,074
 (1,426)17
 35,178
 (99) 39,827
 (588) 75,005
 (687)
Single issuer trust preferred securities issued by banks and insurers2
 2,207
 (10) —
 —
 2,207
 (10)1
 —
 —
 1,490
 (10) 1,490
 (10)
Pooled trust preferred securities issued by banks and insurers1
 —
 —
 1,281
 (372) 1,281
 (372)1
 —
 —
 1,106
 (387) 1,106
 (387)
Small business administration pooled securities1
 —
 —
 7,973
 (30) 7,973
 (30)
Total temporarily impaired securities35
 $37,732
 $(101) $108,166
 $(1,830) $145,898
 $(1,931)25
 $45,333
 $(138) $43,477
 $(990) $88,810
 $(1,128)

 December 31, 2018
   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 securities3
 $9,960
 $(43) $22,078
 $(396) $32,038
 $(439)
Agency mortgage-backed securities144
 104,616
 (1,363) 222,850
 (5,147) 327,466
 (6,510)
Agency collateralized mortgage obligations48
 57,871
 (398) 279,229
 (9,957) 337,100
 (10,355)
Single issuer trust preferred securities issued by banks and insurers2
 2,197
 (20) —
 —
 2,197
 (20)
Pooled trust preferred securities issued by banks and insurers1
 —
 —
 1,329
 (349) 1,329
 (349)
Small business administration pooled securities7
 28,257
 (662) 40,621
 (1,077) 68,878
 (1,739)
Total temporarily impaired securities205
 $202,901
 $(2,486) $566,107
 $(16,926) $769,008
 $(19,412)

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 each security before the recovery of its amortized cost basis. As a result, the Company does not consider these investments to be OTTI and accordingly, there was no0 OTTI recorded for the sixthree and nine months ended JuneSeptember 30, 2019 and 2018. There was no0 cumulative credit related component of OTTI as of JuneSeptember 30, 2019 or December 31, 2018. 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 JuneSeptember 30, 2019:
•
U.S. Government Agency Securities, Agency Mortgage-Backed Securities and Agency Collateralized Mortgage Obligations and Small Business Administration Pooled Securities:Obligations: These portfolios have contractual terms that generally do not permit the issuer to settle the securities at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. Government or one of its agencies.

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

•
Pooled Trust Preferred Securities: This portfolio consists of one below investment grade security which is performing. The unrealized loss on this security is attributable to the illiquid nature of the trust preferred market in the current economic and regulatory environment. Management evaluates collateral credit and instrument structure, including current and expected deferral and default rates and timing. In addition, discount rates are determined by evaluating comparable spreads observed currently in the market for similar instruments.



NOTE 5 - LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY
The following tables bifurcate the amount of loans and the allowance allocated to each loan category based on the type of impairment analysis as of the periods indicated:
June 30, 2019 September 30, 2019 
(Dollars in thousands) (Dollars in thousands) 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 Other Consumer Total 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 Other Consumer Total 
Financing receivables ending balance:                                
Collectively evaluated for impairment$1,373,573
 $4,042,092
 $491,598
 $173,397
 $1,636,033
 $1,137,736
 $26,083
 $8,880,512
  $1,385,379
 $3,979,670
 $520,585
 $171,723
 $1,625,923
 $1,130,777
 $26,545
 $8,840,602
  
Individually evaluated for impairment$27,351
 $9,069
 $—
 $530
 $11,351
 $5,689
 $173
 $54,163
  26,137
 13,984
 —
 315
 11,039
 5,325
 140
 56,940
  
Purchased credit impaired loans$—
 $6,905
 $—
 $—
 $7,798
 $1,074
 $335
 $16,112
 —
 6,833
 —
 —
 7,796
 1,007
 323
 15,959
 
Total loans by group$1,400,924
 $4,058,066
 $491,598
 $173,927
 $1,655,182
 $1,144,499
 $26,591
 $8,950,787
(1)$1,411,516
 $4,000,487
 $520,585
 $172,038
 $1,644,758
 $1,137,109
 $27,008
 $8,913,501
(1)
December 31, 2018 December 31, 2018 
(Dollars in thousands) (Dollars in thousands) 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 Other Consumer Total 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 Other Consumer Total 
Financing receivables ending balance:                                
Collectively evaluated for impairment$1,064,800
 $3,235,418
 $365,165
 $164,135
 $906,959
 $1,085,961
 $15,901
 $6,838,339
 $1,064,800
 $3,235,418
 $365,165
 $164,135
 $906,959
 $1,085,961
 $15,901
 $6,838,339
 
Individually evaluated for impairment$28,829
 $10,839
 $—
 $541
 $12,706
 $5,948
 $197
 $59,060
  28,829
 10,839
 —
 541
 12,706
 5,948
 197
 59,060
  
Purchased credit impaired loans$—
 $4,991
 $—
 $—
 $3,629
 $175
 $—
 $8,795
 —
 4,991
 —
 —
 3,629
 175
 —
 8,795
 
Total loans by group$1,093,629
 $3,251,248
 $365,165
 $164,676
 $923,294
 $1,092,084
 $16,098
 $6,906,194
(1)$1,093,629
 $3,251,248
 $365,165
 $164,676
 $923,294
 $1,092,084
 $16,098
 $6,906,194
(1)
 
(1)The amount of net deferred costs on originated loans included in the ending balance was $7.9$7.2 million and $7.1 million at JuneSeptember 30, 2019 and December 31, 2018, respectively. Net unamortized discounts on acquired loans not deemed to be purchased credit impaired ("PCI") included in the ending balance was $29.8$24.7 million and $15.2 million at JuneSeptember 30, 2019 and December 31, 2018, respectively.
    













The following tables summarize changes in allowance for loan losses by loan category for the periods indicated:
Three Months Ended June 30, 2019Three Months Ended September 30, 2019
(Dollars in thousands)(Dollars in thousands)
Commercial and
Industrial		 Commercial
Real Estate		 Commercial
Construction		 Small
Business		 Residential
Real Estate		       
Home  Equity		 Other Consumer TotalCommercial and
Industrial		 Commercial
Real Estate		 Commercial
Construction		 Small
Business		 Residential
Real Estate		       
Home  Equity		 Other Consumer Total
Allowance for loan losses                              
Beginning balance$16,872
 $32,049
 $5,355
 $1,784
 $3,234
 $5,507
 $339
 $65,140
$16,857
 $32,660
 $5,593
 $1,768
 $3,296
 $5,547
 $239
 $65,960
Charge-offs—
 —
 —
 (49) —
 (71) (352) (472)—
 (82) —
 (125) —
 (28) (472) (707)
Recoveries—
 13
 —
 20
 —
 18
 241
 292
1,003
 106
 —
 61
 140
 194
 185
 1,689
Provision (benefit)(15) 598
 238
 13
 62
 93
 11
 1,000
(528) (33) 240
 48
 (88) 36
 325
 —
Ending balance$16,857
 $32,660
 $5,593
 $1,768
 $3,296
 $5,547
 $239
 $65,960
$17,332
 $32,651
 $5,833
 $1,752
 $3,348
 $5,749
 $277
 $66,942
                              
Three Months Ended June 30, 2018Three Months Ended September 30, 2018
(Dollars in thousands)(Dollars in thousands)
Commercial and
Industrial		 Commercial
Real Estate		 Commercial
Construction		 Small
Business		 Residential
Real Estate		 
Home  Equity		 Other Consumer TotalCommercial and
Industrial		 Commercial
Real Estate		 Commercial
Construction		 Small
Business		 Residential
Real Estate		 
Home  Equity		 Other Consumer Total
Allowance for loan losses                              
Beginning balance$13,533
 $31,459
 $5,679
 $1,593
 $2,837
 $5,359
 $402
 $60,862
$14,788
 $32,095
 $5,216
 $1,709
 $2,909
 $5,468
 $372
 $62,557
Charge-offs(4) —
 —
 (102) (109) (95) (259) (569)(218) (82) —
 (111) —
 (87) (349) (847)
Recoveries59
 18
 —
 10
 1
 23
 153
 264
108
 29
 —
 10
 9
 71
 223
 450
Provision (benefit)1,200
 618
 (463) 208
 180
 181
 76
 2,000
430
 226
 (189) 160
 153
 102
 193
 1,075
Ending balance$14,788
 $32,095
 $5,216
 $1,709
 $2,909
 $5,468
 $372
 $62,557
$15,108
 $32,268
 $5,027
 $1,768
 $3,071
 $5,554
 $439
 $63,235



Six Months Ended June 30, 2019Nine Months Ended September 30, 2019
(Dollars in thousands)(Dollars in thousands)
Commercial and
Industrial		 Commercial
Real Estate		 Commercial
Construction		 Small
Business		 Residential
Real Estate		 
Home Equity		 Other Consumer TotalCommercial and
Industrial		 Commercial
Real Estate		 Commercial
Construction		 Small
Business		 Residential
Real Estate		 
Home Equity		 Other Consumer Total
Allowance for loan losses                              
Beginning balance$15,760
 $32,370
 $5,158
 $1,756
 $3,219
 $5,608
 $422
 $64,293
$15,760
 $32,370
 $5,158
 $1,756
 $3,219
 $5,608
 $422
 $64,293
Charge-offs—
 —
 —
 (194) —
 (184) (653) (1,031)—
 (82) —
 (319) —
 (212) (1,125) (1,738)
Recoveries124
 46
 —
 47
 1
 84
 396
 698
1,127
 152
 —
 108
 141
 278
 581
 2,387
Provision (benefit)973
 244
 435
 159
 76
 39
 74
 2,000
445
 211
 675
 207
 (12) 75
 399
 2,000
Ending balance$16,857
 $32,660
 $5,593
 $1,768
 $3,296
 $5,547
 $239
 $65,960
$17,332
 $32,651
 $5,833
 $1,752
 $3,348
 $5,749
 $277
 $66,942
Ending balance: collectively evaluated for impairment$16,850
 $32,586
 $5,593
 $1,730
 $2,507
 $5,388
 $233
 $64,887
$17,326
 $32,610
 $5,833
 $1,741
 $2,729
 $5,594
 $272
 $66,105
Ending balance: individually evaluated for impairment$7
 $74
 $—
 $38
 $789
 $159
 $6
 $1,073
$6
 $41
 $—
 $11
 $619
 $155
 $5
 $837
Six Months Ended June 30, 2018Nine Months Ended September 30, 2018
(Dollars in thousands)(Dollars in thousands)
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 Other Consumer Total
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 Other Consumer Total
Allowance for loan losses                              
Beginning balance$13,256
 $31,453
 $5,698
 $1,577
 $2,822
 $5,390
 $447
 $60,643
$13,256
 $31,453
 $5,698
 $1,577
 $2,822
 $5,390
 $447
 $60,643
Charge-offs(137) —
 —
 (126) (148) (174) (577) (1,162)(355) (82) —
 (237) (148) (261) (926) (2,009)
Recoveries71
 38
 —
 19
 3
 57
 388
 576
179
 67
 —
 29
 12
 128
 611
 1,026
Provision (benefit)1,598
 604
 (482) 239
 232
 195
 114
 2,500
2,028
 830
 (671) 399
 385
 297
 307
 3,575
Ending balance$14,788
 $32,095
 $5,216
 $1,709
 $2,909
 $5,468
 $372
 $62,557
$15,108
 $32,268
 $5,027
 $1,768
 $3,071
 $5,554
 $439
 $63,235
Ending balance: collectively evaluated for impairment$14,780
 $32,021
 $5,216
 $1,708
 $2,050
 $5,237
 $358
 $61,370
$15,101
 $32,234
 $5,027
 $1,767
 $2,197
 $5,386
 $426
 $62,138
Ending balance: individually evaluated for impairment$8
 $74
 $—
 $1
 $859
 $231
 $14
 $1,187
$7
 $34
 $—
 $1
 $874
 $168
 $13
 $1,097

For the purpose of estimating the allowance for loan losses, management segregates the loan portfolio into the portfolio segments detailed in the above tables.  Each of these loan categories possesses unique risk characteristics that are considered when determining the appropriate level of allowance for each segment.  Some of the risk characteristics unique to each loan category include:
Commercial Portfolio
•
Commercial and Industrial: Loans in this category consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment.  Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant and equipment, or real estate, if applicable. Repayment sources consist of primarily, operating cash flow, and secondarily, liquidation of assets.
•
Commercial Real Estate: Loans in this category consist of mortgage loans to finance investment in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties.  Loans are typically written with amortizing payment structures.  Collateral values are determined based upon third party appraisals and evaluations.  Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources consist of, primarily, cash flow from operating leases and rents and, secondarily, liquidation of assets.
•
Commercial Construction: Loans in this category consist of short-term construction loans, revolving and nonrevolving credit lines and construction/permanent loans to finance the acquisition, development and construction or rehabilitation of real property.  Project types include residential 1-4 family, condominium and multi-family homes, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties.  Loans may be written with nonamortizing or hybrid payment structures depending upon the type of project.  Collateral values are determined based upon third party appraisals and evaluations.  Loan to value ratios at origination are governed by established policy and regulatory guidelines.  Repayment sources vary depending upon the type of project and may consist of sale or lease of units, operating cash flows or liquidation of other assets.

•
Small Business: Loans in this category consist of revolving, term loan and mortgage obligations extended to sole proprietors and small businesses for purposes of financing working capital and/or capital investment.  Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, or real estate if applicable.  Repayment sources consist primarily of operating cash flows and, secondarily, liquidation of assets.
For the commercial portfolio it is the Company’s policy to obtain personal guarantees for payment from individuals holding material ownership interests in the borrowing entities.
Consumer Portfolio
•
Residential Real Estate: Residential mortgage loans held in the Company’s portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors such as current and expected income, employment status, current assets, other financial resources, credit history and the value of the collateral.  Collateral consists of mortgage liens on 1-4 family residential properties.  Residential mortgage loans also include loans to construct owner-occupied 1-4 family residential properties.
•
Home Equity: Home equity loans and credit lines are made to qualified individuals and are primarily secured by senior or junior mortgage liens on owner-occupied 1-4 family homes, condominiums or vacation homes. Each home equity loan has a fixed rate and is billed in equal payments comprised of principal and interest. The majority of home equity lines of credit have a variable rate and are 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 then outstanding principal balance plus all accrued interest over a predetermined repayment period, as set forth in the note. Additionally, the Company has the option of renewing each line of credit for additional draw periods.  Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan to value ratios within established policy guidelines.
•
Other Consumer: Other consumer loan products include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, debt consolidation, personal expenses or overdraft protection.  Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines.  These loans may be secured or unsecured.
Credit Quality
The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as adversely risk-rated, 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 credit risk-rating system, which assigns a risk-grade to each loan obligation based on a number of quantitative and qualitative factors associated with a commercial or small business loan transaction. Factors considered include industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral, and other considerations. The risk-ratings categories are defined as follows:
•
1- 6 Rating — Pass: Risk-rating grades “1” through “6” comprise those loans ranging from ‘Substantially Risk Free’ which indicates borrowers are of unquestioned credit standing and the pinnacle of credit quality, well established companies with a very strong financial condition, and loans fully secured by cash collateral, through ‘Acceptable Risk’, which indicates borrowers may exhibit declining earnings, strained cash flow, increasing or above average leverage and/or weakening market fundamentals that indicate below average asset quality, margins and market share. Collateral coverage is protective.
•
7 Rating — Potential Weakness: Borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Company’s asset and position. While potentially weak, currently these borrowers are marginally acceptable; no loss of principal or interest is envisioned.
•
8 Rating — Definite Weakness Loss Unlikely: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. LoanLoans 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 Company is not warranted.
The credit quality of the commercial loan portfolio is actively monitored and any changes in credit quality are reflected in risk-rating changes. Risk-ratings are assigned or reviewed for all new loans, when advancing significant additions to existing relationships (over $50,000), at least quarterly for all actively managed loans, and any time a significant event occurs, including at renewal of the loan.
The Company utilizes a comprehensive strategy for monitoring commercial credit quality. Actively managed commercial 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, while continuous portfolio monitoring techniques are employed to evaluate changes in credit quality for smaller loan relationships. 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 tables detail the amount of outstanding principal balances relative to each of the risk-rating categories for the Company’s commercial portfolio:
  June 30, 2019  September 30, 2019
Category
Risk
Rating
 
Commercial  and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 Small Business Total
Risk
Rating
 
Commercial  and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 Small Business Total
  (Dollars in thousands)  (Dollars in thousands)
Pass1 - 6 $1,279,778
 $3,917,266
 $486,775
 $170,247
 $5,854,066
1 - 6 $1,299,386
 $3,857,847
 $514,521
 $169,023
 $5,840,777
Potential weakness7 61,051
 103,537
 2,883
 1,533
 169,004
7 47,727
 89,772
 4,235
 1,434
 143,168
Definite weakness-loss unlikely8 60,095
 37,263
 1,940
 2,147
 101,445
8 64,403
 52,868
 1,829
 1,581
 120,681
Partial loss probable9 —
 —
 —
 —
 —
9 —
 —
 —
 —
 —
Definite loss10 —
 —
 —
 —
 —
10 —
 —
 —
 —
 —
Total $1,400,924
 $4,058,066
 $491,598
 $173,927
 $6,124,515
 $1,411,516
 $4,000,487
 $520,585
 $172,038
 $6,104,626

   December 31, 2018
Category
Risk
Rating
 
Commercial  and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 Small Business Total
   (Dollars in thousands)
Pass1 - 6 $1,014,370
 $3,156,989
 $361,884
 $161,851
 $4,695,094
Potential weakness7 16,860
 56,840
 298
 888
 74,886
Definite weakness-loss unlikely8 58,909
 37,419
 2,983
 1,937
 101,248
Partial loss probable9 3,490
 —
 —
 —
 3,490
Definite loss10 —
 —
 —
 —
 —
Total  $1,093,629
 $3,251,248
 $365,165
 $164,676
 $4,874,718


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”) scores and Loan to Value (“LTV”) estimates. Current FICO data is purchased and appended to all consumer loans on a regular basis. In addition, automated valuation services and broker opinions of value are used to supplement original value data for the residential and home equity portfolios, periodically. The following table shows the weighted average FICO scores and the weighted average combined LTV ratios as of the periods indicated below:
June 30,
2019		 December 31,
2018		September 30
2019		 December 31
2018
Residential portfolio      
FICO score (re-scored)(1)749
 749
749
 749
LTV (re-valued)(2)62.1% 58.6%60.0% 58.6%
Home equity portfolio      
FICO score (re-scored)(1)767
 767
767
 767
LTV (re-valued)(2)(3)47.9% 49.3%47.1% 49.3%
 
(1)The average FICO scores at JuneSeptember 30, 2019 are based upon rescores available from June 2019 or origination data for loans booked from April through JuneSeptember 2019.  The average FICO scores at December 31, 2018 are based upon rescores available from November 2018 and origination score data for loans booked in December 2018.
(2)The combined LTV ratios for JuneSeptember 30, 2019 are based upon updated automated valuations as of AprilAugust 2019, when available, or the most current valuation data available.  The combined LTV ratios for December 31, 2018 are based upon updated automated valuations as of November 2018, when available, and/or the most current valuation data available.  The updated automated valuations provide new information on loans that may be available since the previous valuation was obtained.  If no new information is available, the valuation will default to the previously obtained data or most recent appraisal.
(3)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.

Asset Quality
The Company’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 collection specialists and the Company 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. The Company also may use discretion regarding other loans over 90 days delinquent if the loan is well secured and/or in process of collection.
The following table shows information regarding nonaccrual loans at the dates indicated:
June 30, 2019 December 31, 2018September 30, 2019 December 31, 2018
(Dollars in thousands)(Dollars in thousands)
Commercial and industrial$24,895
 $26,310
$23,507
 $26,310
Commercial real estate833
 3,015
1,666
 3,015
Commercial construction—
 311
—
 311
Small business168
 235
112
 235
Residential real estate9,986
 8,251
11,281
 8,251
Home equity6,973
 7,278
6,720
 7,278
Other consumer111
 13
74
 13
Total nonaccrual loans (1)$42,966
 $45,413
$43,360
 $45,413

(1)Included in these amounts were $27.8$26.2 million and $29.3 million of nonaccruing TDRs at JuneSeptember 30, 2019 and December 31, 2018, respectively.

The following table shows information regarding foreclosed residential real estate property at the dates indicated:
June 30, 2019 December 31, 2018September 30, 2019 December 31, 2018
(Dollars in thousands)(Dollars in thousands)
Foreclosed residential real estate property held by the creditor$2,889
 $—
$2,500
 $—
Recorded investment in mortgage loans collateralized by residential real estate property that are in the process of foreclosure$3,102
 $3,174
$4,141
 $3,174

The following tables show the age analysis of past due financing receivables as of the dates indicated:
June 30, 2019 September 30, 2019 
30-59 days 60-89 days 90 days or more Total Past Due   
Total
Financing
Receivables
 
Recorded
Investment
>90 Days
and  Accruing
 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 
Number
of Loans
 
Principal
Balance
 
Number
of Loans
 
Principal
Balance
 
Number
of Loans
 
Principal
Balance
 
Number
of Loans
 
Principal
Balance
 Current 
(Dollars in thousands) (Dollars in thousands) 
Loan Portfolio                                            
Commercial and industrial1
 $296
 —
 $—
 4
 $109
 5
 $405
 $1,400,519
 $1,400,924
 $—
 1
 $278
 2
 $100
 3
 $39
 6
 $417
 $1,411,099
 $1,411,516
 $—
 
Commercial real estate5
 637
 2
 352
 1
 81
 8
 1,070
 4,056,996
 4,058,066
 —
 6
 1,641
 2
 238
 4
 1,021
 12
 2,900
 3,997,587
 4,000,487
 —
 
Commercial construction2
 706
 —
 —
 —
 —
 2
 706
 490,892
 491,598
 —
 —
 —
 —
 —
 —
 —
 —
 —
 520,585
 520,585
 —
 
Small business2
 51
 5
 95
 9
 139
 16
 285
 173,642
 173,927
 —
 10
 315
 5
 260
 7
 99
 22
 674
 171,364
 172,038
 —
 
Residential real estate18
 3,306
 12
 2,168
 40
 8,470
 70
 13,944
 1,641,238
 1,655,182
 1,776
(1)24
 3,267
 6
 1,257
 40
 8,317
 70
 12,841
 1,631,917
 1,644,758
 1,807
(1)
Home equity25
 1,185
 10
 618
 34
 3,439
 69
 5,242
 1,139,257
 1,144,499
 541
(1)23
 1,974
 8
 982
 36
 3,314
 67
 6,270
 1,130,839
 1,137,109
 511
(1)
Other consumer(2)336
 254
 20
 39
 19
 102
 375
 395
 26,196
 26,591
 11
(2)307
 233
 8
 44
 16
 62
 331
 339
 26,669
 27,008
 24
 
Total389
 $6,435
 49
 $3,272
 107
 $12,340
 545
 $22,047
 $8,928,740
 $8,950,787
 $2,328
 371
 $7,708
 31
 $2,881
 106
 $12,852
 508
 $23,441
 $8,890,060
 $8,913,501
 $2,342
 
December 31, 2018December 31, 2018 
30-59 days 60-89 days 90 days or more Total Past Due   
Total
Financing
Receivables
 
Recorded
Investment
>90 Days
and Accruing
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 
Number
of Loans
 
Principal
Balance
 
Number
of Loans
 
Principal
Balance
 
Number
of Loans
 
Principal
Balance
 
Number
of Loans
 
Principal
Balance
 Current 
(Dollars in thousands)(Dollars in thousands) 
Loan Portfolio             ��                             
Commercial and industrial—
 $—
 4
 $382
 11
 $26,311
 15
 $26,693
 $1,066,936
 $1,093,629
 $—
—
 $—
 4
 $382
 11
 $26,311
 15
 $26,693
 $1,066,936
 $1,093,629
 $—
 
Commercial real estate9
 1,627
 —
 —
 8
 2,250
 17
 3,877
 3,247,371
 3,251,248
 —
9
 1,627
 —
 —
 8
 2,250
 17
 3,877
 3,247,371
 3,251,248
 —
 
Commercial construction1
 1,271
 —
 —
 1
 311
 2
 1,582
 363,583
 365,165
 —
1
 1,271
 —
 —
 1
 311
 2
 1,582
 363,583
 365,165
 —
 
Small business15
 506
 19
 87
 24
 162
 58
 755
 163,921
 164,676
 —
15
 506
 19
 87
 24
 162
 58
 755
 163,921
 164,676
 —
 
Residential real estate23
 3,486
 6
 521
 25
 4,382
 54
 8,389
 914,905
 923,294
 —
23
 3,486
 6
 521
 25
 4,382
 54
 8,389
 914,905
 923,294
 —
 
Home equity22
 1,331
 12
 855
 29
 2,663
 63
 4,849
 1,087,235
 1,092,084
 —
22
 1,331
 12
 855
 29
 2,663
 63
 4,849
 1,087,235
 1,092,084
 —
 
Other consumer (2)330
 181
 15
 9
 12
 13
 357
 203
 15,895
 16,098
 5
330
 181
 15
 9
 12
 13
 357
 203
 15,895
 16,098
 5
 
Total400
 $8,402
 56
 $1,854
 110
 $36,092
 566
 $46,348
 $6,859,846
 $6,906,194
 $5
400
 $8,402
 56
 $1,854
 110
 $36,092
 566
 $46,348
 $6,859,846
 $6,906,194
 $5
 


(1)Represents purchased credit impaired loans that are accruing interest due to expectations of future cash collections.
(2)Other consumer portfolio is inclusive of deposit account overdrafts recorded as loan balances.

Troubled Debt Restructurings
In the course of resolving nonperforming loans, the Bank may choose to restructure the contractual terms of certain loans. The Bank attempts to work out an alternative payment schedule with the borrower in order to avoid foreclosure actions. Any loans that are modified are reviewed by the Bank to identify if a TDR has occurred, which is when, for economic or legal reasons related

to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.

The following table shows the Company’s total TDRs and other pertinent information as of the dates indicated:
June 30, 2019 December 31, 2018September 30, 2019 December 31, 2018
(Dollars in thousands)(Dollars in thousands)
TDRs on accrual status$22,423
 $23,849
$20,182
 $23,849
TDRs on nonaccrual27,841
 29,348
26,232
 29,348
Total TDRs$50,264
 $53,197
$46,414
 $53,197
Amount of specific reserves included in the allowance for loan losses associated with TDRs$1,073
 $1,079
$837
 $1,079
Additional commitments to lend to a borrower who has been a party to a TDR$377
 $982
$61
 $982

The Company’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 tables show the modifications which occurred during the periods indicated and the change in the recorded investment subsequent to the modifications occurring:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, 2019 June 30, 2019September 30, 2019 September 30, 2019
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
(Dollars in thousands)(Dollars in thousands)
Troubled debt restructurings                      
Commercial and industrial1
 $97
 $97
 1
 $97
 $97
1
 $87
 $87
 2
 $184
 $184
Commercial real estate—
 —
 —
 1
 150
 150
1
 133
 133
 2
 283
 283
Small business2
 56
 56
 2
 56
 56
1
 19
 19
 2
 33
 33
Residential real estate1
 163
 168
 1
 163
 168
Home equity—
 —
 —
 1
 75
 75
1
 46
 46
 2
 121
 121
Total3
 $153
 $153
 5
 $378
 $378
5
 $448
 $453
 9
 $784
 $789
 
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, 2018 June 30, 2018September 30, 2018 September 30, 2018
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
(Dollars in thousands)(Dollars in thousands)
Troubled debt restructurings                      
Commercial and industrial2
 $126
 $126
 2
 $126
 $126
Commercial real estate—
 —
 —
 1
 445
 445
1
 205
 205
 2
 650
 650
Residential real estate1
 149
 149
 1
 149
 149
3
 503
 523
 4
 652
 672
Home equity4
 230
 230
 6
 472
 472
2
 74
 74
 8
 546
 546
Total5
 $379
 $379
 8
 $1,066
 $1,066
8
 $908
 $928
 16
 $1,974
 $1,994
 


The following table shows the Company’s post-modification balance of TDRs listed by type of modification during the periods indicated:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30 June 30September 30 September 30
2019 2018 2019 20182019 2018 2019 2018
(Dollars in thousands) (Dollars in thousands)(Dollars in thousands) (Dollars in thousands)
Adjusted interest rate$—
 $—
 $150
 $—
$—
 $—
 $150
 $—
Combination rate and maturity—
 237
 —
 237
Court ordered concession—
 379
 75
 621
—
 74
 75
 695
Extended maturity153
 —
 153
 445
453
 617
 606
 1,062
Total$153
 $379
 $378
 $1,066
$453
 $928
 $831
 $1,994

The Company considers a loan to have defaulted when it reaches 90 days past due. During the three and sixnine months ended JuneSeptember 30, 2019 there was one residential loanwere 0 loans modified during the proceeding twelve months with a recorded investment of $120,000, whichthat subsequently defaulted. At JuneSeptember 30, 2018, there were no0 loans modified during the past twelve months that subsequently defaulted during the three and sixnine months ended JuneSeptember 30, 2018.
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 carrying value of the loan is determined by measuring the recorded investment in the loan against the fair value of the collateral less costs to sell. The Company 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.
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Company 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.




The tables below set forth information regarding the Company’s impaired loans by loan portfolio at the dates indicated:
June 30, 2019September 30, 2019
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
(Dollars in thousands)(Dollars in thousands)
With no related allowance recorded          
Commercial and industrial$27,085
 $37,169
 $—
$25,788
 $36,356
 $—
Commercial real estate7,414
 7,634
 —
12,588
 12,797
 —
Small business342
 389
 —
225
 235
 —
Residential real estate4,694
 4,831
 —
5,009
 5,161
 —
Home equity4,723
 4,976
 —
4,373
 4,633
 —
Other consumer42
 43
 —
37
 38
 —
Subtotal44,300
 55,042
 —
48,020
 59,220
 —
With an allowance recorded          
Commercial and industrial$266
 $266
 $7
$349
 $350
 $6
Commercial real estate1,655
 1,655
 74
1,396
 1,396
 41
Small business188
 229
 38
90
 127
 11
Residential real estate6,657
 7,765
 789
6,030
 6,934
 619
Home equity966
 1,127
 159
952
 1,114
 155
Other consumer131
 133
 6
103
 114
 5
Subtotal9,863
 11,175
 1,073
8,920
 10,035
 837
Total$54,163
 $66,217
 $1,073
$56,940
 $69,255
 $837
 December 31, 2018
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 (Dollars in thousands)
With no related allowance recorded     
Commercial and industrial$28,459
 $35,913
 $—
Commercial real estate9,552
 9,832
 —
Small business358
 439
 —
Residential real estate4,518
 4,686
 —
Home equity4,957
 5,199
 —
Other consumer56
 56
 —
Subtotal47,900
 56,125
 —
With an allowance recorded     
Commercial and industrial$370
 $370
 $7
Commercial real estate1,287
 1,287
 37
Small business183
 223
 1
Residential real estate8,188
 9,217
 862
Home equity991
 1,149
 164
Other consumer141
 143
 8
Subtotal11,160
 12,389
 1,079
Total$59,060
 $68,514
 $1,079


The following tables set forth information regarding interest income recognized on impaired loans, by portfolio, for the periods indicated:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, 2019 June 30, 2019September 30, 2019 September 30, 2019
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
(Dollars in thousands)(Dollars in thousands)
With no related allowance recorded              
Commercial and industrial$27,406
 $34
 $28,971
 $70
$25,694
 $35
 $27,937
 $108
Commercial real estate7,496
 92
 7,582
 186
12,987
 149
 13,261
 478
Small business309
 2
 319
 6
235
 3
 266
 10
Residential real estate4,713
 58
 4,727
 113
5,031
 57
 5,061
 175
Home equity4,751
 53
 4,783
 107
4,417
 50
 4,479
 151
Other consumer42
 1
 45
 1
39
 1
 43
 2
Subtotal44,717
 240
 46,427
 483
48,403
 295
 51,047
 924
With an allowance recorded              
Commercial and industrial$268
 $3
 $270
 $6
$353
 $4
 $360
 $13
Commercial real estate1,662
 24
 1,672
 49
1,402
 20
 1,415
 60
Small business190
 2
 192
 5
92
 —
 95
 2
Residential real estate6,707
 59
 6,775
 116
6,047
 61
 6,115
 179
Home equity972
 11
 978
 22
959
 11
 972
 33
Other consumer132
 2
 135
 2
107
 1
 116
 3
Subtotal9,931
 101
 10,022
 200
8,960
 97
 9,073
 290
Total$54,648
 $341
 $56,449
 $683
$57,363
 $392
 $60,120
 $1,214



Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, 2018 June 30, 2018September 30, 2018 September 30, 2018
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
(Dollars in thousands)(Dollars in thousands)
With no related allowance recorded              
Commercial and industrial$32,557
 $34
 $33,198
 $68
$31,376
 $28
 $32,424
 $89
Commercial real estate13,018
 148
 13,131
 295
12,040
 135
 12,423
 428
Small business672
 3
 703
 8
432
 4
 478
 13
Residential real estate4,825
 60
 4,842
 119
4,798
 56
 4,826
 173
Home equity5,100
 54
 5,160
 106
5,078
 58
 5,185
 168
Other consumer66
 1
 68
 2
62
 1
 66
 3
Subtotal56,238
 300
 57,102
 598
53,786
 282
 55,402
 874
With an allowance recorded              
Commercial and industrial$225
 $2
 $226
 $5
$324
 $4
 $330
 $11
Commercial real estate2,165
 24
 2,172
 48
1,701
 24
 1,715
 71
Small business163
 3
 169
 6
148
 3
 154
 8
Residential real estate8,003
 68
 8,045
 136
8,057
 69
 8,194
 207
Home equity1,732
 15
 1,744
 27
1,453
 14
 1,467
 39
Other consumer194
 1
 198
 3
187
 1
 194
 4
Subtotal12,482
 113
 12,554
 225
11,870
 115
 12,054
 340
Total$68,720
 $413
 $69,656
 $823
$65,656
 $397
 $67,456
 $1,214


Purchased Credit Impaired Loans

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 Company would be able to collect all contractually required payments. As such, these loans were deemed to be 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 PCI loans at the dates indicated:
June 30, 2019 December 31, 2018September 30, 2019 December 31, 2018
(Dollars in thousands)(Dollars in thousands)
Outstanding balance$20,221
 $9,749
$19,822
 $9,749
Carrying amount$16,112
 $8,795
$15,959
 $8,795


The following table summarizes activity in the accretable yield for the PCI loan portfolio:
Three Months Ended June 30 Six Months Ended June 30Three Months Ended September 30 Nine Months Ended September 30
2019 2018 2019 20182019 2018 2019 2018
(Dollars in thousands)(Dollars in thousands)
Beginning balance$1,164
 $1,642
 $1,191
 $1,791
$2,238
 $1,604
 $1,191
 $1,791
Acquisition1,464
 —
 1,464
 —
—
 —
 1,464
 —
Accretion(662) (198) (803) (413)(412) (518) (1,215) (931)
Other change in expected cash flows (1)272
 160
 386
 204
237
 104
 623
 308
Reclassification from nonaccretable difference for loans which have paid off (2)—
 —
 —
 22
227
 203
 227
 225
Ending balance$2,238
 $1,604
 $2,238
 $1,604
$2,290
 $1,393
 $2,290
 $1,393


(1) 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).
(2) Results in increased interest income during the period in which the loan paid off at amount greater than originally expected.

NOTE 6 - BORROWINGS

On March 14, 2019, the Company issued $50.0 million of fixed to floating rate subordinated notes in a private placement transaction to institutional accredited investors. The subordinated debentures mature on March 15, 2029. However with regulatory approval, the Company may redeem the subordinated debt without penalty at any scheduled payment date on or after March 15, 2024 with 30 days notice. The subordinated notes carry interest at a fixed rate of 4.75% through March 15, 2024, after which it converts to a variable rate.

On March 28, 2019, the Company entered into a credit facility for an aggregate principal amount of $125.0 million, including a $50.0 million senior unsecured revolving loan credit facility and a $75.0 million senior unsecured term loan credit facility. Advances under the revolving loan facility and term loan facility bear interest at an interest rate equal to the one-month LIBORLondon Inter-Bank Offered Rate ("LIBOR") rate plus 1.15% for the revolving loan facility and one-month LIBOR plus 1.25% for the term loan facility, which is due and payable in full on March 28, 2022.

The Company used the proceeds of these borrowings for funding needs related to the second quarter closing of BHB. During the second quarter of 2019, the Company repaid in full the entire $50.0 million amount of the senior unsecured revolving loan.


NOTE 7 -EARNINGS PER SHARE
Earnings per share consisted of the following components for the periods indicated:

Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30 June 30September 30 September 30
2019 2018 2019 20182019 2018 2019 2018
(Dollars in thousands, except per share data)(Dollars in thousands, except per share data)
Net income$30,628
 $31,118
 $65,853
 $58,673
$51,845
 $33,015
 $117,698
 $91,688
              
Weighted Average Shares      
Basic shares34,313,492
 27,526,653
 31,226,985
 27,506,724
34,361,176
 27,537,841
 32,283,196
 27,517,210
Effect of dilutive securities41,878
 54,525
 48,381
 61,480
39,390
 63,499
 45,416
 62,596
Diluted shares34,355,370
 27,581,178
 31,275,366
 27,568,204
34,400,566
 27,601,340
 32,328,612
 27,579,806
              
Net income per share              
Basic EPS$0.89
 $1.13
 $2.11
 $2.13
$1.51
 $1.20
 $3.65
 $3.33
Effect of dilutive securities—
 —
 —
 —
—
 —
 (0.01) (0.01)
Diluted EPS$0.89
 $1.13
 $2.11
 $2.13
$1.51
 $1.20
 $3.64
 $3.32

The diluted earnings per share computations do not assumeDuring the conversion, exercise, or contingent issuancethree months ended September 30, 2019 there were 5,000 options to purchase common stock and 0 shares of the following shares for the following periods because the result would have been anti-dilutive for the periods indicated. As a result of the anti-dilution, the potential common sharesperformance-based restricted stock that were excluded from the calculation of diluted earnings are as follows:
 Three Months Ended Six Months Ended
 June 30 June 30
 2019 2018 2019 2018
Stock options—
 4,890
 —
 2,458
Performance-based restricted stock—
 —
 11,419
 —



per share because they were anti-dilutive. There were 0 such options or shares of performance-based restricted stock that were anti-dilutive during the three months ended September 30, 2018 or during the nine months ended September 30, 2019 and 2018.

NOTE 8 - STOCK BASED COMPENSATION
Time Vested Restricted Stock Awards
During the sixnine months ended JuneSeptember 30, 2019, the Company made the following awards of restricted stock:
Date Shares Granted Plan Grant Date Fair Value Per Share Vesting Period
2/21/2019 43,250
 2005 Employee Stock Plan $83.87
 Ratably over 5 years from grant date
3/15/2019 600
 2005 Employee Stock Plan $79.55
 Ratably over 5 years from grant date
4/1/2019 1,090
 2005 Employee Stock Plan $82.62
 Ratably over 3 years from grant date
5/21/2019 6,500
 2018 Non-Employee Director Stock Plan $77.08
 Shares vested immediately

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 are entitled to receive dividends and to vote from and as of the date of grant.
Performance-Based Restricted Stock Awards
On February 21, 2019, the Company granted 15,900 performance-based restricted stock awards to certain executive level employees. These performance-based restricted stock awards were issued from the 2005 Employee Stock Plan and were determined to have a grant date fair value per share of $83.87, determined by the average of the high and low price at which the Company's common stock traded on the date of grant. The number of shares to be vested is contingent upon the Company's attainment of certain performance measures outlined in the award agreement and will be measured as of the end of the three year performance period, January 1, 2019 through December 31, 2021. The awards will vest upon the earlier of the date on which it is determined if the performance goal is achieved subsequent to the performance period or March 31, 2022. These awards are accounted for as equity awards due to the nature of these awards and the fact that these shares will not be settled in cash.
The holders of these awards are not entitled to receive dividends or vote until the shares are vested.
    On February 26, 2019, the performance-based restricted stock awards that were awarded on February 11, 2016 vested at 100% of the maximum target shares awarded, or 17,947 shares.
Stock Options
The Company did not grant any awards of options to purchase shares of common stock during the sixnine months ended JuneSeptember 30, 2019.


NOTE 9 - DERIVATIVE 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 may utilize various interest rate derivatives as hedging instruments against interest rate risk associated with the Company’s borrowings and loan portfolios. An interest rate derivative 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 following tables reflect the Company's derivative positions for the periods indicated below for interest rate derivatives which qualify as cash flow hedges for accounting purposes:
June 30, 2019
September 30, 2019September 30, 2019
   Weighted Average Rate     Weighted Average Rate  
 Notional Amount Average Maturity Current
Rate
Received		 Pay Fixed
Swap Rate		 Fair Value Notional Amount Average Maturity Current
Rate
Received		 Pay Fixed
Swap Rate		 Fair Value
 (in thousands) (in years)     (in thousands) (in thousands) (in years)     (in thousands)
Interest rate swaps on borrowings $75,000
 2.68 2.45% 1.53% $337
 $75,000
 2.43 2.12% 1.53% $5
                
   Current Rate Paid 
Receive Fixed
Swap Rate
     Current Rate Paid 
Receive Fixed
Swap Rate
  
Interest rate swaps on loans 400,000
 4.01 2.37% 2.47% 13,743
 400,000
 3.76 2.03% 2.47% 16,389
                
   Current Rate Paid 
Receive Fixed Swap Rate
Cap - Floor
     Current Rate Paid 
Receive Fixed Swap Rate
Cap - Floor
  
Interest rate collars on loans 350,000
 3.99 2.36% 2.87% - 2.32%
 11,011
 350,000
 3.74 2.03% 2.87% - 2.32%
 12,913
                
Total $825,000
     $25,091
 $825,000
     $29,307
                
                
December 31, 2018
   Weighted Average Rate     Weighted Average Rate  
 Notional Amount Average Maturity Current
Rate
Received		 Pay Fixed
Swap Rate		 Fair Value Notional Amount Average Maturity Current
Rate
Received		 Pay Fixed
Swap Rate		 Fair Value
 (in thousands) (in years)     (in thousands) (in thousands) (in years)     (in thousands)
Interest rate swaps on borrowings $75,000
 3.18 2.74% 1.53% $2,282
 $75,000
 3.18 2.74% 1.53% $2,282
                
 
 Current Rate Paid 
Receive Fixed
Swap Rate
 
 
 Current Rate Paid 
Receive Fixed
Swap Rate
 
Interest rate swaps on loans 250,000
 4.52 2.57% 2.67% 2,938
 250,000
 4.52 2.57% 2.67% 2,938
                
   Current Rate Paid 
Receive Fixed Swap Rate
Cap - Floor
     Current Rate Paid 
Receive Fixed Swap Rate
Cap - Floor
  
Interest rate collars on loans 250,000
 4.17 2.47% 3.02% - 2.51%
 3,344
 250,000
 4.17 2.47% 3.02% - 2.51%
 3,344
                
Total $575,000
     $8,564
 $575,000
     $8,564

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 4.84.6 years.
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 other comprehensive income ("OCI"), and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  The Company expects approximately $4.3$5.8 million (pre-tax) to be reclassified to interest income and $343,000$201,000 (pre-tax) to be reclassified as an offset 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 JuneSeptember 30, 2019.
The Company recognized $61,000 and $122,000$183,000 of net amortization income that was an offset to interest expense related to previously terminated swaps for the three and sixnine month periods ended JuneSeptember 30, 2018, respectively. The Company did not recognize any amortization income related to previously terminated swaps for the three and sixnine month periods ended JuneSeptember 30, 2019.

The Company had no0 fair value hedges as of JuneSeptember 30, 2019 or December 31, 2018.
Customer Related Positions
Loan level derivatives, primarily interest rate swaps, offered to commercial borrowers through the Company’s loan level derivative program do not qualify as hedges for accounting purposes. The Company 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 Company 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. The amounts relating to the notional principal amount are not actually exchanged.
Foreign exchange contracts offered to commercial borrowers through the Company’s derivative program do not qualify as hedges for accounting purposes. The Company acts as a seller and buyer of foreign exchange contracts to accommodate its customers. To mitigate the market and liquidity risk associated with these derivatives, the Company enters into similar offsetting positions.
The following tables reflect the Company’s customer related derivative positions for the periods indicated below for those derivatives not designated as hedging:
  Notional Amount Maturing    Notional Amount Maturing  
Number of  Positions (1) Less than 1 year Less than 2 years Less than 3 years Less than 4 years Thereafter Total Fair Value
Number of  Positions 
(1)
 Less than 1 year Less than 2 years Less than 3 years Less than 4 years Thereafter Total Fair Value
June 30, 2019September 30, 2019
(Dollars in thousands)(Dollars in thousands)
Loan level swaps                              
Receive fixed, pay variable302
 $112,642
 $209,727
 $77,125
 $159,751
 $978,497
 $1,537,742
 $49,459
305
 $74,074
 $225,274
 $43,837
 $200,589
 $1,064,509
 $1,608,283
 $71,302
Pay fixed, receive variable293
 $112,642
 $209,727
 $77,125
 $159,751
 $978,497
 $1,537,742
 $(49,453)296
 $74,074
 $225,274
 $43,837
 $200,589
 $1,064,509
 $1,608,283
 $(71,292)
Foreign exchange contracts                              
Buys foreign currency, sells U.S. currency36
 $74,431
 $—
 $—
 $—
 $—
 $74,431
 $(1,160)41
 $82,118
 $—
 $—
 $—
 $—
 $82,118
 $(3,305)
Buys U.S. currency, sells foreign currency36
 $74,431
 $—
 $—
 $—
 $—
 $74,431
 $1,196
41
 $82,118
 $—
 $—
 $—
 $—
 $82,118
 $3,345
December 31, 2018December 31, 2018
(Dollars in thousands)(Dollars in thousands)
Loan level swaps                              
Receive fixed, pay variable235
 $50,702
 $124,222
 $97,904
 $47,308
 $631,471
 $951,607
 $(2,907)235
 $50,702
 $124,222
 $97,904
 $47,308
 $631,471
 $951,607
 $(2,907)
Pay fixed, receive variable220
 $50,702
 $124,222
 $97,904
 $47,308
 $631,471
 $951,607
 $2,903
220
 $50,702
 $124,222
 $97,904
 $47,308
 $631,471
 $951,607
 $2,903
Foreign exchange contracts                              
Buys foreign currency, sells U.S. currency27
 $60,297
 $3,505
 $—
 $—
 $—
 $63,802
 $(1,404)27
 $60,297
 $3,505
 $—
 $—
 $—
 $63,802
 $(1,404)
Buys U.S. currency, sells foreign currency27
 $60,297
 $3,505
 $—
 $—
 $—
 $63,802
 $1,434
27
 $60,297
 $3,505
 $—
 $—
 $—
 $63,802
 $1,434
 

(1)The Company may enter into one dealer swap agreement which offsets multiple commercial borrower swap agreements.

Mortgage Derivatives
The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that loans will likely be sold subsequently in the secondary market. Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. These commitments are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded within 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 change in fair value of loans held for sale was an increase of $919,000increased by $272,000 and $70,000$103,000 for the three month periods ended JuneSeptember 30, 2019 and 2018, respectively. The change infair value associated

fair value associated with loans held for sale was an increase of $920,000increased by $1.2 million and $44,000$147,000 for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively. These amounts were offset in earnings by the change in the fair value of mortgage derivatives.
Outstanding loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might change from inception of the rate lock to funding of the loan due to changes in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. To protect against the price risk inherent in derivative loan commitments, the Company utilizes both "mandatory delivery" and "best efforts" forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Included in the mandatory delivery forward commitments are To Be Announced securities (“TBAs”). Certain assumptions, including pull through rates and rate lock periods, are used in managing the existing and future hedges. The accuracy of underlying assumptions will impact the ultimate effectiveness of any hedging strategies.
With mandatory delivery contracts, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor/counterparty to compensate the investor for the shortfall. Generally the Company makes this type of commitment once mortgage loans have been funded and are held for sale, in order to minimize the risk of failure to deliver the requisite volume of loans to the investor and paying pair-off fees as a result. The Company also sells TBA securities to offset potential changes in the fair value of derivative loan commitments. Generally the Company sells TBA securities upon entering derivative loan commitments for settlement in 30 to 90 days. The Company expects that mandatory delivery contracts, including TBA securities, will experience changes in fair value opposite to the changes in the fair value of derivative loan commitments.
With best effort contracts, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally best efforts cash contracts have no pair off risk regardless of market movement. The price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower). The Company expects that these best efforts forward loan sale commitments will experience a net neutral shift in fair value with related derivative loan commitments.
The aggregate amount of net realized gains or losses on sales of such loans included within mortgage banking income was $3.3$5.5 million and $755,000$1.1 million for the three month periods ended JuneSeptember 30, 2019 and 2018, respectively, and $4.0$9.5 million and $1.5$2.6 million for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.

The table below presents the fair value of the Company’s derivative financial instruments, as well as their classification on the balance sheet at the periods indicated:
Asset Derivatives Liability DerivativesAsset Derivatives Liability Derivatives
 Fair Value at Fair Value at Fair Value at Fair Value at Fair Value at Fair Value at Fair Value at Fair Value at
Balance Sheet
Location		 June 30
2019		 December 31
2018		 Balance Sheet
Location		 June 30
2019		 December 31
2018		Balance Sheet
Location		 September 30
2019		 December 31
2018		 Balance Sheet
Location		 September 30
2019		 December 31
2018
(Dollars in thousands)(Dollars in thousands)
Derivatives designated as hedges                
Interest rate derivativesOther assets $25,216
 $8,955
 Other liabilities $125
 $391
Other assets $29,551
 $8,955
 Other liabilities $244
 $391
Derivatives not designated as hedges                
Customer Related Positions                
Loan level derivativesOther assets $51,417
 $15,580
 Other liabilities $51,411
 $15,584
Other assets $71,554
 $15,580
 Other liabilities $71,544
 $15,584
Foreign exchange contractsOther assets 1,543
 1,578
 Other liabilities 1,507
 1,548
Other assets 3,345
 1,578
 Other liabilities 3,305
 1,548
Mortgage Derivatives                
Interest rate lock commitmentsOther assets 2,377
 91
 Other liabilities —
 —
Other assets 2,133
 91
 Other liabilities —
 —
Forward sale loan commitmentsOther assets 3
 106
 Other liabilities 66
 —
Other assets —
 106
 Other liabilities 41
 —
Forward sale hedge commitmentsOther assets —
 —
 Other liabilities 570
 —
Other assets 18
 —
 Other liabilities —
 —
 $55,340
 $17,355
 $53,554
 $17,132
 $77,050
 $17,355
 $74,890
 $17,132
Total $80,556
 $26,310
 $53,679
 $17,523
 $106,601
 $26,310
 $75,134
 $17,523


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 Six Months EndedThree Months Ended Nine Months Ended
June 30 June 30September 30 September 30
2019 2018 2019 20182019 2018 2019 2018
(Dollars in thousands)(Dollars in thousands)
Derivatives designated as hedges              
Gain in OCI on derivatives (effective portion), net of tax$8,590
 $(112) $11,875
 $103
Gain (loss) in OCI on derivatives (effective portion), net of tax$3,030
 $(405) $14,905
 $(302)
Gain reclassified from OCI into interest income or interest expense (effective portion)$394
 $167
 $818
 $257
$352
 $268
 $1,170
 $525
Loss recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)              
Interest expense$—
 $—
 $—
 $—
$—
 $—
 $—
 $—
Other expense—
 —
 —
 —
—
 —
 —
 —
Total$—
 $—
 $—
 $—
$—
 $—
 $—
 $—
Derivatives not designated as hedges              
Changes in fair value of customer related positions              
Other income$14
 $15
 $27
 $24
$10
 $3
 $37
 $27
Other expense(10) (5) (11) (18)(2) (10) (13) (28)
Changes in fair value of mortgage derivatives              
Mortgage banking income1,488
 141
 1,547
 153
366
 (139) 1,913
 14
Total$1,492
 $151
 $1,563
 $159
$374
 $(146) $1,937
 $13


The Company's derivative agreements with institutional counterparties contain various credit-risk related contingent provisions, such as requiring the Company to maintain a well-capitalized capital position. If the Company fails to meet these conditions, the counterparties could request the Company make immediate payment or demand that the Company provide immediate and ongoing full collateralization on derivative positions in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position was $24.7$42.2 million and $176,000 at JuneSeptember 30, 2019 and December 31, 2018, respectively. Although none of the contingency provisions have applied as of JuneSeptember 30, 2019 and December 31, 2018, the Company has posted collateral to offset the net liability exposures with institutional counterparties.

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 institutional counterparties is remote. The Company's exposure relating to institutional counterparties was $26.5$30.0 million and $18.4 million at JuneSeptember 30, 2019 and December 31, 2018, respectively. The Company’s exposure relating to customer counterparties was approximately $50.6$71.7 million and $6.4 million at JuneSeptember 30, 2019 and December 31, 2018, respectively. Credit exposure may be reduced by the value of collateral pledged by the counterparty.


NOTE 10 - BALANCE SHEET OFFSETTING
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.
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  Gross Amounts Not Offset in the Statement of Financial Position 
Gross Amounts Recognized in the Statement of Financial PositionGross Amounts Offset in the Statement of Financial PositionNet Amounts Presented in the Statement of Financial Position
Financial Instruments
(1)
Collateral Pledged (Received)Net AmountGross Amounts Recognized in the Statement of Financial PositionGross Amounts Offset in the Statement of Financial PositionNet Amounts Presented in the Statement of Financial Position
Financial Instruments
(1)
Collateral Pledged (Received)Net Amount
June 30, 2019September 30, 2019
(Dollars in thousands)(Dollars in thousands)
Derivative Assets  
Interest rate swaps$25,216
$—
$25,216
$25,216
$—
$—
$29,551
$—
$29,551
$29,551
$—
$—
Loan level derivatives51,417
—
51,417
979
—
50,438
71,554
—
71,554
126
—
71,428
Customer foreign exchange contracts1,543
—
1,543
—
—
1,543
3,345
—
3,345
—
—
3,345
$78,176
$—
$78,176
$26,195
$—
$51,981
$104,450
$—
$104,450
$29,677
$—
$74,773
  
Derivative Liabilities  
Interest rate swaps$125
$—
$125
$—
$125
$—
$244
$—
$244
$—
$244
$—
Loan level derivatives51,411
—
51,411
26,195
23,709
1,507
71,544
—
71,544
29,677
41,192
675
Customer foreign exchange contracts1,507
—
1,507
—
—
1,507
3,305
—
3,305
—
—
3,305
$53,043
$—
$53,043
$26,195
$23,834
$3,014
$75,093
$—
$75,093
$29,677
$41,436
$3,980
(1)Reflects offsetting derivative positions with the same counterparty.


    Gross Amounts Not Offset in the Statement of Financial Position 
 Gross Amounts Recognized in the Statement of Financial PositionGross Amounts Offset in the Statement of Financial PositionNet Amounts Presented in the Statement of Financial PositionFinancial Instruments (1)Collateral Pledged (Received)Net Amount
 December 31, 2018
 (Dollars in thousands)
Derivative Assets 
Interest rate swaps$8,955
$—
$8,955
$391
$(5,527)$3,037
Loan level derivatives15,580
—
15,580
6,165
(3,001)6,414
Customer foreign exchange contracts1,578
—
1,578
—
—
1,578
 $26,113
$—
$26,113
$6,556
$(8,528)$11,029
       
Derivative Liabilities 
Interest rate swaps$391
$—
$391
$391
$—
$—
Loan level derivatives15,584
—
15,584
6,165
173
9,246
Customer foreign exchange contracts1,548
—
1,548
—
—
1,548
 $17,523
$—
$17,523
$6,556
$173
$10,794

(1)Reflects offsetting derivative positions with the same counterparty.

NOTE 11 - 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 assumptions applied by the Company when determining fair value reflect those that the Company determines market participants would use to price 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 if the asset were to be sold or that would be or paid if the liability were to be transferred in an orderly market transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. When determining fair value, the Company considers pricing information and other inputs that are current as of the measurement date. In periods of market dislocation, the observability of prices and other inputs may be reduced for certain instruments, or not available at all. The unavailability or reduced availability of pricing or other input information 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
Trading and Equity Securities
These equity securities are valued based on market quoted prices. These securities are categorized in Level 1 as they are actively traded and no valuation adjustments have been applied.
U.S. 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 Small Business Administration Pooled 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, reported trades, new issue data, broker dealer quotes, and collateral performance. If there is at least one significant model assumption or input that is not observable, these securities are categorized as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2.
State, County, and Municipal Securities
The fair value is estimated using a valuation matrix with inputs including bond interest rate tables, recent transactions, and yield relationships. These securities are categorized as Level 2.
Single and Pooled Issuer Trust Preferred Securities
The fair value of trust preferred securities, including pooled and single 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, reported trades, new issue data, broker dealer quotes, and collateral performance. If there is at least one significant model assumption or input that is not observable, these securities are classified as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2.
Loans Held for Sale
The Company has elected the fair value option to account for originated closed loans intended for sale. The fair value is measured on an individual loan basis using quoted market prices and when not available, comparable market value or discounted cash flow analysis may be utilized. These assets are typically classified 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 interest rate derivatives may also 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 JuneSeptember 30, 2019 and December 31, 2018, 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 properly classified as Level 2.

Mortgage Derivatives
The fair value of mortgage derivatives is determined based on current market prices for similar assets in the secondary market and, therefore, classified as Level 2 within the fair value hierarchy.
Impaired Loans
Collateral dependent loans that are deemed to be impaired are valued based upon the lower of cost or fair value of the underlying collateral less costs to sell.  The inputs used in the appraisals of the collateral are not always observable, and in such cases the loans may be classified as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2.
Other Real Estate Owned and Other Foreclosed Assets
Other Real Estate Owned ("OREO") and Other Foreclosed Assets are valued at the lower of cost or fair value of the property, less estimated costs to sell. The fair values are generally 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 OREO and Other Foreclosed Assets may be classified as Level 3 within the fair value hierarchy.
Goodwill and Other Intangible Assets
Goodwill and other 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. 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 a 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.

Assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows as of the dates indicated:
  Fair Value Measurements at Reporting Date Using  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)
Balance 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
June 30, 2019September 30, 2019
(Dollars in thousands)(Dollars in thousands)
Recurring fair value measurements              
Assets              
Trading securities$1,939
 $1,939
 $—
 $—
$1,963
 $1,963
 $—
 $—
Equity securities20,807
 20,807
 —
 —
21,021
 21,021
 —
 —
Securities available for sale              
U.S. Government agency securities32,923
 —
 32,923
 —
33,302
 —
 33,302
 —
Agency mortgage-backed securities197,665
 —
 197,665
 —
200,603
 —
 200,603
 —
Agency collateralized mortgage obligations98,643
 —
 98,643
 —
94,538
 —
 94,538
 —
State, county, and municipal securities1,738
 —
 1,738
 —
1,736
 —
 1,736
 —
Single issuer trust preferred securities issued by banks and insurers717
 —
 717
 —
720
 —
 720
 —
Pooled trust preferred securities issued by banks and insurers1,281
 —
 —
 1,281
1,106
 —
 —
 1,106
Small business administration pooled securities60,181
 —
 60,181
 —
59,970
 —
 59,970
 —
Loans held for sale123,557
 —
 123,557
 —
55,937
 —
 55,937
 —
Derivative instruments80,556
 —
 80,556
 —
106,601
 —
 106,601
 —
Liabilities              
Derivative instruments53,679
 —
 53,679
 —
75,134
 —
 75,134
 —
Total recurring fair value measurements$566,328
 $22,746
 $542,301
 $1,281
$502,363
 $22,984
 $478,273
 $1,106
              
Nonrecurring fair value measurements              
Assets              
Collateral dependent impaired loans$26,471
 $—
 $—
 $26,471
$32,645
 $—
 $—
 $32,645
Other real estate owned and other foreclosed assets2,889
 —
 —
 2,889
2,500
 —
 —
 2,500
Total nonrecurring fair value measurements$29,360
 $—
 $—
 $29,360
$35,145
 $—
 $—
 $35,145


   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)
 December 31, 2018
 (Dollars in thousands)
Recurring fair value measurements       
Assets       
Trading securities$1,504
 $1,504
 $—
 $—
Equity securities19,477
 19,477
 —
 —
Securities available for sale       
U.S. Government agency securities32,038
 —
 32,038
 —
Agency mortgage-backed securities220,105
 —
 220,105
 —
Agency collateralized mortgage obligations134,911
 —
 134,911
 —
State, county, and municipal securities1,735
 —
 1,735
 —
Single issuer trust preferred securities issued by banks and insurers707
 —
 707
 —
Pooled trust preferred securities issued by banks and insurers1,329
 —
 —
 1,329
Small business administration pooled securities51,927
 —
 51,927
 —
Loans held for sale6,431
 —
 6,431
 —
Derivative instruments26,310
 —
 26,310
 —
Liabilities       
Derivative instruments17,523
 —
 17,523
 —
Total recurring fair value measurements$478,951
 $20,981
 $456,641
 $1,329
        
Nonrecurring fair value measurements:       
Assets       
Collateral dependent impaired loans$29,109
 $—
 $—
 $29,109
Total nonrecurring fair value measurements$29,109
 $—
 $—
 $29,109


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), which were valued using pricing models and discounted cash flow methodologies, as of the dates indicated:
Three Months EndedThree Months Ended
June 30September 30
2019 20182019 2018
(Dollars in thousands)(Dollars in thousands)
Pooled Trust Preferred Securities      
Beginning balance$1,314
 $1,655
$1,281
 $1,751
Gains and (losses) (realized/unrealized)      
Included in other comprehensive income(27) 104
(14) 55
Settlements(6) (8)(161) (6)
Ending balance$1,281
 $1,751
$1,106
 $1,800
      
Six Months EndedNine Months Ended
June 30September 30
2019 20182019 2018
(Dollars in thousands)(Dollars in thousands)
Pooled Trust Preferred Securities      
Beginning balance$1,329
 $1,640
$1,329
 $1,640
Gains and (losses) (realized/unrealized)      
Included in other comprehensive income(24) 125
(38) 180
Settlements(24) (14)(185) (20)
Ending balance$1,281
 $1,751
$1,106
 $1,800
      



The following table sets forth certain unobservable inputs regarding the Company’s financial instruments that are classified as Level 3 for the periods indicated:
 June 30
2019		 December 31
2018		 June 30
2019		 December 31
2018		 June 30
2019		 December 31
2018		 September 30
2019		 December 31
2018		 September 30
2019		 December 31
2018		 September 30
2019		 December 31
2018
Valuation Technique Fair Value Unobservable Inputs Range Weighted Average Fair Value Unobservable Inputs Range Weighted Average
 (Dollars in thousands)  (Dollars in thousands) 
Discounted cash flow methodologyDiscounted cash flow methodology Discounted cash flow methodology 
Pooled trust preferred securities $1,281
 $1,329
 Cumulative prepayment 0% - 58% 0% - 59% 2.6% 2.1% $1,106
 $1,329
 Cumulative prepayment 0% - 58% 0% - 59% 2.7% 2.1%
     Cumulative default 5% - 100% 5% - 100% 13.6% 16.2%     Cumulative default 2% - 100% 5% - 100% 13.6% 16.2%
     Loss given default 85% - 100% 85% - 100% 92.1% 94.8%     Loss given default 85% - 100% 85% - 100% 92.6% 94.8%
     Cure given default 0% - 75% 0% - 75% 60.9% 60.9%     Cure given default 0% - 75% 0% - 75% 60.9% 60.9%
Appraisals of collateral(1)Appraisals of collateral(1) Appraisals of collateral(1) 
Collateral dependent impaired loans $26,471
 $29,109
  $32,645
 $29,109
 
 
(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.
The significant unobservable inputs used in the fair value measurement of the Company’s pooled trust preferred securities are cumulative prepayment rates, cumulative default rates, loss given default rates and cure given default rates. 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 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    Fair Value Measurements at Reporting Date Using
Carrying
Value
 
Fair
Value
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
 
Fair
Value
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
June 30, 2019September 30, 2019
(Dollars in thousands)(Dollars in thousands)
Financial assets      
Securities held to maturity(a)                  
U.S. government agency securities

$12,833
 $12,963
 $—
 $12,963
 $—
$12,853
 $12,999
 $—
 $12,999
 $—
U.S. Treasury securities1,003
 1,024
 —
 1,024
 —
1,003
 1,022
 —
 1,022
 —
Agency mortgage-backed securities423,825
 431,267
 —
 431,267
 —
418,350
 427,211
 —
 427,211
 —
Agency collateralized mortgage obligations324,441
 327,718
 —
 327,718
 —
310,352
 315,522
 —
 315,522
 —
Single issuer trust preferred securities issued by banks1,500
 1,490
 —
 1,490
 —
1,500
 1,490
 —
 1,490
 —
Small business administration pooled securities33,757
 34,194
 —
 34,194
 —
33,212
 33,919
 —
 33,919
 —
Loans, net of allowance for loan losses(b)8,858,356
 8,719,439
 —
 —
 8,719,439
8,813,914
 8,638,200
 —
 —
 8,638,200
Federal Home Loan Bank stock(c)26,085
 26,085
 —
 26,085
 —
14,976
 14,976
 —
 14,976
 —
Cash surrender value of life insurance policies(d)197,292
 197,292
 —
 197,292
 —
195,883
 195,883
 —
 195,883
 —
Financial liabilities                  
Deposit liabilities, other than time deposits(e)$7,862,856
 $7,862,856
 $—
 $7,862,856
 $—
$7,855,975
 $7,855,975
 $—
 $7,855,975
 $—
Time certificates of deposits(f)1,445,059
 1,441,990
 —
 1,441,990
 —
1,470,116
 1,470,062
 —
 1,470,062
 —
Federal Home Loan Bank borrowings(f)277,671
 277,554
 —
 277,554
 —
70,708
 70,850
 —
 70,850
 —
Long-term borrowings(f)74,879
 72,426
 —
 72,426
 —
74,894
 72,497
 —
 72,497
 —
Junior subordinated debentures(g)62,847
 64,586
 —
 64,586
 —
62,848
 65,835
 —
 65,835
 —
Subordinated debentures(f)84,305
 87,963
 —
 —
 87,963
84,341
 87,884
 —
 —
 87,884
 

     Fair Value Measurements at Reporting Date Using
 
Carrying
Value
 
Fair
Value
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
  
December 31, 2018
 (Dollars in thousands)
Financial assets 
Securities held to maturity(a)         
U.S. Treasury securities$1,004
 $1,015
 $—
 $1,015
 $—
Agency mortgage-backed securities252,484
 250,928
 —
 250,928
 —
Agency collateralized mortgage obligations332,775
 326,724
 —
 326,724
 —
Single issuer trust preferred securities issued by banks1,500
 1,490
 —
 1,490
 —
Small business administration pooled securities23,727
 23,483
 —
 23,483
 —
Loans, net of allowance for loan losses(b)6,812,792
 6,635,209
 —
 —
 6,635,209
Federal Home Loan Bank stock(c)15,683
 15,683
 —
 15,683
 —
Cash surrender value of life insurance policies(d)160,456
 160,456
 —
 160,456
 —
Financial liabilities         
Deposit liabilities, other than time deposits(e)$6,716,017
 $6,716,017
 $—
 $6,716,017
 $—
Time certificates of deposits(f)711,103
 703,728
 —
 703,728
 —
Federal Home Loan Bank borrowings(f)147,806
 147,603
 —
 147,603
 —
Junior subordinated debentures(g)76,173
 73,827
 —
 73,827
 —
Subordinated debentures(f)34,728
 32,509
 —
 —
 32,509

(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 analysis.
(b)Fair value of loans is measured using the exit price valuation method, determined primarily 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, while incorporating liquidity and credit assumptions. Additionally, this amount excludes collateral dependent impaired loans, which are deemed to be marked to fair value on a nonrecurring basis.
(c)FHLB stock has no quoted market value and is carried at cost, therefore the carrying amount approximates fair value.
(d)Cash surrender value of life insurance is recorded at its cash surrender value (or the amount that can be realized upon surrender of the policy), therefore carrying amount approximates fair value.
(e)Fair value of demand deposits, savings and interest checking accounts and money market deposits is the amount payable on demand at the reporting date.
(f)Fair value was determined by discounting anticipated future cash payments using rates currently available for instruments with similar remaining maturities.
(g)Fair value was determined based upon market prices of securities with similar terms and maturities.
This summary excludes certain financial assets and liabilities for which the carrying value approximates fair value. For financial assets, these may include cash and due from banks, federal funds sold and short-term investments. For financial liabilities, these may include federal funds purchased. These instruments would all be considered to be classified as Level 1 within 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 considers its current use of financial instruments to be the highest and best use of the instruments.


NOTE 12 - REVENUE RECOGNITION

A portion of the Company's noninterest income is derived from contracts with customers, and as such, the revenue recognized depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company considers the terms of the contract and all relevant facts and circumstances when applying this guidance. To ensure its alignment with this core principle, the Company measures revenue and the timing of recognition by applying the following five steps:

1.Identify the contract(s) with customers
2.Identify the performance obligations
3.Determine the transaction price
4.Allocate the transaction price to the performance obligations
5.Recognize revenue when (or as) the entity satisfies a performance obligation
    
The Company has disaggregated its revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The following table presents the revenue streams that the Company has disaggregated as of the periods indicated:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018September 30
2019		 September 30
2018		 September 30
2019		 September 30
2018
(Dollars in thousands)(Dollars in thousands)
Deposit account fees (inclusive of cash management fees)$5,080
 $4,551
 $9,486
 $8,982
$5,299
 $4,658
 $14,785
 $13,640
Interchange fees4,825
 3,919
 8,560
 7,324
4,913
 3,943
 13,473
 11,267
ATM fees856
 736
 1,522
 1,390
939
 825
 2,461
 2,215
Investment management - wealth management and advisory services6,423
 6,083
 12,492
 11,665
6,635
 5,912
 19,127
 17,577
Investment management - retail investments and insurance revenue730
 739
 1,409
 1,299
553
 652
 1,962
 1,951
Merchant processing income324
 348
 604
 779
230
 227
 834
 1,006
Other noninterest income1,642
 1,060
 2,581
 2,034
1,487
 1,152
 4,068
 3,186
Total noninterest income in-scope of ASC 60619,880
 17,436
 36,654
 33,473
20,056
 17,369
 56,710
 50,842
Total noninterest income out-of-scope of ASC 6068,768
 4,451
 13,527
 8,277
11,760
 5,895
 25,287
 14,172
Total noninterest income28,648
 21,887
 50,181
 41,750
$31,816
 $23,264
 $81,997
 $65,014

In each of the revenue streams identified above, there were no significant judgments made in determining or allocating the transaction price, as the consideration and service requirements are generally explicitly identified in the associated contracts. Additional information related to each of the revenue streams is further noted below.

Deposit Account Fees

The Company offers various deposit account products to its customers governed by specific deposit agreements applicable to either personal customers or business customers. These agreements identify the general conditions and obligations of both parties, and include standard information regarding deposit account related fees.

Deposit account services include providing access to deposit accounts as well as access to the various deposit transactional services of the Company. These transactional services are primarily those that are identified in the standard fee schedule, and include, but are not limited to, services such as overdraft protection, wire transfer, and check collection. Revenue is recognized in conjunction with the various services being provided. For example, the Company may assess monthly fixed service fees associated with the customer having access to a deposit account, which can vary depending on the account type and daily account balance. In addition, the Company may also assess separate fixed fees associated with and at the time specific transactions are entered into by the customer. As such, the Company considers its performance obligations to be met concurrently with providing the account access or completing the requested deposit transaction.


Cash Management
        
Cash management services are a subset of the deposit account fees revenue stream. These services primarily include ACH transaction processing, positive pay and remote deposit services. These services are also governed by separate agreements entered into with the customer. The fee arrangement for these services is structured to assess fees under one of two scenarios, either a per transaction fee arrangement or an earnings credit analysis arrangement. Under the per transaction fee arrangement, fixed fees are assessed concurrently with customers executing the transactions, and as such, the Company considers its performance obligations to be met concurrently with completing the requested transaction. Under the earnings credit analysis arrangement, the Company provides a monthly earnings credit to the customer that is negotiated and determined based on various factors. The credit is then available to absorb the per transaction fees that are assessed on the customer's deposit account activity for the month. Any amount of the transactional fees in excess of the earnings credit is recognized as revenue in that month.

Interchange Fees

The Company earns interchange revenue from its issuance of credit and debit cards granted through its membership in various card payment networks. The Company provides credit cards and debit cards to its customers which are authorized and settled through these payment networks, and in exchange, the Company earns revenue as determined by each payment network's interchange program. The revenue is recognized concurrently with the settlement of card transactions within each network.

ATM Fees

The Company deploys automated teller machines (ATMs) as part of its overall branch network. Certain transactions performed at the ATMs require customers to acknowledge and pay a fee for the requested service. Certain ATM fees are disclosed in the deposit account agreement fee schedules, whereas those assessed to non-Rockland Trust deposit holders are solely determined during the transaction at the machine.

The ATM fee is a fixed dollar per transaction amount, and as such, is recognized concurrently with the overall daily processing and settlement of the ATM activity.

Investment Management - Wealth Management and Advisory Services

The Company offers investment management and trust services to individuals, institutions, small businesses and charitable institutions. Each investment management product is governed by its own contract along with a separate identifiable fee schedule unique to that product. The Company also offers additional services, such as estate settlement, financial planning, tax services and other special services quoted at the client's request.

The asset management and/or custody fees are based upon a percentage of the monthly valuation of the principal assets in the customer's account, whereas fees for additional or special services are fixed in nature and are charged as services are rendered. As the fees are dependent on assets under management, which are susceptible to market factors outside of the Company's control, this variable consideration is constrained and therefore no revenue is estimated at contract initiation. As such, all revenue is recognized in correlation to the monthly management fee determinations or as transactional services are provided. Due to the fact that payments are primarily made subsequent to the valuation period, the Company records a receivable for revenue earned but not received. The following table provides the amount of investment management revenue earned but not received as of the periods indicated:
 June 30, 2019 December 31, 2018
 (Dollars in thousands)
Receivables, included in other assets$1,964
 $1,893
 September 30, 2019 December 31, 2018
 (Dollars in thousands)
Receivables, included in other assets$2,124
 $1,893


Investment Management - Retail Investments and Insurance Revenue

The Company offers the sale of mutual fund shares, unit investment trust shares, general securities, fixed and variable annuities and life insurance products through registered representatives who are both employed by the Company and licensed and contracted with various broker general agents to offer these products to the Company’s customer base. As such, the Company performs these services as an agent and earns a fixed commission on the sales of these products and services. To a lesser degree, production bonus commissions can also be earned based upon the Company meeting certain volume thresholds.


In general, the Company recognizes commission revenue at the point of sale, and for certain insurance products, may also earn and recognize annual residual commissions commensurate with annual premiums being paid.

Merchant Processing Income
    
The Company refers customers to third party merchant processing partners in exchange for commission and fee income. The income earned is comprised of multiple components, including a fixed referral fee per each referred customer, a rebate amount determined primarily as a percentage of net revenue earned by the third party from services provided to each referred customer, and overall production bonus commissions if certain new account production thresholds are met. Merchant processing income is recognized in conjunction with either completing the referral to earn the fixed fee amount or as the merchant activity is processed to derive the Company's rebate and/or production bonus amounts.
    
Other Noninterest Income

The Company earns various types of other noninterest income that fall within the scope of the new revenue recognition rules, and have been aggregated into one general revenue stream in the table noted above. This amount includes, but is not limited to, the following types of revenue with customers:

Safe Deposit Rent

The Company rents out the use of safe deposit boxes to its customers, which can be accessed when the bank is open for business. The safe deposit box rental fee is paid upfront and is recognized as revenue ratably over the annual term of the contract.

1031 Exchange Fee Revenue

The Company provides like-kind exchange services pursuant to Section 1031 of the Internal Revenue Code. Fee income is recognized in conjunction with completing the exchange transactions.

Foreign Currency

The Company earns fee income associated with various transactions related to foreign currency product offerings, including foreign currency bank notes and drafts and foreign currency wires. The majority of this income is derived from commissions earned related to customers executing the above mentioned foreign currency transactions through arrangements with third party correspondents.
 

NOTE 13 - COMPREHENSIVE INCOME (LOSS)
The following tables present a reconciliation of the changes in the components of other comprehensive income (loss) for the dates indicated, including the amount of income tax (expense) benefit allocated to each component of other comprehensive income (loss):
Three Months Ended
June 30, 2019		 Six Months Ended
June 30, 2019		Three Months Ended
September 30, 2019		 Nine Months Ended
September 30, 2019
Pre Tax
Amount		 Tax (Expense)
Benefit		 After Tax
Amount		 Pre Tax
Amount		 Tax (Expense)
Benefit		 After Tax
Amount		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$5,663
 $(1,269) $4,394
 $11,841
 $(2,718) $9,123
$2,858
 $(683) $2,175
 $14,699
 $(3,401) $11,298
Less: net security losses reclassified into other noninterest expense(1,462) 411
 (1,051) (1,462) 411
 (1,051)—
 —
 —
 (1,462) 411
 (1,051)
Net change in fair value of securities available for sale7,125
 (1,680) 5,445
 13,303
 (3,129) 10,174
2,858
 (683) 2,175
 16,161
 (3,812) 12,349
                      
Change in fair value of cash flow hedges12,349
 (3,476) 8,873
 17,345
 (4,882) 12,463
4,568
 (1,285) 3,283
 21,913
 (6,167) 15,746
Less: net cash flow hedge gains reclassified into interest income or interest expense394
 (111) 283
 818
 (230) 588
352
 (99) 253
 1,170
 (329) 841
Net change in fair value of cash flow hedges11,955
 (3,365) 8,590
 16,527
 (4,652) 11,875
4,216
 (1,186) 3,030
 20,743
 (5,838) 14,905
                      
Net unamortized loss related to defined benefit pension and other postretirement adjustments arising during the period(11) 3
 (8) (22) 6
 (16)(11) 3
 (8) (33) 9
 (24)
Amortization of net actuarial gains(2) —
 (2) (4) 1
 (3)(2) 1
 (1) (6) 2
 (4)
Amortization of net prior service costs69
 (19) 50
 138
 (39) 99
69
 (19) 50
 207
 (58) 149
Net change in other comprehensive income for defined benefit postretirement plans (1)56
 (16) 40
 112
 (32) 80
56
 (15) 41
 168
 (47) 121
Total other comprehensive income$19,136
 $(5,061) $14,075
 $29,942
 $(7,813) $22,129
$7,130
 $(1,884) $5,246
 $37,072
 $(9,697) $27,375

Three Months Ended
June 30, 2018		 Six Months Ended
June 30, 2018		Three Months Ended
September 30, 2018		 Nine Months Ended
September 30, 2018
Pre Tax
Amount		 Tax (Expense)
Benefit		 After Tax
Amount		 Pre Tax
Amount		 Tax (Expense)
Benefit		 After Tax
Amount		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$(2,533) $609
 $(1,924) $(9,773) $2,381
 $(7,392)$(2,988) $726
 $(2,262) $(12,761) $3,107
 $(9,654)
Less: net security gains reclassified into other noninterest income (expense)—
 —
 —
 —
 —
 —
—
 —
 —
 —
 —
 —
Net change in fair value of securities available for sale(2,533) 609
 (1,924) (9,773) 2,381
 (7,392)(2,988) 726
 (2,262) (12,761) 3,107
 (9,654)
                      
Change in fair value of cash flow hedges10
 (2) 8
 396
 (108) 288
(296) 83
 (213) 100
 (25) 75
Less: net cash flow hedge gains reclassified into interest income or interest expense167
 (47) 120
 257
 (72) 185
268
 (76) 192
 525
 (148) 377
Net change in fair value of cash flow hedges(157) 45
 (112) 139
 (36) 103
(564) 159
 (405) (425) 123
 (302)
                      
Amortization of net actuarial losses93
 (27) 66
 187
 (53) 134
94
 (26) 68
 281
 (79) 202
Amortization of net prior service costs69
 (18) 51
 138
 (38) 100
69
 (20) 49
 207
 (58) 149
Net change in other comprehensive income for defined benefit postretirement plans (1)162
 (45) 117
 325
 (91) 234
163
 (46) 117
 488
 (137) 351
Total other comprehensive loss$(2,528) $609
 $(1,919) $(9,309) $2,254
 $(7,055)$(3,389) $839
 $(2,550) $(12,698) $3,093
 $(9,605)

(1) 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, 2018, filed with the Securities and Exchange Commission.

Effective January 1, 2018, the Company elected to reclassify certain tax effects from accumulated other comprehensive income to retained earnings, related to items that were stranded in other comprehensive income as a result of the Tax Act. A description of the other income tax effects that were reclassified as a result of the Tax Act are listed in the table below.

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 Gain (Loss) on Cash Flow Hedge Deferred Gain on Hedge Transactions Defined Benefit Postretirement Plans Accumulated Other Comprehensive Income (Loss)Unrealized Gain on Securities Unrealized Gain (Loss) on Cash Flow Hedge Deferred Gain on Hedge Transactions Defined Benefit Postretirement Plans Accumulated Other Comprehensive Income (Loss)
(Dollars in thousands)(Dollars in thousands)
20192019
Beginning balance: January 1, 2019$(5,947) $6,148
 $—
 $(1,374) $(1,173)$(5,947) $6,148
 $—
 $(1,374) $(1,173)
Net change in other comprehensive income (loss)10,174
 11,875
 —
 80
 22,129
12,349
 14,905
 —
 121
 27,375
Ending balance: June 30, 2019$4,227
 $18,023
 $—
 $(1,294) $20,956
Ending balance: September 30, 2019$6,402
 $21,053
 $—
 $(1,253) $26,202
20182018
Beginning balance: January 1, 2018$(504) $948
 $137
 $(2,412) $(1,831)$(504) $948
 $137
 $(2,412) $(1,831)
Opening balance reclassification(111) 205
 29
 (520) (397)(111) 205
 29
 (520) (397)
Cumulative effect accounting adjustment(831) —
 —
 —
 (831)(831) —
 —
 —
 (831)
Net change in other comprehensive income (loss)(7,392) 191
 (88) 234
 (7,055)(9,654) (170) (132) 351
 (9,605)
Ending balance: June 30, 2018$(8,838) $1,344
 $78
 $(2,698) $(10,114)
Ending balance: September 30, 2018$(11,100) $983
 $34
 $(2,581) $(12,664)




NOTE 14 - LEASES

The Company adopted the new lease accounting standard ("the lease standard") under Accounting Standards Codification Topic 842 ("ASC 842") using the modified retrospective transition method with an effective date as of January 1, 2019. Therefore, periods prior to to that date were not restated, and are not presented below. The Company elected the package of practical expedients, which permits the Company not to reassess prior conclusions about lease identifications, lease classification and initial direct costs. The Company has elected the short-term lease recognition exemption for all leases that qualify. The Company did not elect to apply the hindsight practical expedient pertaining to using hindsight knowledge as of the effective date when determining lease terms and impairment.

The Company leases office space, space for ATM locations and certain branch locations under noncancelable operating leases. As of JuneSeptember 30, 2019, the Company has entered into 92 noncancelable operating lease agreements. Several of the Company's leases for office space, space for ATM locations and certain branch locations contain renewal options to extend lease terms for a period of 1 to 10 years. The Company makes the decision on whether or not to renew an option to extend a lease by considering various factors. The Company will recognize an adjustment to its ROU asset and lease liability when lease agreements are amended and executed. The discount rate used in determining the present value of lease payments is based on the Company's incremental borrowing rate for borrowings with terms similar to each lease at commencement date. The Company has no financing leases outstanding and no leases with residual value guarantees. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes, and insurance are not included in the measurement of the lease liability since they are generally able to be segregated.

As of JuneSeptember 30, 2019, the Company had two leases on branch locations where the location is subleased from a non-related party, and one1 ATM location lease with a non-employee related party. The future lease payments under these leasesthis lease do not have a material effect on the Company's financial position or result of operations. The Company does not have any material sub-lease agreements.
The Company's right-of-use asset related to operating leases was $51.5$51.8 million at JuneSeptember 30, 2019 and is recognized in the Company's Consolidated Balance Sheet in other assets.

The following table provides information related to the Company's lease cost.
Three Months Ended Six Months Ended
June 30, 2019Three Months Ended Nine Months Ended
(Dollars in thousands)September 30, 2019
   (Dollars in thousands)
Operating lease cost$2,825 $4,936$2,881 $7,817
Short-term lease cost4
 43
39
 82
Variable lease cost—
 —
—
 —
Total lease cost$2,829 $4,979$2,920 $7,899


As of JuneSeptember 30, 2019, the weighted average remaining lease term for operating leases was 6.996.88 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.99%2.91%.



The following table sets forth the undiscounted cash flows of base rent related to operating leases outstanding at JuneSeptember 30, 2019 with payments scheduled over the next five years and thereafter, including a reconciliation to the operating lease liability recognized in the Company's Consolidated Balance Sheet in other liabilities.
(Dollars in thousands)
 (Dollars in thousands)
Remainder of 2019$5,616
$2,845
202010,569
10,879
20219,487
9,986
20228,402
8,904
20236,396
6,889
Thereafter18,799
19,860
Total minimum lease payments$59,269
59,363
Less: amount representing interest6,162
5,922
Present value of future minimum lease payments$53,107
$53,441
 


NOTE 15 - COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company enters into various transactions to meet the financing needs of its customers, which, in accordance with GAAP, are not included in its consolidated balance sheets. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of these commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding.
Standby letters of credit are written conditional commitments issued to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment were funded, the Company would be entitled to seek recovery from the customer. The Company’s policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.
The fees collected in connection with the issuance of standby letters of credit are representative of the fair value of the Company's obligation undertaken in issuing the guarantee. In accordance with applicable accounting standards related to guarantees, fees collected in connection with the issuance of standby letters of credit are deferred. The fees are then recognized in income proportionately over the life of the standby letter of credit agreement. The deferred standby letter of credit fees represent the fair value of the Company's potential obligations under the standby letter of credit guarantees.
The following table summarizes the above financial instruments at the dates indicated:
June 30, 2019 December 31, 2018September 30, 2019 December 31, 2018
(Dollars in thousands)(Dollars in thousands)
Commitments to extend credit$3,156,061
 $2,639,689
$3,113,931
 $2,639,689
Standby letters of credit23,091
 16,708
22,943
 16,708
Deferred standby letter of credit fees180
 122
197
 122

Other Contingencies
At JuneSeptember 30, 2019, Rockland Trust was involved in pending lawsuits that arose in the ordinary course of business. Management has reviewed these pending lawsuits with legal counsel and has taken into consideration the view of counsel as to their outcome.
In the opinion of management, the final disposition of pending lawsuits is not expected to have a material adverse effect on the Company’s financial position or results of operations.

The Bank is required to maintain certain reserve requirements of vault cash and/or deposits with the Federal Reserve Bank of Boston. The reserve requirement was $124.4$48.7 million and $53.5 million at JuneSeptember 30, 2019 and December 31, 2018, respectively.


NOTE 16 - LOW INCOME HOUSING PROJECT INVESTMENTS
The Company has invested in low income housing projects that generate Low Income Housing Tax Credits (“LIHTC”) which provide the Company with tax credits and operating loss tax benefits over a period of approximately 15 years. None of the original investment is expected to be repaid.

The following table presents certain information related to the Company's investments in low income housing projects as of the dates indicated:
June 30
2019		 December 31
2018		September 30
2019		 December 31
2018
(Dollars in thousands)(Dollars in thousands)
Original investment value$59,750
 $50,232
$75,471
 $50,232
Current recorded investment39,240
 33,681
53,618
 33,681
Unfunded liability obligation7,811
 3,935
20,667
 3,935
Tax credits and benefits6,727
(1)5,407
6,700
(1)5,407
Amortization of investments5,079
(2)4,377
5,071
(2)4,377
Net income tax benefit1,648
(3)1,030
1,628
(3)1,030
(1) This amount reflects anticipated tax credits and tax benefits for the full year ended December 31, 2019.
(2) The amortization amount reduces the tax credits and benefits anticipated for the full year ended December 31, 2019.
(3) This amount represents the net tax benefit expected to be realized for the full year ended December 31, 2019 in determining the Company's effective tax rate.


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, 2018, filed with the Securities and Exchange Commission.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, in the Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by forward-looking terminology such as “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements, in addition to those risk factors listed under the “Risk Factors” section of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018, include, but are not limited to:
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;
adverse changes or volatility in the local real estate market;
adverse changes in asset quality including an unanticipated credit deterioration in our loan portfolio including those related to one or more large commercial relationships;
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;

inability to raise capital on terms that are favorable;
additional regulatory oversight and additional costs associated with the Company's increase in assets to over $10 billion;

changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
higher than expected tax expense, resulting from failure to comply with general tax laws, changes in tax laws, or failure to comply with requirements of the federal New Markets Tax Credit program;
changes in market interest rates for interest earning assets and/or interest bearing liabilities and changes related to the phase-out of LIBOR;the London Inter-Bank Offered Rate ("LIBOR");
increased competition in the Company’s market area;
unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather or other external events;
a deterioration in the conditions of the securities markets;
a deterioration of the credit rating for U.S. long-term sovereign debt;
inability to adapt to changes in information technology, including changes to industry accepted delivery models driven by a migration to the internet as a means of service delivery;
electronic fraudulent activity within the financial services industry, especially in the commercial banking sector;
adverse changes in consumer spending and savings habits;
the inability to realize expected synergies from merger transactions in the amounts or in the timeframes anticipated;
inability to retain customers and employees, including those acquired in the MNB and BHBrecent acquisitions;
the effect of laws and regulations regarding the financial services industry including, but not limited to, the Dodd-Frank Wall Street Reform and the Consumer Protection Act and regulatory uncertainty surrounding these laws and regulations;
changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) generally applicable to the Company’s business;
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;
cyber security attacks or intrusions that could adversely impact our businesses; and
other unexpected material adverse changes in our operations or earnings.

Except as required by law, the Company disclaims any intent or obligation to update publicly any such forward-looking statements, whether in response to new information, future events or otherwise. Any public statements or disclosures by the Company following this Quarterly Report on Form 10-Q which modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

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 in this Quarterly Report on Form 10-Q.
  Three Months Ended    Three Months Ended  
June 30,
2019		 March 31,
2019		 December 31,
2018		 September 30,
2018		 June 30,
2018		September 30
2019		 June 30
2019		 March 31
2019		 December 31
2018		 September 30
2018
(Dollars in thousands, except per share data)(Dollars in thousands, except per share data)
Financial condition data                  
Securities$1,213,253
 $1,083,126
 $1,075,223
 $1,011,577
 $1,002,921
$1,192,229
 $1,213,253
 $1,083,126
 $1,075,223
 $1,011,577
Loans8,950,787
 6,976,872
 6,906,194
 6,527,402
 6,479,271
8,913,501
 8,950,787
 6,976,872
 6,906,194
 6,527,402
Allowance for loan losses(65,960) (65,140) (64,293) (63,235) (62,557)(66,942) (65,960) (65,140) (64,293) (63,235)
Goodwill and other intangible assets537,896
 270,444
 271,355
 239,185
 239,724
535,869
 537,896
 270,444
 271,355
 239,185
Total assets11,603,199
 8,997,457
 8,851,592
 8,375,497
 8,381,002
11,538,639
 11,603,199
 8,997,457
 8,851,592
 8,375,497
Total deposits9,307,915
 7,463,602
 7,427,120
 6,976,239
 7,013,490
9,326,091
 9,307,915
 7,463,602
 7,427,120
 6,976,239
Total borrowings499,702
 308,040
 258,707
 299,738
 300,792
292,791
 499,702
 308,040
 258,707
 299,738
Stockholders’ equity1,636,003
 1,104,538
 1,073,490
 998,305
 977,065
1,682,324
 1,636,003
 1,104,538
 1,073,490
 998,305
Nonperforming loans45,294
 43,331
 45,418
 45,394
 47,112
45,702
 45,294
 43,331
 45,418
 45,394
Nonperforming assets48,183
 43,331
 45,418
 45,584
 47,357
48,202
 48,183
 43,331
 45,418
 45,584
Income statement         
Interest income$119,624
 $122,144
 $91,543
 $87,910
 $82,875

Income statement         
Interest income$122,144
 $91,543
 $87,910
 $82,875
 $79,167
Interest expense16,125
 9,018
 7,618
 6,641
 5,999
15,026
 16,125
 9,018
 7,618
 6,641
Net interest income106,019
 82,525
 80,292
 76,234
 73,168
104,598
 106,019
 82,525
 80,292
 76,234
Provision for loan losses1,000
 1,000
 1,200
 1,075
 2,000
—
 1,000
 1,000
 1,200
 1,075
Noninterest income28,648
 21,533
 23,491
 23,264
 21,887
31,816
 28,648
 21,533
 23,491
 23,264
Noninterest expenses93,032
 56,311
 64,391
 55,439
 52,688
67,533
 93,032
 56,311
 64,391
 55,439
Net income30,628
 35,225
 29,934
 33,015
 31,118
51,845
 30,628
 35,225
 29,934
 33,015
Per share data                  
Net income—basic$0.89
 $1.25
 $1.08
 $1.20
 $1.13
$1.51
 $0.89
 $1.25
 $1.08
 $1.20
Net income—diluted0.89
 1.25
 1.07
 1.20
 1.13
1.51
 0.89
 1.25
 1.07
 1.20
Cash dividends declared0.44
 0.44
 0.38
 0.38
 0.38
0.44
 0.44
 0.44
 0.38
 0.38
Book value per share47.67
 39.26
 38.23
 36.25
 35.49
48.95
 47.67
 39.26
 38.23
 36.25
Tangible book value per share (1)32.00
 29.64
 28.57
 27.56
 26.78
33.36
 32.00
 29.64
 28.57
 27.56
Performance ratios                  
Return on average assets1.06% 1.62% 1.38% 1.57% 1.52%1.78% 1.06% 1.62% 1.38% 1.57%
Return on average common equity7.59% 13.10% 11.49% 13.19% 12.85%12.33% 7.59% 13.10% 11.49% 13.19%
Net interest margin (on a fully tax equivalent basis)4.09% 4.14% 4.05% 3.94% 3.89%4.03% 4.09% 4.14% 4.05% 3.94%
Equity to assets14.10% 12.28% 12.13% 11.92% 11.66%14.58% 14.10% 12.28% 12.13% 11.92%
Dividend payout ratio40.42% 30.29% 34.96% 31.69% 33.60%29.13% 40.42% 30.29% 34.96% 31.69%
Asset Quality Ratios                  
Nonperforming loans as a percent of gross loans0.51% 0.62% 0.66% 0.70% 0.73%0.51% 0.51% 0.62% 0.66% 0.70%
Nonperforming assets as a percent of total assets0.42% 0.48% 0.51% 0.54% 0.57%0.42% 0.42% 0.48% 0.51% 0.54%
Allowance for loan losses as a percent of total loans0.74% 0.93% 0.93% 0.97% 0.97%0.75% 0.74% 0.93% 0.93% 0.97%
Allowance for loan losses as a percent of nonperforming loans145.63% 150.33% 141.56% 139.30% 132.78%146.47% 145.63% 150.33% 141.56% 139.30%
Capital ratios                  
Tier 1 leverage capital ratio10.45% 10.64% 10.69% 10.49% 10.39%10.83% 10.45% 10.64% 10.69% 10.49%
Common equity tier 1 capital ratio12.08% 12.09% 11.92% 11.98% 11.64%12.52% 12.08% 12.09% 11.92% 11.98%
Tier 1 risk-based capital ratio12.75% 13.11% 12.99% 13.07% 12.73%13.19% 12.75% 13.11% 12.99% 13.07%
Total risk-based capital ratio14.42% 15.28% 14.45% 14.58% 14.24%14.88% 14.42% 15.28% 14.45% 14.58%

(1)
Represents a non-GAAP measure. For reconciliation to GAAP book value per share, see Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Level Overview - Non-GAAP Measures" below.



Executive Level Overview

Management evaluates the Company's operating results and financial condition using measures that include net income, earnings per share, return on assets and equity, return on tangible common equity, net interest margin, tangible book value per share, asset quality indicators, and many others. These metrics are used by management to make key decisions regarding the Company's balance sheet, liquidity, interest rate sensitivity, and capital resources and assist with identifying opportunities for improving the Company's financial position or operating results. The Company is focused on organic growth, but will also consider acquisition opportunities that can provide a satisfactory financial return, including the recent acquisition of MNB Bancorp ("MNB") in the fourth quarter of 2018 and Blue Hills Bancorp ("BHB") in the second quarter of 2019.

Interest-Earning Assets

Management’s asset strategy emphasizes loan growth, primarily in the commercial and home equity portfolios. The results depicted in the following table reflect an overall increase in total loansthe trend of the Company's interest-earning assets over the past five quarters due to the results of that strategy, as well as the impact from acquisitions.quarters. For the secondthird quarter of 2019, the Company'sdecrease in interest-earning assets was due to increased payoff activity within the loan growth was driven primarily by the BHB acquisition.portfolio.
chart-8b6a4fe7e7065468919.jpgchart-35206d7ec33e5736b12.jpg

Management strives to be disciplined about loan pricing and considers interest rate sensitivity when generating loan assets. In addition, management takes a disciplined approach to credit underwriting, seeking to avoid undue credit risk and loan losses.

 

Funding and Net Interest Margin

The Company's overall sources of funding reflect strong business and retail deposit growth with a management emphasis over core deposit growth to fund loans. The following chart shows the sources of funding and the percentage of core deposits to total deposits for the trailing five quarters, with the second quarterand third quarters of 2019 results reflecting the increased percentage of time deposits as a result of the BHB acquisition:

chart-a6afb0f0540f523c962.jpgchart-b72f24fbbdc5557386d.jpg

As of JuneSeptember 30, 2019, core deposits comprised 82.93%82.49% of total deposits. The cost of deposits for the 2019 secondthird quarter was 0.49%0.50%, reflecting an increase of 101 basis pointspoint when compared to the firstsecond quarter of 2019, and the2019. The Company's net interest margin was 4.09%4.03% for the quarter ended JuneSeptember 30, 2019, a fivesix basis point decrease from the firstsecond quarter of 2019, both reflective of
which was driven primarily by lower asset yields linked to the higher cost funding base assumed in the BHB acquisition.July and September Federal Reserve Rate cuts.

chart-f4a5d03907a450c2acb.jpg


chart-dd1866ed57845ea89bf.jpg

Noninterest Income

Management continues to focus on noninterest income, which is primarily comprised of deposit account fees, interchange and ATM fees, investment management fees and mortgage banking income. The following chart shows the components of noninterest income over the past five quarters:
chart-b99772a97d3659569a9.jpgchart-8212f1bd80dd5683b1a.jpg


Expense Control

Management seeks to take a balanced approach to noninterest expense control by monitoring ongoing operating expenses while making needed capital expenditures and prudently investing in growth initiatives. The Company’s primary expenses arise from Rockland Trust’s employee salaries and benefits, as well as expenses associated with buildings and equipment. The following chart depicts the Company's efficiency ratio on a GAAP basis (calculated by dividing noninterest expense by the sum of noninterest income and net interest income), as well as the Company's efficiency ratio on a non-GAAP operating basis, if applicable (calculated by dividing noninterest expense, excluding certain noncore items, by the sum of noninterest income, excluding certain noncore items, and net interest income), over the past five quarters:

chart-f95533417057519fbe1.jpgchart-230b4aa22978535ead0.jpg
*See "Non-GAAP Measures" below for a reconciliation to GAAP financial measures.


Tax Effectiveness

The Company participates in federal and state tax credit programs designed to promote economic development, affordable housing, and job creation. The Company continues to participate in the federal New Markets Tax Credit program and has also made low-income housing tax credit investments. The Company has also established security corporation subsidiaries and, through its subsidiaries, purchased tax-exempt bonds. Federal and state tax credit program participation and other tax strategies help the Company operate in a more tax effective manner and sometimes also create a competitive advantage for Rockland Trust and its community development subsidiaries. During the secondthird quarter of 2019, the Company’s effective tax rate was 24.63%24.73%, compared to 24.65%24.63% at March 31,June 30, 2019.


Capital

The Company's approach with respect to revenue, expense, and tax effectiveness is designed to promote long-term earnings growth. Strong earnings retention has contributed to capital growth, both on an absolute level and per share basis. The following chart shows the Company's book value and tangible book value per share over the past five quarters (see "Non-GAAP Measures" below for a reconciliation of non-GAAP measures):

chart-05017fc504365fb887a.jpgchart-b36a9aad129651deb95.jpg
*See "Non-GAAP Measures" below for a reconciliation to GAAP financial measures.

The Company's growth in capital enables the payment of cash dividends. The Company declared quarterly cash dividends of $0.44 per share for the first twothree quarters of 2019, representing an increase of 15.8% from the 2018 quarterly dividend rate of $0.38 per share.

SecondThird Quarter 2019 Results

Net income for the secondthird quarter of 2019 was $30.6$51.8 million, or $0.89$1.51 on a diluted earnings per share basis, and decreased 1.6%increased 57.0% and 21.2%25.8%, respectively, as compared to $31.1$33.0 million, or $1.13$1.20 on a diluted earnings per share basis, for the prior year secondthird quarter. The secondthird quarter of 2019 included gain on the sale of loans and merger and acquisition costs which the Company deems to be noncore. Excluding thesethe gain on the sale of loans and merger and acquisition expenses, secondthird quarter 2019 operating net income was $48.8$51.7 million compared to operating net income from the secondthird quarter of 2018 of $31.4$34.9 million, an increase of 55.2%47.9%. See "Non-GAAP Measures" below for a reconciliation of non-GAAP measures.

2019 Outlook

During the Company’s secondthird quarter 2019 earnings call, the Company's Chief Financial Officer stated that he anticipates the following for the remainderfourth quarter of 2019:

With a continued focus on Company liquidity, along with pricing competitionAssuming minimal changes in the competitive and additional expected runoff on the acquired portfolios, overalleconomic landscape, net loan growth is anticipatedexpected to be in theremain relatively flat to low single digit range for the restremainder of the year;

Deposits are expected to grow modestly in the low single digit range for the rest of the year;fourth quarter;
Assuming no Federal Reserve rate changes in the fourth quarter and a normalized level of loan accretion, the net interest margin is anticipatedexpected to be in the high 3.9%low 3.90%'s range assuming normalizedfor the fourth quarter.  In addition, based upon current assessments, management anticipates that any future 25 basis point Federal Reserve rate cut may further reduce the net interest margin prospectively by approximately 6 basis points; 
Excluding the third quarter gain on sale of loans, noninterest income in the fourth quarter is expected to decrease when compared to the third quarter, the degree to which is contingent upon market demand for mortgage banking and loan accretion levels. However, the impact of loan payoff activity can provide for upside potential in any given quarter;level derivatives;
Non-interest incomeExcluding merger related expenses incurred in the third quarter, is expected to remain relatively consistent with second quarter results as demand over mortgage banking is anticipated to remain strong into early fall, combined with decreases from non-recurring items realized in the second quarter being offset by an anticipated gain on the pending deleverage residential sale. With no anticipated non-recurring gains and mortgage demand expected to wane in the fourth quarter of 2019, non-interest income is anticipated to decrease in the mid-single digit range in the fourth quarter when compared to third quarter estimates;
With no further transitionary costs and full BHB cost save expectations to be realized in the third quarter, quarterly non-interestnoninterest expense is expected to decrease in the lowbe flat with third quarter levels;

Provision for loan loss levels should continue to mid-single digit range compared to operating second quarter results;
No near termreflect general allocations needed for organic loan growth, with no immediate significant credit concerns however, eventual deterioration of the loan portfolio is likely;noted;
Effective tax rate of approximately 25%.

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 and other noncore items shown in the tables that follow. There are items that impact the Company's results that management believes are unrelated to its core banking business such as merger and acquisition expenses and other items. Management, therefore, computes certain non-GAAP measures including net operating earnings and operating EPS, noninterest income on an operating basis and efficiency ratio on an operating basis, which exclude items management considers to be noncore. Management believes excluding these items facilitates greater visibility into the Company’s core banking business and underlying trends that may, to some extent, be obscured by inclusion of such items.
Management also supplements its evaluation of financial performance with analyses of tangible book value per share (which is computed by dividing stockholders' equity less goodwill and identifiable intangible assets, or "tangible common equity", by common shares outstanding) and the tangible common equity ratio (which is computed by dividing tangible common equity by "tangible assets", defined as total assets less goodwill and other intangibles). The Company has included information on tangible book value per share and the tangible common equity ratio because management believes that investors may find it useful to have access to the same analytical tools used by management.  As a result of merger and acquisition activity, the Company has recognized goodwill and other intangible assets in conjunction with business combination accounting principles.  Excluding the impact of goodwill and other intangibles in measuring asset and capital values for the ratios provided, along with other bank standard capital ratios, provides a framework to compare the capital adequacy of the Company to other companies in the financial services industry.
These non-GAAP measures should not be viewed as a substitute for operating results and other financial measures determined in accordance with GAAP. An item which management deems to be noncore and excludes when computing these non-GAAP measures can be of substantial importance to the Company’s results for any particular quarter or year. The Company’s non-GAAP performance measures, including operating earnings, operating EPS, operating return on average assets, operating return on average equity, tangible book value per share and the tangible common equity ratio, are not necessarily comparable to non-GAAP performance measures which may be presented by other companies.
    

The following tables summarize adjustments for noncore items for the time periods indicated below and reconcile non-GAAP measures:
Three Months Ended June 30Three Months Ended September 30
Net Income 
Diluted
Earnings Per Share
Net Income 
Diluted
Earnings Per Share
2019 2018 2019 20182019 2018 2019 2018
(Dollars in thousands, except per share data)(Dollars in thousands, except per share data)
Net income available to common shareholders (GAAP)$30,628
 $31,118
 $0.89
 $1.13
$51,845
 $33,015
 $1.51
 $1.20
Non-GAAP adjustments              
Noninterest income components       
Gain on sale of loans951
 —
 0.03
 —
Noninterest expense components              
Merger and acquisition expenses24,696
 434
 0.72
 0.01
705
 2,688
 0.02
 0.10
Total impact of noncore items24,696
 434
 0.72
 0.01
(246) 2,688
 (0.01) 0.10
Less -net tax benefit associated with noncore items (1)(6,560) (122) (0.19) —
Net tax expense (benefit) associated with noncore items (1)72
 (756) —
 (0.03)
Noncore items, net of tax$18,136
 $312
 $0.53
 $0.01
$(174) $1,932
 $(0.01) $0.07
Operating net income (Non-GAAP)$48,764
 $31,430
 $1.42
 $1.14
$51,671
 $34,947
 $1.50
 $1.27
              
Six Months Ended June 30Nine Months Ended September 30
Net Income 
Diluted
Earnings Per Share
Net Income 
Diluted
Earnings Per Share
2019 2018 2019 20182019 2018 2019 2018
(Dollars in thousands, except per share data)(Dollars in thousands, except per share data)
Net income available to common shareholders (GAAP)$65,853
 $58,673
 $2.11
 $2.13
$117,698
 $91,688
 $3.64
 $3.32
Non-GAAP adjustments              
Noninterest income components       
Gain on sale of loans951
 —
 0.03
 —
Noninterest expense components      

      

Merger and acquisition expenses25,728
 434
 0.82
 0.01
26,433
 3,122
 0.82
 0.12
Total impact of noncore items25,728
 434
 0.82
 0.01
25,482
 3,122
 0.79
 0.12
Less -net tax benefit associated with noncore items (1)(6,758) (122) (0.22) —
Net tax expense (benefit) associated with noncore items (1)(6,686) (878) (0.21) (0.03)
Add - adjustment for tax effect of previously incurred merger and acquisition expenses650
 —
 0.02
 —
650
 —
 0.02
 —
Noncore items, net of tax$19,620
 $312
 $0.62
 $0.01
$19,446
 $2,244
 $0.60
 $0.09
Operating net income (Non-GAAP)$85,473
 $58,985
 $2.73
 $2.14
$137,144
 $93,932
 $4.24
 $3.41
(1)The net tax benefit associated with noncore items is determined by assessing whether each noncore item is included or excluded from net taxable income and applying the Company's combined marginal tax rate to only those items included in net taxable income.

Three Months Ended Three Months Ended 
June 30
2019		 March 31
2019		 December 31
2018		 September 30
2018		 June 30
2018		  September 30
2019		 June 30
2019		 March 31
2019		 December 31
2018		 September 30
2018		  
(Dollars in thousands) (Dollars in thousands) 
Net interest income (GAAP)$106,019
 $82,525
 $80,292
 $76,234
 $73,168
 (a)$104,598
 $106,019
 $82,525
 $80,292
 $76,234
 (a)
                    
Noninterest income (GAAP)$28,648
 $21,533
 $23,491
 $23,264
 $21,887
 (b)$31,816
 $28,648
 $21,533
 $23,491
 $23,264
 (b)
Noninterest income on an operating basis (Non-GAAP)*$28,648
 $21,533
 $23,491
 $23,264
 $21,887
 (c)
Less:          
Gain on sale of loans951
 —
 —
 —
 —
 
Noninterest income on an operating basis (Non-GAAP)$30,865
 $28,648
 $21,533
 $23,491
 $23,264
 (c)
                    
Noninterest expense (GAAP)$93,032
 $56,311
 $64,391
 $55,439
 $52,688
 (d)$67,533
 $93,032
 $56,311
 $64,391
 $55,439
 (d)
Less:                    
Merger and acquisition expense24,696
 1,032
 8,046
 2,688
 434
 705
 24,696
 1,032
 8,046
 2,688
 
Noninterest expense on an operating basis (Non-GAAP)$68,336
 $55,279
 $56,345
 $52,751
 $52,254
 (e)$66,828
 $68,336
 $55,279
 $56,345
 $52,751
 (e)
                    
Total revenue (GAAP)$134,667
 $104,058
 $103,783
 $99,498
 $95,055
 (a+b)$136,414
 $134,667
 $104,058
 $103,783
 $99,498
 (a+b)
Total operating revenue (Non-GAAP)*$134,667
 $104,058
 $103,783
 $99,498
 $95,055
 (a+c)$135,463
 $134,667
 $104,058
 $103,783
 $99,498
 (a+c)
                    
Ratios                    
Noninterest income as a % of revenue (GAAP based)21.27% 20.69% 22.63% 23.38% 23.03% (b/(a+b))23.32% 21.27% 20.69% 22.63% 23.38% (b/(a+b))
Noninterest income as a % of revenue on an operating basis (Non-GAAP)*21.27% 20.69% 22.63% 23.38% 23.03% (c/(a+c))22.78% 21.27% 20.69% 22.63% 23.38% (c/(a+c))
Efficiency ratio (GAAP based)69.08% 54.12% 62.04% 55.72% 55.43% (d/(a+b))49.51% 69.08% 54.12% 62.04% 55.72% (d/(a+b))
Efficiency ratio on an operating basis (Non-GAAP)50.74% 53.12% 54.29% 53.02% 54.97% (e/(a+c))49.33% 50.74% 53.12% 54.29% 53.02% (e/(a+c))
* There were no adjustments for the periods presented.

The following table summarizes the calculation of the Company's tangible common equity ratio and tangible book value per share for the periods indicated:
June 30,
2019		 March 31
2019		 December 31
2018		 September 30
2018		 June 30,
2018		 September 30
2019		 June 30
2019		 March 31
2019		 December 31
2018		 September 30
2018		 
(Dollars in thousands, except per share data) (Dollars in thousands, except per share data) 
Tangible common equity                    
Stockholders' equity (GAAP)$1,636,003
 $1,104,538
 $1,073,490
 $998,305
 $977,065
(a)$1,682,324
 $1,636,003
 $1,104,538
 $1,073,490
 $998,305
(a)
Less: Goodwill and other intangibles537,896
 270,444
 271,355
 239,185
 239,724
 535,869
 537,896
 270,444
 271,355
 239,185
 
Tangible common equity (Non-GAAP)1,098,107
 834,094
 802,135
 759,120
 737,341
(b)1,146,455
 1,098,107
 834,094
 802,135
 759,120
(b)
Tangible assets        
         
 
Assets (GAAP)11,603,199
 8,997,457
 8,851,592
 8,375,498
 8,381,002
(c)11,538,639
 11,603,199
 8,997,457
 8,851,592
 8,375,498
(c)
Less: Goodwill and other intangibles537,896
 270,444
 271,355
 239,185
 239,724
 535,869
 537,896
 270,444
 271,355
 239,185
 
Tangible assets (Non-GAAP)$11,065,303
 $8,727,013
 $8,580,237
 $8,136,313
 $8,141,278
(d)$11,002,770
 $11,065,303
 $8,727,013
 $8,580,237
 $8,136,313
(d)
Common shares34,321,061

28,137,504

28,080,408
 27,540,843
 27,532,524
(e)34,366,781

34,321,061

28,137,504
 28,080,408
 27,540,843
(e)
                    
Common equity to assets ratio (GAAP)14.10% 12.28% 12.13% 11.92% 11.66%(a/c)14.58% 14.10% 12.28% 12.13% 11.92%(a/c)
Tangible common equity to tangible assets ratio (Non-GAAP)9.92% 9.56% 9.35% 9.33% 9.06%(b/d)10.42% 9.92% 9.56% 9.35% 9.33%(b/d)
Book value per share (GAAP)$47.67
 $39.26
 $38.23
 $36.25
 $35.49
(a/e)$48.95
 $47.67
 $39.26
 $38.23
 $36.25
(a/e)
Tangible book value per share (Non-GAAP)$32.00
 $29.64
 $28.57
 $27.56
 $26.78
(b/e)$33.36
 $32.00
 $29.64
 $28.57
 $27.56
(b/e)

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 most critical accounting policies are those which the Company’s financial condition depends upon, and which involve the most complex or subjective decisions or assessments.
There have been no material changes in critical accounting policies during the first sixnine months of 2019. Please refer to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for a complete listing of critical accounting policies.


FINANCIAL POSITION
Securities Portfolio The Company’s securities portfolio consists of trading securities, equity securities, securities available for sale, and securities which management intends to hold until maturity. Securities increased by $138.0$117.0 million, or 12.8%10.9%, at JuneSeptember 30, 2019 as compared to December 31, 2018, reflecting the $196.9 million in securities included in the BHB acquisition andas well as additional purchases of $51.6$73.5 million made during the sixnine month period, partiallyperiod. These increases were offset by paydowns on existing securities and the sale of approximately $47.3 million of acquired BHB mortgage backed securities. The ratio of securities to total assets was 10.46%10.33% and 12.15% at JuneSeptember 30, 2019 and December 31, 2018, respectively.
The Company monitors investment securities for the presence of other-than-temporary impairment (“OTTI”). For debt securities, the primary consideration in determining whether impairment is OTTI is whether or not the Bank expects to collect all contractual cash flows. Further details regarding the Company's analysis of potential OTTI can be found in Note 4 “Securities” within Condensed 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. During the sixnine months ended JuneSeptember 30, 2019 and 2018, the Company originated residential loans with the intention of selling them in the secondary market or to hold in the Company's residential portfolio. 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 losses during the three and sixnine month periods ended JuneSeptember 30, 2019 and JuneSeptember 30, 2018 related to these activities.mortgage repurchases.

The following table shows the total residential loans that were closed and whether the amounts were held in the portfolio or sold/held for sale in the secondary market during the periods indicated:
Table 1 - Closed Residential Real Estate Loans
Three Months Ended June 30 Six Months Ended June 30Three Months Ended September 30 Nine Months Ended September 30
2019 2018 2019 20182019 2018 2019 2018
(Dollars in thousands)(Dollars in thousands)
Held in portfolio$58,323
 $41,770
 $89,523
 $80,586
$43,098
 $52,125
 $133,111
 $132,711
Sold or held for sale in the secondary market179,705
 45,851
 218,563
 83,942
232,129
 58,320
 450,203
 142,262
Total closed loans$238,028
 $87,621
 $308,086
 $164,528
$275,227
 $110,445
 $583,314
 $274,973

The table below reflects additional information related to the loans which were sold during the periods indicated:

Table 2 - Residential Mortgage Loan Sales
Three Months Ended June 30 Six Months Ended June 30Three Months Ended September 30 Nine Months Ended September 30
2019 2018 2019 20182019 2018 2019 2018
(Dollars in thousands)(Dollars in thousands)
Sold with servicing rights released$125,186
 $40,242
 $164,894
 $79,138
$169,532
 $61,910
 $334,426
 $141,048
Sold with servicing rights retained23,636
 —
 23,636
 —
45,829
 —
 69,465
 —
Total loans sold$148,822
 $40,242
 $188,530
 $79,138
$215,361
 $61,910
 $403,891
 $141,048

When a loan is sold the Company may decide to also sell the servicing of sold loans for a servicing release premium, simultaneous with the sale of the loan, or the Company may have opt to sell the loan and retain the servicing. In the event of a sale with servicing rights retained, a 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 principal balance of loans serviced by the Bank on behalf of investors was $567.2$649.4 million, $240.2 million and $256.9$244.9 million at JuneSeptember 30, 2019, December 31, 2018, and JuneSeptember 30, 2018, respectively.
  
The following table shows the adjusted cost of the servicing rights associated with these loans and the changes for the periods indicated:

Table 3 - Mortgage Servicing Asset
Three Months Ended June 30 Six Months Ended June 30Three Months Ended September 30 Nine Months Ended September 30
2019 2018 2019 20182019 2018 2019 2018
(Dollars in thousands)(Dollars in thousands)
Balance at beginning of period$1,374
 $1,632
 $1,445
 $1,697
$4,587
 $1,559
 $1,445
 $1,697
Additions213
 —
 213
 —
419
 —
 632
 —
Acquired portfolio3,198
 —
 3,198
 —
—
 —
 3,198
 —
Amortization(197) (76) (268) (159)(215) (71) (483) (230)
Change in valuation allowance(1) 3
 (1) 21
(34) (10) (35) 11
Balance at end of period$4,587
 $1,559
 $4,587
 $1,559
$4,757
 $1,478
 $4,757
 $1,478
Forward sale loan commitments of mortgage loans, considered derivative instruments for accounting purposes, may be utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain 1-4 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, the Company utilizes both "mandatory delivery" and "best efforts" forward loan sale commitments. See Note 9, “Derivative and Hedging Activities” within Condensed Notes to Consolidated Financial Statements included in Item 1 hereof for more information on mortgage activity and mortgage related derivatives.
Loan Portfolio The Company’s loan portfolio increased by $2.0 billion during the first sixnine months of 2019. The overall increase and movementwas primarily the result of the loan portfolio balances were the net result of a variety of factors, including the addition of BHB loans acquired. Exclusive of the acquired a transfer of loans, to held for sale, expected runoff in certain BHB loan segments, and growth in legacy portfolios. Strongstrong organic growth in the commercial construction portfolio of 13.1%21.0% and the commercial and industrial portfolio of 4.4%5.3% was offset by decreases in all other commercial loan categories, as anticipated payoffs primarily within the acquired portfolios, outpaced new originations during the first sixnine months of 2019.

The following table summarizes loan growth/decline during the periods indicated:
Table 4 - Components of Loan Growth/(Decline)
 June 30
2019		 December 31
2018		 Blue Hills Acquisition Reclass to LHFS (1) Organic Growth/(Decline) Organic Growth/ (Decline) % September 30
2019		 December 31
2018		 Blue Hills Acquisition Loans Sold (1) Organic Growth/(Decline) Organic Growth/ (Decline) %
 (Dollars in thousands) (Dollars in thousands)
Commercial and industrial $1,400,924
 $1,093,629
 $259,592
 $—
 $47,703
 4.36 % $1,411,516
 $1,093,629
 $259,592
 $—
 $58,295
 5.33 %
Commercial real estate 4,058,066
 3,251,248
 838,018
 —
 (31,200) (0.96)% 4,000,487
 3,251,248
 838,018
 —
 (88,779) (2.73)%
Commercial construction 491,598
 365,165
 78,609
 —
 47,824
 13.10 % 520,585
 365,165
 78,609
 —
 76,811
 21.03 %
Small business 173,927
 164,676
 13,851
 —
 (4,600) (2.79)% 172,038
 164,676
 13,851
 —
 (6,489) (3.94)%
Total commercial 6,124,515
 4,874,718
 1,190,070
 —
 59,727
 1.23 % 6,104,626
 4,874,718
 1,190,070
 —
 39,838
 0.82 %
Residential real estate 1,655,182
 923,294
 807,154
 85,986
 10,720
 1.16 % 1,644,758
 923,294
 807,154
 67,170
 (18,520) (2.01)%
Home equity 1,144,499
 1,092,084
 64,299
 —
 (11,884) (1.09)% 1,137,109
 1,092,084
 64,299
 —
 (19,274) (1.76)%
Total consumer real estate 2,799,681
 2,015,378
 871,453
 85,986
 (1,164) (0.06)% 2,781,867
 2,015,378
 871,453
 67,170
 (37,794) (1.88)%
Total other consumer 26,591
 16,098
 12,191
 —
 (1,698) (10.55)% 27,008
 16,098
 12,191
 —
 (1,281) (7.96)%
Total loans $8,950,787
 $6,906,194
 $2,073,714
 $85,986
 $56,865
 0.82 % $8,913,501
 $6,906,194
 $2,073,714
 $67,170
 $763
 0.01 %
(1)At June 30,During the third quarter of 2019, the Company transferred $86.0sold $67.2 million of residential mortgage loans, as held for sale, primarily comprised of acquired BHB loans. The table above adjusts for the amounts transferredsold to arrive at the organic growth/(decline) prior tofor the transfer.period.

    
The Company's commercial loan portfolio is comprised primarily of commercial and industrial loans as well as commercial real estate loans. Management considers the Company’s commercial and industrial portfolio to be well-diversified with loans to various types of industries. The following pie chart shows the diversification of the commercial and industrial portfolio as of JuneSeptember 30, 2019:
chart-091ed51051425e0082a.jpgchart-ff7aa25e53dc535981f.jpg
(Dollars in thousands)(Dollars in thousands)
Average loan size$320
$323
Largest individual commercial and industrial loan outstanding$29,021
$26,615
Commercial and industrial nonperforming loans/commercial and industrial loans1.78%1.67%
The Company’s commercial real estate loan portfolio, inclusive of commercial construction, is the Company’s largest loan type concentration. The Company believes that 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, 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 loan portfolio as of JuneSeptember 30, 2019:

chart-b447f59cdbf150c0ba0.jpgchart-62380fc976d457b9b01.jpg
 
(Dollars in thousands)(Dollars in thousands)
Average loan size$1,019
$1,028
Largest individual commercial real estate mortgage outstanding$32,000
$32,000
Commercial real estate nonperforming loans/commercial real estate loans0.02%0.04%
Owner occupied commercial real estate loans/commercial real estate loans14.7%14.6%

In addition to the commercial portfolios, the Company also originates
The Company's consumer portfolio consists of both fixed-rate and adjustable-rate residential real estate loans as well as residential construction lending related to single-home residential development within the Company's market area. The Company 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 junior mortgage on the borrower's residence or second home. Additionally, the Company makes loans for a wide variety of other personal needs. Consumer loans primarily consist of installment loans and overdraft protections. The residential, home equity and other consumer portfolios totaled $2.8 billion at JuneSeptember 30, 2019.2019, as noted below:
chart-d4e80c2f87da418ec0a.jpg


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 Company’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations.  The Company seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame.  Generally, the Company requires that a delinquency notice be mailed to a borrower upon expiration of a grace period (typically no longer than 15 days beyond the due date).  Reminder notices may be sent and telephone calls may be made prior to the expiration of the grace period. If the delinquent status is not resolved within a reasonable time frame following the mailing of a delinquency notice, the Bank’s personnel charged with managing its loan portfolios contacts the borrower to ascertain the reasons for delinquency and the prospects for payment.  Any subsequent actions taken to resolve the delinquency will depend upon the nature of the loan and the length of time that the loan has been delinquent. The borrower’s needs are considered as much as reasonably possible without jeopardizing the Bank’s position. A late charge is usually assessed on loans upon expiration of the grace period.
Nonaccrual Loans    As a general rule, loans more than 90 days past due with respect to principal or interest are classified as nonaccrual loans. However, certain loans that are more than 90 days past due may be kept on an accruing status if the loans are well secured and/or in the process of collection. The Company may also put a junior lien mortgage on nonaccrual status as a

result of delinquency with respect to the first position, which is held by another financial institution, while the junior lien 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), 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 Company may choose to restructure the contractual terms of certain loans. The Company attempts to work out an alternative payment schedule with the borrower in order to avoid or cure a default. Loans that are modified are reviewed by the Company 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 Company’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 their 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 at the purchase date and for which it is probable that all contractually required payments will not be collected. 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 because their interest income recognized relates to the accretable yield and not to contractual interest payments. See Note 5, "Loans, Allowance for Loan Losses, and Credit Quality" within Condensed Notes to Consolidated Financial Statements included in Item 1 hereof for more information.
Nonperforming Assets     Nonperforming assets are typically comprised of nonperforming loans and other real estate owned (“OREO”). Nonperforming loans consist of nonaccrual loans and loans that are more than 90 days past due but still accruing interest.
OREO consists of real estate properties, which have primarily 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 generally charged to noninterest expense. In the event the real estate is utilized as a rental property, net rental income and expenses are recorded as incurred within noninterest expense.

The following table sets forth information regarding nonperforming assets held by the Company at the dates indicated:
Table 5 - Nonperforming Assets

June 30,
2019		 December 31,
2018		 June 30,
2018		September 30
2019		 December 31
2018		 September 30
2018
(Dollars in thousands)(Dollars in thousands)
Loans accounted for on a nonaccrual basis          
Commercial and industrial$24,895
 $26,310
 $30,095
$23,507
 $26,310
 $28,742
Commercial real estate833
 3,326
 3,110
1,666
 3,326
 1,960
Small business168
 235
 384
112
 235
 191
Residential real estate9,986
 8,251
 7,612
11,281
 8,251
 8,076
Home equity6,973
 7,278
 5,861
6,720
 7,278
 6,367
Other consumer111
 13
 36
74
 13
 49
Total (1)$42,966
 $45,413
 $47,098
$43,360
 $45,413
 $45,385
Loans past due 90 days or more but still accruing          
Residential real estate (2)1,776
 —
 —
1,807
 —
 —
Home equity (2)541
 —
 —
511
 —
 —
Other consumer11
 5
 14
24
 5
 9
Total$2,328
 $5
 $14
$2,342
 $5
 $9
Total nonperforming loans$45,294
 $45,418
 $47,112
$45,702
 $45,418
 $45,394
Other real estate owned2,889
 —
 245
2,500
 —
 190
Total nonperforming assets$48,183
 $45,418
 $47,357
$48,202
 $45,418
 $45,584
Nonperforming loans as a percent of gross loans0.51% 0.66% 0.73%0.51% 0.66% 0.70%
Nonperforming assets as a percent of total assets0.42% 0.51% 0.57%0.42% 0.51% 0.54%
 

(1)Inclusive of TDRs on nonaccrual status of $27.8$26.2 million, $29.3 million, and $4.1$3.4 million at JuneSeptember 30, 2019, December 31, 2018, and JuneSeptember 30, 2018, respectively.
(2)Represents purchased credit impaired loans that are accruing interest due to expectation of future cash collections.
The following table summarizes the changes in nonperforming assets for the periods indicated:
Table 6 - Activity in Nonperforming Assets
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30,
2019		 June 30,
2018		 June 30, 2019 June 30, 2018September 30
2019		 September 30
2018		 September 30
2019		 September 30
2018
(Dollars in thousands)(Dollars in thousands)
Nonperforming assets beginning balance$43,331
 $48,071
 $45,418
 $50,250
$48,183
 $47,357
 $45,418
 $50,250
New to nonperforming4,801
 3,642
 6,658
 5,643
4,946
 4,984
 11,604
 10,627
Acquired nonperforming loans2,317
 —
 2,317
 —
—
 —
 2,317
 —
Loans charged-off(472) (568) (1,031) (1,162)(707) (847) (1,738) (2,009)
Loans paid-off(3,289) (2,209) (6,460) (4,901)(3,041) (4,932) (9,501) (9,833)
Loans restored to performing status(1,266) (1,490) (1,498) (2,180)(714) (921) (2,212) (3,101)
Acquired other real estate owned2,818
 —
 2,818
 —
—
 —
 2,818
 —
Valuation write down(389) —
 (389) —
Sale of other real estate owned—
 —
 —
 (254)—
 —
 —
 (254)
Other(57) (89) (39) (39)(76) (57) (115) (96)
Nonperforming assets ending balance$48,183
 $47,357
 $48,183
 $47,357
$48,202
 $45,584
 $48,202
 $45,584


The following table sets forth information regarding troubled debt restructured loans as of the dates indicated:
Table 7 - Troubled Debt Restructurings

June 30,
2019		 December 31,
2018		 June 30,
2018		September 30
2019		 December 31
2018		 September 30
2018
(Dollars in thousands)(Dollars in thousands)
Performing troubled debt restructurings$22,423
 $23,849
 $25,528
$20,182
 $23,849
 $24,554
Nonaccrual troubled debt restructurings (1)27,841
 29,348
 4,095
26,232
 29,348
 3,370
Total$50,264
 $53,197
 $29,623
$46,414
 $53,197
 $27,924
Performing troubled debt restructurings as a % of total loans0.25% 0.35% 0.39%0.23% 0.35% 0.38%
Nonaccrual troubled debt restructurings as a % of total loans0.31% 0.42% 0.06%0.29% 0.42% 0.05%
Total troubled debt restructurings as a % of total loans0.56% 0.77% 0.46%0.52% 0.77% 0.43%
(1) During the fourth quarter of 2018 nonaccrual loans associated with a large commercial loan customer that had previously declared bankruptcy were modified when a court confirmed the customer's bankruptcy reorganization plan. That revision to loan terms required the Company to deem loans associated with the customer as troubled debt restructured loans.

The following table summarizes changes in TDRs for the periods indicated:
Table 8 - Activity in Troubled Debt Restructurings

Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30
2019		 June 30
2018		 June 30
2019		 June 30
2018		September 30
2019		 September 30
2018		 September 30
2019		 September 30
2018
(Dollars in thousands)(Dollars in thousands)
TDRs beginning balance$51,961
 $31,254
 $53,197
 $31,919
$50,264
 $29,623
 $53,197
 $31,919
New to TDR status107
 378
 332
 613
290
 432
 622
 1,045
Paydowns(1,804) (1,815) (3,265) (2,660)(4,131) (1,952) (7,396) (4,612)
Charge-offs—
 (194) —
 (249)(9) (179) (9) (428)
TDRs ending balance$50,264
 $29,623
 $50,264
 $29,623
$46,414
 $27,924
 $46,414
 $27,924
    
Income accruals are suspended on all nonaccrual loans and all previously accrued and uncollected interest is reversed against current income. The table below shows interest income that was recognized or collected on all nonaccrual loans and TDRs as of the dates indicated:
Table 9 - Interest Income - Nonaccrual Loans and Troubled Debt Restructurings
 
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
2019 2018 2019 2018September 30
2019		 September 30
2018		 September 30
2019		 September 30
2018
(Dollars in thousands)(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$727
 $632
 $1,292
 $1,268
$705
 $650
 $1,997
 $1,918
The amount of interest income on nonaccrual loans and performing TDRs that was included in net income$808
 $544
 $1,630
 $928
$1,047
 $519
 $3,155
 $1,301
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.
Impaired loans include 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. Impairment is measured on a loan by loan basis 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.
Total impaired loans at JuneSeptember 30, 2019 and December 31, 2018 were $54.2$56.9 million and $59.1 million, respectively. For additional information regarding the Company’s asset quality, including delinquent loans, nonaccruals, TDRs, and impaired loans, see Note 5, “Loans, Allowance for Loan Losses, and Credit Quality” within Condensed Notes to Consolidated Financial Statements included in Item 1 hereof.

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. At JuneSeptember 30, 2019, there were 6270 relationships, with an aggregate balance of $74.2$82.2 million, deemed to be potential problem loans. 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 Company.
Allowance for Loan Losses  The allowance for loan losses is maintained at a level that management considers appropriate 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 credits for 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 to assess whether the allowance was determined in accordance with GAAP and applicable guidance.
The allowance for loan losses is allocated to loan types using both a formula-based approach applied to groups of loans and an analysis of certain individual loans for impairment. The formula-based approach emphasizes loss factors derived from actual historical portfolio loss rates, which are combined with an assessment of certain qualitative factors to determine the allowance amounts allocated to the various loan categories. Allowance amounts are determined based on an estimate of the historical average annual percentage rate of loan loss for each loan category, an estimate of the incurred loss emergence and confirmation period for each loan category, and certain qualitative risk factors considered in the computation of the allowance for loan losses. Additionally, 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.
As of JuneSeptember 30, 2019, the allowance for loan losses totaled $66.0$66.9 million, or 0.74%0.75% of total loans, as compared to $64.3 million, or 0.93% of total loans, at December 31, 2018. The decrease in this percentage is attributable to the treatment of loans acquired in connection with the BHB acquisition. These acquired loans are recorded at fair value, which includes consideration for estimated credit losses, and without carryover of the respective portfolio's historical allowance for loan losses.

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

Table 10 - Summary of Changes in the Allowance for Loan Losses

Three Months EndedThree Months Ended
June 30,
2019		 March 31,
2019		 December 31,
2018		 September 30,
2018		 June 30,
2018		September 30
2019		 June 30
2019		 March 31
2019		 December 31
2018		 September 30
2018
(Dollars in thousands)(Dollars in thousands)
Average total loans$9,046,591
 $6,935,927
 $6,688,141
 $6,500,907
 $6,432,287
$8,897,794
 $9,046,591
 $6,935,927
 $6,688,141
 $6,500,907
Allowance for loan losses, beginning of period$65,140
 $64,293
 $63,235
 $62,557
 $60,862
$65,960
 $65,140
 $64,293
 $63,235
 $62,557
Charged-off loans                  
Commercial and industrial—
 —
 —
 218
 4
—
 —
 —
 —
 218
Commercial real estate—
 —
 —
 82
 —
82
 —
 —
 —
 82
Small business49
 145
 135
 111
 102
125
 49
 145
 135
 111
Residential real estate—
 —
 —
 —
 109
—
 —
 —
 —
 —
Home equity71
 113
 32
 87
 95
28
 71
 113
 32
 87
Other consumer352
 301
 421
 349
 259
472
 352
 301
 421
 349
Total charged-off loans472
 559
 588
 847
 569
707
 472
 559
 588
 847
Recoveries on loans previously charged-off                  
Commercial and industrial—
 124
 3
 108
 59
1,003
 —
 124
 3
 108
Commercial real estate13
 33
 121
 29
 18
106
 13
 33
 121
 29
Small business20
 27
 17
 10
 10
61
 20
 27
 17
 10
Residential real estate—
 1
 —
 9
 1
140
 —
 1
 —
 9
Home equity18
 66
 28
 71
 23
194
 18
 66
 28
 71
Other consumer241
 155
 277
 223
 153
185
 241
 155
 277
 223
Total recoveries292
 406
 446
 450
 264
1,689
 292
 406
 446
 450
Net loans charged-off (recovered)                  
Commercial and industrial—
 (124) (3) 110
 (55)(1,003) —
 (124) (3) 110
Commercial real estate(13) (33) (121) 53
 (18)(24) (13) (33) (121) 53
Small business29
 118
 118
 101
 92
64
 29
 118
 118
 101
Residential real estate—
 (1) —
 (9) 108
(140) —
 (1) —
 (9)
Home equity53
 47
 4
 16
 72
(166) 53
 47
 4
 16
Other consumer111
 146
 144
 126
 106
287
 111
 146
 144
 126
Total net loans charged-off180
 153
 142
 397
 305
Total net loans (recovered) charged-off(982) 180
 153
 142
 397
Provision for loan losses1,000
 1,000
 1,200
 1,075
 2,000
—
 1,000
 1,000
 1,200
 1,075
Total allowance for loan losses, end of period$65,960
 $65,140
 $64,293
 $63,235
 $62,557
$66,942
 $65,960
 $65,140
 $64,293
 $63,235
Net loans charged-off as a percent of average total loans (annualized)0.01% 0.01% 0.01% 0.02% 0.02%
Net loans (recovered)/charged-off as a percent of average total loans (annualized)(0.04)% 0.01% 0.01% 0.01% 0.02%
Allowance for loan losses as a percent of total loans0.74% 0.93% 0.93% 0.97% 0.97%0.75 % 0.74% 0.93% 0.93% 0.97%
Allowance for loan losses as a percent of nonperforming loans145.63% 150.33% 141.56% 139.30% 132.78%146.47 % 145.63% 150.33% 141.56% 139.30%

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 possesspossesses 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 11 - Summary of Allocation of Allowance for Loan Losses
 
June 30,
2019		 December 31,
2018		September 30
2019		 December 31
2018
Allowance
Amount
 
Percent of
Loans
In  Category
To Total Loans
 
Allowance
Amount
 
Percent of
Loans
In  Category
To Total Loans
Allowance
Amount
 
Percent of
Loans
In  Category
To Total Loans
 
Allowance
Amount
 
Percent of
Loans
In  Category
To Total Loans
(Dollars in thousands)(Dollars in thousands)
Commercial and industrial$16,857
 15.7% $15,760
 15.8%$17,332
 15.8% $15,760
 15.8%
Commercial real estate32,660
 45.3% 32,370
 47.1%32,651
 44.9% 32,370
 47.1%
Commercial construction5,593
 5.5% 5,158
 5.3%5,833
 5.8% 5,158
 5.3%
Small business1,768
 1.9% 1,756
 2.4%1,752
 1.9% 1,756
 2.4%
Residential real estate3,296
 18.5% 3,219
 13.4%3,348
 18.5% 3,219
 13.4%
Home equity5,547
 12.8% 5,608
 15.8%5,749
 12.8% 5,608
 15.8%
Other consumer239
 0.3% 422
 0.2%277
 0.3% 422
 0.2%
Total allowance for loan losses$65,960
 100.0% $64,293
 100.0%$66,942
 100.0% $64,293
 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 carrying value of the loan or receivable, or a deficiency balance following the sale of the collateral.
For additional information regarding the Company’s allowance for loan losses, see Note 5, “Loans, Allowance for Loan Losses, and Credit Quality” within Condensed Notes to Consolidated Financial Statements included in Item 1 hereof.
Federal Home Loan Bank Stock The Bank held an investment in Federal Home Loan Bank (“FHLB”) of Boston stock of $26.1$15.0 million and $15.7 million at JuneSeptember 30, 2019 and December 31, 2018, respectively. 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 as a tool to manage liquidity and interest rate risk. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. The Company purchases and/or is subject to redemption of FHLB stock proportional to the volume of funding received and views the holdings as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return. During the second quarter of 2019, the Company acquired $17.6 million of additional FHLB stock in connection with the BHB acquisition, and was subject to both redemptions of stock from the FHLB, as well as additional required purchases.
Goodwill and Other Intangible Assets Goodwill and other intangible assets were $537.9$535.9 million and $271.4 million as of JuneSeptember 30, 2019 and December 31, 2018, respectively. The increase was due to the BHB acquisition, partially offset by amortization of definite-lived intangibles.
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. Accordingly, the Company performed its annual goodwill impairment testing during the third quarter of 20182019 and determined that the Company's goodwill was not impaired. 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. There were no events or changes that indicated impairment of other intangible assets.

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 $197.3$195.9 million and $160.5 million at JuneSeptember 30, 2019 and December 31, 2018, respectively, with $34.5 million of the increase attributable to policies obtained in the BHB acquisition. The Company recorded tax exempt income from life insurance policies of $1.3 million and $998,000$984,000 for the three months ended JuneSeptember 30, 2019 and 2018, respectively, and $2.3$3.6 million and $1.9$2.9 million for the sixnine month periods ended JuneSeptember 30, 2019 and 2018, respectively. In addition, during the third quarter of 2019 the Company recorded gains on life insurance benefits of $434,000.
Deposits As of JuneSeptember 30, 2019, total deposits were $9.3 billion, representing a $1.9 billion, or 25.3%25.6%, increase from December 31, 2018. The increase is primarily attributable to the BHB acquisition. The total cost of deposits was 0.49%0.50% and 0.27%0.30% for the three months ended JuneSeptember 30, 2019 and 2018, respectively, and 0.44%0.46% and 0.25%0.27%, for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively. Core deposits represented 82.93%82.49% of total deposits as of JuneSeptember 30, 2019.
The Company also participates in the Promontory Interfinancial Network, allowing the Bank to provide easy access to multi-million dollar Federal Deposit Insurance Corporation ("FDIC") deposit insurance protection on certificate of deposit and money market investments for consumers, businesses and public entities. This channel allows the Company to seek additional funding in potentially large quantities by attracting deposits from outside the Bank’s core market and amounted to $199.0$211.0 million and $180.5 million at JuneSeptember 30, 2019 and December 31, 2018, respectively. In addition, the Company may occasionally raise funds through the use of brokered deposits outside of the Promontory Interfinancial Network, which amounted to $303.4 million and $6.0 million at September 30, 2019 and December 31, 2018, respectively. During 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was promulgated and determined that reciprocal deposits, such as those acquired through the Promontory Interfinancial Network, were no longer to be treated as brokered deposits. Accordingly, these amounts are no longer included in the total brokered amounts reported by the Company.
    In addition, the Company may occasionally raise funds through the use of brokered deposits outside of the Promontory Interfinancial Network, which amounted to $260.2 million and $6.0 million at June 30, 2019 and December 31, 2018, respectively.
Excluding the effects of the BHB acquisition, the Company's deposits have declined modestly on an organic basis as compared to the prior year end. The table below summarizes these organic declines by category for the period indicated:
Table 12 - Components of Deposit Growth/(Decline)
June 30
2019		 December 31
2018		 Blue Hills Bancorp Acquisition Organic Growth/(Decline) Organic Growth/ (Decline)%September 30
2019		 December 31
2018		 Blue Hills Bancorp Acquisition Organic Growth/(Decline) Organic Growth/ (Decline)%
(Dollars in thousands)  (Dollars in thousands)  
Demand deposits$2,738,420
 $2,450,907
 $301,276
 $(13,763) (0.6)%
Noninterest-bearing demand deposits$2,752,150
 $2,450,907
 $301,276
 $(33) — %
Savings and interest checking3,196,639
 2,865,349
 351,554
 (20,264) (0.7)%3,199,182
 2,865,349
 351,554
 (17,721) (0.6)%
Money market1,927,797
 1,399,761
 543,842
 (15,806) (1.1)%1,904,643
 1,399,761
 543,842
 (38,960) (2.8)%
Time certificates of deposits1,445,059
 711,103
 733,764
 192
 — %1,470,116
 711,103
 733,764
 25,249
 3.6 %
Total$9,307,915
 $7,427,120
 $1,930,436
 $(49,641) (0.7)%$9,326,091
 $7,427,120
 $1,930,436
 $(31,465) (0.4)%
    



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. Maintaining available borrowing capacity provides the Bank with a contingent source of liquidity. Borrowings increased by $241.0$34.1 million, or 93.2%13.2%, at JuneSeptember 30, 2019, as compared to December 31, 2018, reflecting $124.8 million in borrowings assumed in2018. The following table presents activity for the BHB acquisition as well as increases in the Federal Home Loan Bank overnight borrowings, partially offset by the paydownnine months ended September 30, 2019 within each of the $50.0 million line of credit funding that was obtained to the first quarter to supplement the financing of the BHB acquisition, as well as a $10.3 redemption of trust preferred securities during the second quarter of 2019. Company's major borrowing categories:
Table 13 - Components of Borrowings
  December 31
2018		 BHB Deal Financing Borrowings Acquired from BHB Other Issuances/(Payments) September 30
2019
  (Dollars in thousands)
Federal Home Loan Bank borrowings $147,806
 $—
 $124,817
 $(201,915) $70,708
Line of credit —
 50,000
 —
 (50,000) —
Long-term borrowings —
 75,000
 —
 (106) 74,894
Junior subordinated debentures 76,173
 —
 —

(13,325) 62,848
Subordinated debentures 34,728
 —
 —
 49,613
 84,341
Total borrowings $258,707
 $125,000
 $124,817
 $(215,733) $292,791
Additionally, the Bank had $3.7$4.2 billion and $2.8 billion of assets pledged as collateral against borrowings at JuneSeptember 30, 2019 and December 31, 2018, respectively. These assets are primarily pledged to the FHLB of Boston and the Federal Reserve Bank of Boston.


Capital Resources On June 20,September 19, 2019, the Company’s Board of Directors declared a cash dividend of $0.44 per share to stockholders of record as of the close of business on July 1,September 30, 2019. This dividend was paid on July 12,October 11, 2019.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total, Tier 1 Capital and Common Equity Tier 1 Capital (as defined for regulatory purposes) to risk weighted assets (as defined for regulatory purposes) and Tier 1 Capital to average assets (as defined for regulatory purposes). At JuneSeptember 30, 2019 and December 31, 2018, the Company and the Bank exceeded the minimum requirements for all applicable ratios that were in effect during the respective periods. The Company’s and the Bank’s capital amounts and ratios are presented in the following table, along with the applicable minimum requirements for each period indicated:

Table 1314 - Company and Bank's Capital Amounts and Ratios 
Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt
Corrective Action Provisions		Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt
Corrective Action Provisions
Amount Ratio Amount   Ratio Amount   RatioAmount Ratio Amount   Ratio Amount   Ratio
June 30, 2019September 30, 2019
(Dollars in thousands)(Dollars in thousands)
Company (consolidated)                      
Total capital (to risk weighted assets)$1,309,720
 14.42% $726,383
 ≥ 8.0% N/A N/A$1,349,454
 14.88% $725,646
 ≥ 8.0% N/A N/A
Common equity tier 1 capital
(to risk weighted assets)
1,096,915
 12.08% 408,591
 ≥ 4.5% N/A N/A1,135,617
 12.52% 408,176
 ≥ 4.5% N/A N/A
Tier 1 capital (to risk weighted assets)1,157,915
 12.75% 544,787
 ≥ 6.0% N/A N/A1,196,617
 13.19% 544,235
 ≥ 6.0% N/A N/A
Tier 1 capital (to average assets)1,157,915
 10.45% 443,263
 ≥ 4.0% N/A N/A1,196,617
 10.83% 462,887
 ≥ 4.0% N/A N/A
Bank                      
Total capital (to risk weighted assets)$1,292,707
 14.26% $725,328
 ≥ 8.0% $906,660
 ≥ 10.00%$1,312,911
 14.47% $725,665
 ≥ 8.0% $907,081
 ≥ 10.00%
Common equity tier 1 capital
(to risk weighted assets)
1,225,086
 13.51% 407,997
 ≥ 4.5% 589,329
 ≥ 6.50%1,244,308
 13.72% 408,187
 ≥ 4.5% 589,603
 ≥ 6.50%
Tier 1 capital (to risk weighted assets)1,225,086
 13.51% 543,996
 ≥ 6.0% 725,328
 ≥ 8.00%1,244,308
 13.72% 544,249
 ≥ 6.0% 725,665
 ≥ 8.00%
Tier 1 capital (to average assets)1,225,086
 11.10% 441,642
 ≥ 4.0% 552,052
 ≥ 5.00%1,244,308
 11.29% 444,347
 ≥ 4.0% 555,433
 ≥ 5.00%
December 31, 2018December 31, 2018
(Dollars in thousands)(Dollars in thousands)
Company (consolidated)                      
Total capital (to risk weighted assets)$992,454
 14.45% $549,297
 ≥ 8.0% N/A N/A$992,454
 14.45% $549,297
 ≥ 8.0% N/A N/A
Common equity tier 1 capital
(to risk weighted assets)
818,176
 11.92% 308,980
 ≥ 4.5% N/A N/A818,176
 11.92% 308,980
 ≥ 4.5% N/A N/A
Tier 1 capital (to risk weighted assets)892,176
 12.99% 411,973
 ≥ 6.0% N/A N/A892,176
 12.99% 411,973
 ≥ 6.0% N/A N/A
Tier 1 capital (to average assets)892,176
 10.69% 333,754
 ≥ 4.0% N/A N/A892,176
 10.69% 333,754
 ≥ 4.0% N/A N/A
Bank                      
Total capital (to risk weighted assets)$937,574
 13.66% $549,036
 ≥ 8.0% $686,295
 ≥ 10.00%$937,574
 13.66% $549,036
 ≥ 8.0% $686,295
 ≥ 10.00%
Common equity tier 1 capital
(to risk weighted assets)
872,024
 12.71% 308,833
 ≥ 4.5% 446,092
 ≥ 6.50%872,024
 12.71% 308,833
 ≥ 4.5% 446,092
 ≥ 6.50%
Tier 1 capital (to risk weighted assets)872,024
 12.71% 411,777
 ≥ 6.0% 549,036
 ≥ 8.00%872,024
 12.71% 411,777
 ≥ 6.0% 549,036
 ≥ 8.00%
Tier 1 capital (to average assets)872,024
 10.46% 333,595
 ≥ 4.0% 416,994
 ≥ 5.00%872,024
 10.46% 333,595
 ≥ 4.0% 416,994
 ≥ 5.00%

In addition to the minimum risk-based capital requirements outlined in the table above, the Company is required to maintain a minimum capital conservation buffer, in the form of common equity, in order to avoid restrictions on capital distributions and discretionary bonuses. The required amount of the capital conservation buffer is 2.5%. At JuneSeptember 30, 2019, the Company's capital levels exceeded the buffer.
Dividend Restrictions In the ordinary course of business, the Company is dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. Under the foregoing dividend restrictions and while maintaining its "well capitalized" status, dividends paid by the Bank to the Company totaled $27.8$32.6 million and $15.5 million for the three months ended JuneSeptember 30, 2019 and 2018, respectively and totaled $57.7$90.3 million and $28.9$44.5 million for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively. The sixnine months 2019 dividends included $16.5 million that was used for funding the April 1, 2019 BHB acquisition.
Trust Preferred Securities In accordance with the applicable accounting standard related to variable interest entities, the common stock of trusts which have issued trust preferred securities has not been included in the consolidated financial statements of the Company. At JuneSeptember 30, 2019 and December 31, 2018 there was $61.0 million and $74.0 million, respectively, in trust preferred securities which have been included in the Tier 1 capital of the Company for regulatory reporting purposes pursuant to the Federal Reserve's capital adequacy guidelines.
Common Stock Repurchase Program On October 17, 2019, the Company put into place a share repurchase program with the ability to repurchase up to 1.5 million shares of the Company's common stock. Repurchases may be made from time to time on the open market and in privately negotiated transactions, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act. The size and timing of these repurchases will depend on pricing, market and economic condition, legal and contractual requirements and other factors. The repurchase program will expire on October 31, 2020 and may be modified, suspended or discontinued at any time. Management will plan to utilize the repurchase program as another tool to effectively manage capital and liquidity needs. 

Investment Management As of JuneSeptember 30, 2019, the Rockland Trust Investment Management Group had assets under administration of $4.2$4.5 billion, representing 5,9686,024 trust, fiduciary, and agency accounts. At December 31, 2018, assets under administration were $3.6 billion, representing approximately 5,936 trust, fiduciary, and agency accounts. Included in these amounts as of JuneSeptember 30, 2019 and December 31, 2018 are assets under administration of $316.2$327.2 million and $268.0 million, respectively, relating to the Company’s registered investment advisor, Bright Rock Capital Management, LLC, which provides institutional quality investment management services to institutional and high net worth clients. Revenue from the Investment Management Group was $6.4$6.6 million and $6.1$5.9 million for the three months ended JuneSeptember 30, 2019 and 2018, respectively, and $12.5$19.1 million and $11.7$17.6 million for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.
Retail investments and insurance revenue was $729,000$554,000 and $739,000$652,000 for the three months ended JuneSeptember 30, 2019 and 2018, respectively, and $1.4 million and $1.3$2.0 million for both the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.
Retail investments and insurance revenue includes commission revenue from LPL Financial (“LPL”) and its affiliates and their insurance subsidiary, LPL Insurance Associates, Inc., which offers the sale of mutual fund shares, unit investment trust shares, general securities, fixed and variable annuities and life insurance. Registered representatives who are both employed by the Bank and licensed and contracted with LPL are onsite to offer these products to the Bank’s customer base. These same agents are also approved and appointed with various other broker general agents for the purpose of processing insurance solutions for clients.

RESULTS OF OPERATIONS
The following table provides a summary of results of operations for the sixthree and nine months ended JuneSeptember 30, 2019 and 2018:
Table 1415 - Summary of Results of Operations
 
Three Months Ended June 30 Six Months Ended June 30Three Months Ended September 30 Nine Months Ended September 30
2019 2018 2019 20182019 2018 2019 2018
(Dollars in thousands, except per share data)(Dollars in thousands, except per share data)
Net income$30,628
 $31,118
 $65,853
 $58,673
$51,845
 $33,015
 $117,698
 $91,688
Diluted earnings per share$0.89
 $1.13
 $2.11
 $2.13
$1.51
 $1.20
 $3.64
 $3.32
Return on average assets1.06% 1.52% 1.30% 1.46%1.78% 1.57% 1.47% 1.49%
Return on average equity7.59% 12.85% 9.80% 12.30%12.33% 13.19% 10.77% 12.60%
Net interest margin4.09% 3.89% 4.12% 3.83%4.03% 3.94% 4.08% 3.87%
Net Interest Income The amount of net interest income is affected by changes in interest rates and by the volume, mix, and interest rate sensitivity of interest-earning assets and interest-bearing liabilities.
On a fully tax equivalent basis ("FTE"), net interest income for the secondthird quarter of 2019 was $106.3$104.9 million, representing an increase of $32.9$28.4 million, or 44.9%37.2%, when compared to the secondthird quarter of 2018. The increase in net interest income from the year ago period is primarily due to increased interest earning assets, including those obtained in the BHB and MNB acquisitions, as well as higher yields on interest earning assets, partially offset by nominal increases in the costs of deposits, which has increased but at a well contained pace.acquisitions.

The following tables present the Company’s average balances, net interest income, interest rate spread, and net interest margin for the sixthree and nine months ending JuneSeptember 30, 2019 and 2018, respectively. Nontaxable income from loans and securities is presented on a FTE basis by adjusting tax-exempt income upward by an amount equivalent to the prevailing income taxes that would have been paid if the income had been fully taxable.
Table 1516 - Average Balance, Interest Earned/Paid & Average Yields Quarter-to-Date
Three Months Ended June 30Three Months Ended September 30
2019 20182019 2018
Average
Balance
 
Interest
Earned/
Paid
 Yield/Rate 
Average
Balance
 
Interest
Earned/
Paid
 Yield/Rate
Average
Balance
 
Interest
Earned/
Paid
 Yield/Rate 
Average
Balance
 
Interest
Earned/
Paid
 Yield/Rate
(Dollars in thousands)(Dollars in thousands)
Interest-earning assets                      
Interest-earning deposits with banks, federal funds sold, and short term investments$104,157
 $647
 2.49% $122,116
 $541
 1.78%$115,255
 $680
 2.34% $180,802
 $916
 2.01%
Securities                      
Securities - trading1,894
 —
 —% 1,599
 —
 —%1,947
 —
 —% 1,608
 —
 —%
Securities - taxable investments1,240,509
 8,521
 2.76% 993,222
 6,498
 2.62%1,204,314
 8,269
 2.72% 1,005,787
 6,664
 2.63%
Securities - nontaxable investments (1)1,739
 17
 3.92% 2,204
 20
 3.64%1,739
 18
 4.11% 1,992
 18
 3.58%
Total securities$1,244,142
 $8,538
 2.75% $997,025
 $6,518
 2.62%$1,208,000
 $8,287
 2.72% $1,009,387
 $6,682
 2.63%
Loans held for sale15,710
 40
 1.02% 4,719
 30
 2.55%102,065
 456
 1.77% 8,340
 61
 2.90%
Loans (2)                      
Commercial and industrial (1)1,405,693
 20,960
 5.98% 943,110
 11,116
 4.73%1,380,007
 20,274
 5.83% 975,980
 11,936
 4.85%
Commercial real estate (1)4,091,335
 50,860
 4.99% 3,092,771
 35,175
 4.56%4,017,670
 49,139
 4.85% 3,144,613
 37,048
 4.67%
Commercial construction460,921
 7,265
 6.32% 416,830
 5,256
 5.06%510,277
 7,155
 5.56% 356,091
 4,572
 5.09%
Small business166,440
 2,610
 6.29% 138,758
 2,008
 5.80%172,942
 2,626
 6.02% 147,518
 2,183
 5.87%
Total commercial6,124,389
 81,695
 5.35% 4,591,469
 53,555
 4.68%6,080,896
 79,194
 5.17% 4,624,202
 55,739
 4.78%
Residential real estate1,746,723
 17,475
 4.01% 769,441
 7,661
 3.99%1,644,467
 17,329
 4.18% 792,154
 7,959
 3.99%
Home equity1,146,066
 13,313
 4.66% 1,061,082
 10,830
 4.09%1,142,137
 13,309
 4.62% 1,071,511
 11,457
 4.24%
Total consumer real estate2,892,789
 30,788
 4.27% 1,830,523
 18,491
 4.05%2,786,604
 30,638
 4.36% 1,863,665
 19,416
 4.13%
Other consumer29,413
 683
 9.31% 10,295
 211
 8.22%30,294
 627
 8.21% 13,040
 244
 7.42%
Total loans$9,046,591
 $113,166
 5.02% $6,432,287
 $72,257
 4.51%$8,897,794
 $110,459
 4.93% $6,500,907
 $75,399
 4.60%
Total interest-earning assets$10,410,600
 $122,391
 4.72% $7,556,147
 $79,346
 4.21%$10,323,114
 $119,882
 4.61% $7,699,436
 $83,058
 4.28%
Cash and due from banks125,507
     100,952
    121,515
     106,273
    
Federal Home Loan Bank stock22,161
     13,399
    15,781
     13,107
    
Other assets1,041,346
     545,994
    1,119,388
     547,296
    
Total assets$11,599,614
     $8,216,492
    $11,579,798
     $8,366,112
    
Interest-bearing liabilities                      
Deposits                      
Savings and interest checking accounts$3,205,512
 $2,175
 0.27% $2,664,148
 $1,293
 0.19%$3,157,870
 $2,120
 0.27% $2,654,157
 $1,433
 0.21%
Money market1,975,900
 4,440
 0.90% 1,360,216
 1,667
 0.49%1,942,932
 4,220
 0.86% 1,373,594
 2,056
 0.59%
Time deposits1,375,726
 4,563
 1.33% 653,373
 1,627
 1.00%1,471,749
 5,506
 1.48% 652,638
 1,762
 1.07%
Total interest-bearing deposits$6,557,138
 $11,178
 0.68% $4,677,737
 $4,587
 0.39%$6,572,551
 $11,846
 0.72% $4,680,389
 $5,251
 0.45%
Borrowings                      
Federal Home Loan Bank borrowings$372,260
 $2,373
 2.56% $62,600
 $295
 1.89%$156,054
 $945
 2.40% $50,770
 $248
 1.94%
Customer repurchase agreements—
 —
 —% 143,259
 64
 0.18%—
 —
 —% 148,575
 75
 0.20%
Line of credit8,636
 83
 3.85% —
 —
 —%
Long-term borrowings74,932
 745
 3.99% —
 —
 —%74,885
 684
 3.62% —
 —
 —%
Junior subordinated debentures71,508
 701
 3.93% 73,076
 625
 3.43%62,848
 506
 3.19% 73,077
 640
 3.47%
Subordinated debentures84,319
 1,045
 4.92% 34,711
 427
 4.88%

Subordinated debentures84,294
 1,045
 4.97% 34,699
 428
 4.95%
Total borrowings$611,630
 $4,947
 3.24% $313,634
 $1,412
 1.81%$378,106
 $3,180
 3.34% $307,133
 $1,390
 1.80%
Total interest-bearing liabilities$7,168,768
 $16,125
 0.90% $4,991,371
 $5,999
 0.48%$6,950,657
 $15,026
 0.86% $4,987,522
 $6,641
 0.53%
Demand deposits2,641,470
     2,174,571
    
Noninterest bearing demand deposits2,753,596
     2,300,943
    
Other liabilities171,703
     79,266
    207,924
     84,442
    
Total liabilities$9,981,941
     $7,245,208
    $9,912,177
     $7,372,907
    
Stockholders' equity1,617,673
     971,284
    1,667,621
     993,205
    
Total liabilities and stockholders' equity$11,599,614
     $8,216,492
    $11,579,798
     $8,366,112
    
Net interest income (1)  $106,266
     $73,347
    $104,856
     $76,417
  
Interest rate spread (3)    3.82%     3.73%    3.75%     3.75%
Net interest margin (4)    4.09%     3.89%    4.03%     3.94%
Supplemental information                      
Total deposits, including demand deposits$9,198,608
 $11,178
   $6,852,308
 $4,587
  $9,326,147
 $11,846
   $6,981,332
 $5,251
  
Cost of total deposits    0.49%     0.27%    0.50%     0.30%
Total funding liabilities, including demand deposits$9,810,238
 $16,125
   $7,165,942
 $5,999
  $9,704,253
 $15,026
   $7,288,465
 $6,641
  
Cost of total funding liabilities    0.66%     0.34%    0.61%     0.36%
 

(1)The total amount of adjustment to present interest income and yield on a FTE basis is $247,000$258,000 and $179,000$183,000 for the three months ended JuneSeptember 30, 2019 and 2018, respectively. The FTE adjustment relates to tax exempt income relating to securities with average balances of $1.7 million and $2.2$2.0 million and tax exempt income relating to loans with average balances of $85.4$84.5 million and $55.1$57.4 million, for the three months ended JuneSeptember 30, 2019 and 2018, 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 1617 - Average Balance, Interest Earned/Paid & Average Yields Year-to-Date

Six Months Ended June 30Nine Months Ended September 30
2019 20182019 2018
Average
Balance
 
Interest
Earned/
Paid
 
Yield/
Rate
 
Average
Balance
 
Interest
Earned/
Paid
 
Yield/
Rate
Average
Balance
 
Interest
Earned/
Paid
 
Yield/
Rate
 
Average
Balance
 
Interest
Earned/
Paid
 
Yield/
Rate
(Dollars in thousands)(Dollars in thousands)
Interest-earning assets                      
Interest-earning deposits with banks, federal funds sold, and short-term investments$86,673
 $1,073
 2.50% $102,136
 $852
 1.68%$96,305
 $1,753
 2.43% $128,646
 $1,768
 1.84%
Securities                      
Securities - trading1,756
 —
 —% 1,517
 —
 —%1,820
 —
 —% 1,547
 —
 —%
Securities - taxable investments1,163,058
 15,986
 2.77% 980,293
 12,717
 2.62%1,176,961
 24,255
 2.76% 988,885
 19,381
 2.62%
Securities - nontaxable investments (1)1,738
 34
 3.94% 2,233
 40
 3.61%1,739
 52
 4.00% 2,152
 58
 3.60%
Total securities$1,166,552
 $16,020
 2.77% $984,043
 $12,757
 2.61%$1,180,520
 $24,307
 2.75% $992,584
 $19,439
 2.62%
Loans held for sale9,611
 71
 1.49% 3,741
 49
 2.64%40,768
 527
 1.73% 5,291
 110
 2.78%
Loans (2)                      
Commercial and industrial (1)1,260,562
 35,400
 5.66% 911,399
 20,731
 4.59%1,300,815
 55,674
 5.72% 933,163
 32,667
 4.68%
Commercial real estate (1)3,668,191
 90,090
 4.95% 3,100,063
 68,464
 4.45%3,785,964
 139,229
 4.92% 3,115,076
 105,511
 4.53%
Commercial construction424,034
 12,882
 6.13% 407,328
 9,927
 4.91%453,097
 20,037
 5.91% 390,061
 14,499
 4.97%
Small business165,910
 5,094
 6.19% 135,460
 3,870
 5.76%168,280
 7,720
 6.13% 139,523
 6,053
 5.80%
Total commercial5,518,697
 143,466
 5.24% 4,554,250
 102,992
 4.56%5,708,156
 222,660
 5.22% 4,577,823
 158,730
 4.64%
Residential real estate1,339,099
 27,022
 4.07% 762,755
 15,162
 4.01%1,442,007
 44,351
 4.11% 772,663
 23,121
 4.00%
Home equity1,116,507
 25,488
 4.60% 1,056,080
 21,035
 4.02%1,125,144
 38,797
 4.61% 1,061,280
 32,492
 4.09%
Total consumer real estate2,455,606
 52,510
 4.31% 1,818,835
 36,197
 4.01%2,567,151
 83,148
 4.33% 1,833,943
 55,613
 4.05%
Other consumer22,787
 996
 8.81% 10,476
 425
 8.18%25,317
 1,623
 8.57% 11,340
 669
 7.89%
Total loans$7,997,090
 $196,972
 4.97% $6,383,561
 $139,614
 4.41%$8,300,624
 $307,431
 4.95% $6,423,106
 $215,012
 4.48%
Total interest-earning assets$9,259,926
 $214,136
 4.66% $7,473,481
 $153,272
 4.14%$9,618,217
 $334,018
 4.64% $7,549,627
 $236,329
 4.19%
Cash and due from banks115,407
     99,288
    117,465
     101,642
    
Federal Home Loan Bank stock16,958
     13,209
    16,561
     13,174
    
Other assets830,474
     545,756
    927,837
     546,276
    
Total assets$10,222,765
     $8,131,734
    $10,680,080
     $8,210,719
    
Interest-bearing liabilities                      
Deposits                      
Savings and interest checking accounts$3,049,430
 $4,129
 0.27% $2,613,945
 $2,386
 0.18%$3,085,974
 $6,249
 0.27% $2,632,311
 $3,819
 0.19%
Money market1,721,439
 7,159
 0.84% 1,349,301
 3,031
 0.45%1,796,081
 11,379
 0.85% 1,357,488
 5,087
 0.50%
Time deposits1,048,223
 6,918
 1.33% 649,970
 3,105
 0.96%1,190,950
 12,424
 1.39% 646,055
 4,867
 1.01%
Total interest-bearing deposits$5,819,092
 $18,206
 0.63% $4,613,216
 $8,522
 0.37%$6,073,005
 $30,052
 0.66% $4,635,854
 $13,773
 0.40%
Borrowings                      
Federal Home Loan Bank borrowings$243,296
 3,083
 2.56% $67,792
 $555
 1.65%$213,896
 $4,028
 2.52% $62,055
 $803
 1.73%
Customer repurchase agreements—
 —
 —% 149,479
 130
 0.18%—
 —
 —% 149,174
 205
 0.18%
Line of credit5,446
 104
 3.85% —
 —
 —%3,595
 104
 3.87% —
 —
 —%
Long-term borrowings39,329
 777
 3.98% —
 —
 —%51,327
 1,461
 3.81% —
 —
 —%
Junior subordinated debentures72,393
 1,385
 3.86% 73,075
 1,215
 3.35%69,176
 1,891
 3.65% 73,076
 1,855
 3.39%
Subordinated debentures64,595
 1,588
 4.96% 34,693
 855
 4.97%71,242
 2,633
 4.94% 34,699
 1,282
 4.94%
Total borrowings$425,059
 $6,937
 3.29% $325,039
 $2,755
 1.71%$409,236
 $10,117
 3.31% $319,004
 $4,145
 1.74%
Total interest-bearing liabilities$6,244,151
 $25,143
 0.81% $4,938,255
 $11,277
 0.46%$6,482,241
 $40,169
 0.83% $4,954,858
 $17,918
 0.48%

Demand deposits2,480,235
     2,152,168
    
Noninterest bearing demand deposits2,572,357
     2,202,305
    
Other liabilities142,856
     79,196
    164,783
     80,964
    
Total liabilities$8,867,242
     $7,169,619
    $9,219,381
     $7,238,127
    
Stockholders' equity1,355,523
     962,115
    1,460,699
     972,592
    
Total liabilities and stockholders' equity$10,222,765
     $8,131,734
    $10,680,080
     $8,210,719
    
Net interest income (1)  $188,993
     $141,995
    $293,849
     $218,411
  
Interest rate spread (3)    3.85%     3.68%    3.81%     3.71%
Net interest margin (4)    4.12%     3.83%    4.08%     3.87%
Supplemental information                      
Total deposit, including demand deposits$8,299,327
 $18,206
   $6,765,384
 $8,522
  $8,645,362
 $30,052
   $6,838,159
 $13,773
  
Cost of total deposits    0.44%     0.25%    0.46%     0.27%
Total funding liabilities, including demand deposits$8,724,386
 $25,143
   $7,090,423
 $11,277
  $9,054,598
 $40,169
   $7,157,163
 $17,918
  
Cost of total funding liabilities    0.58%     0.32%    0.59%     0.33%
 
(1)The total amount of adjustment to present interest income and yield on a FTE basis is $449,000$707,000 and $356,000$538,000 for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively. The FTE adjustment relates to nontaxable investment securities with average balances of $1.7 million and $2.2 million and tax exempt income relating to loans with average balances of $75.3$78.4 million and $53.5$54.8 million for the sixnine months ended JuneSeptember 30, 2019 and 2018, 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 FTE basis regarding changes in the Company’s interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to: (1) changes in rate (change in rate multiplied by prior period volume), (2) changes in volume (change in volume multiplied by old rate), and (3) changes in volume/rate (change in volume multiplied by change in rate) which is allocated to the change due to rate column:

Table 1718 - Volume Rate Analysis
Three Months Ended June 30 Six Months Ended June 30Three Months Ended September 30 Nine Months Ended September 30
2019 Compared To 2018 2019 Compared To 20182019 Compared To 2018 2019 Compared To 2018
Change
Due to
Rate		 
Change
Due to
Volume
 Total Change 
Change
Due to
Rate
 
Change
Due to
Volume
 Total ChangeChange
Due to
Rate		 
Change
Due to
Volume
 Total Change 
Change
Due to
Rate
 
Change
Due to
Volume
 Total Change
(Dollars in thousands)(Dollars in thousands)
Income on interest-earning assets                      
Interest earning deposits, federal funds sold and short term investments$186
 $(80) $106
 $350
 $(129) $221
$96
 $(332) $(236) $429
 $(444) $(15)
Securities                      
Securities - taxable investments405
 1,618
 2,023
 898
 2,371
 3,269
290
 1,315
 1,605
 1,188
 3,686
 4,874
Securities - nontaxable investments (1)1
 (4) (3) 3
 (9) (6)2
 (2) —
 5
 (11) (6)
Total securities    2,020
     3,263
    1,605
     4,868
Loans held for sale(60) 70
 10
 (55) 77
 22
(291) 686
 395
 (321) 738
 417
Loans                      
Commercial and industrial (1)4,392
 5,452
 9,844
 6,727
 7,942
 14,669
3,397
 4,941
 8,338
 10,137
 12,870
 23,007
Commercial real estate (1)4,328
 11,357
 15,685
 9,079
 12,547
 21,626
1,805
 10,286
 12,091
 10,994
 22,724
 33,718
Commercial construction1,453
 556
 2,009
 2,548
 407
 2,955
603
 1,980
 2,583
 3,195
 2,343
 5,538
Small business201
 401
 602
 354
 870
 1,224
67
 376
 443
 419
 1,248
 1,667
Total commercial    28,140
     40,474
    23,455
     63,930
Residential real estate84
 9,730
 9,814
 403
 11,457
 11,860
807
 8,563
 9,370
 1,201
 20,029
 21,230
Home equity1,616
 867
 2,483
 3,249
 1,204
 4,453
1,097
 755
 1,852
 4,350
 1,955
 6,305
Total consumer real estate    12,297
     16,313
    11,222
     27,535
Other consumer80
 392
 472
 72
 499
 571
60
 323
 383
 129
 825
 954
Total loans (1)(2)    40,909
     57,358
    35,060
     92,419
Total income of interest-earning assets    $43,045
     $60,864
    $36,824
     $97,689
Expense of interest-bearing liabilities                      
Deposits                      
Savings and interest checking accounts$619
 $263
 $882
 $1,345
 $398
 $1,743
$415
 $272
 $687
 $1,772
 $658
 $2,430
Money market2,018
 755
 2,773
 3,292
 836
 4,128
1,312
 852
 2,164
 4,648
 1,644
 6,292
Time certificates of deposits1,137
 1,799
 2,936
 1,910
 1,903
 3,813
1,533
 2,211
 3,744
 3,452
 4,105
 7,557
Total interest bearing deposits    6,591
     9,684
    6,595
     16,279
Borrowings                      
Federal Home Loan Bank borrowings619
 1,459
 2,078
 1,091
 1,437
 2,528
183
 514
 697
 1,260
 1,965
 3,225
Customer repurchase agreements and other short-term borrowings—
 (64) (64) —
 (130) (130)—
 (75) (75) —
 (205) (205)
Line of Credit83
 —
 83
 104
 —
 104
—
 —
 —
 104
 —
 104
Long-term borrowings745
 —
 745
 777
 —
 777
684
 —
 684
 1,461
 —
 1,461
Junior subordinated debentures89
 (13) 76
 181
 (11) 170
(44) (90) (134) 135
 (99) 36
Subordinated debentures5
 612
 617
 (4) 737
 733
8
 610
 618
 1
 1,350
 1,351
Total borrowings    3,535
     4,182
    1,790
     5,972
Total expense of interest-bearing liabilities    10,126
     13,866
    8,385
     22,251
Change in net interest income    $32,919
     $46,998
    $28,439
     $75,438
 

(1)The table above reflects income determined on a FTE basis. See footnote (1) to tables 1516 and 1617 for the related adjustments.
(2)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 appropriate level of allowance for loan losses. TheThere was no provision for loan losses was $1.0 millionduring the three months ended

September 30, 2019 and $2.0 million for the three

and sixnine months ended JuneSeptember 30, 2019, as compared to $2.0$1.1 million and $2.5$3.6 million for the comparable year-ago periods. The Company’s allowance for loan losses, as a percentage of total loans, was 0.74%0.75% at JuneSeptember 30, 2019, 0.93% at December 31, 2018, and 0.97% at JuneSeptember 30, 2018. The decrease in this percentage is attributable to the treatment of loans acquired in connection with the BHB acquisition. These acquired loans are recorded at fair value, which include consideration for estimated credit losses, and without carryover of the respective portfolio's historical allowance for loan losses. The Company recorded net charge-offsrecoveries of $180,000$982,000 and $333,000$649,000 for the three and sixnine months ended JuneSeptember 30, 2019, as compared to net charge-offs of $305,000$397,000 and $586,000$983,000 for the three and sixnine months ended JuneSeptember 30, 2018, respectively.
Management’s periodic evaluation of the appropriate allowance for loan losses considers past loan loss experience, known and inherent risks within 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.  Regarding the estimated value of the underlying collateral, 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.

TheAdditionally, the national and local economies haveremained generally strong and expansion continued their general expansion through the first half of 2019.despite lingering uncertainty regarding trade policy and tariffs.  The labor market in the New England region remains very tight leadingwhich has led to continued difficulty for some employers seeking to fill vacancies.  Wage growth despite the tight labor conditions, has remained subdued,remains somewhat restrained, however more highly skilled workersincreases have been experiencing increasingly noticeable risesbegun to emerge in compensation.a number of industries.  Retail sales versus the prior year are up modestly andwith many retailers are suggestingnoting that they mayhave not see much impact fromexperienced significant pricing pressure despite the ongoing tariff disputes and trade negotiations.negotiations with China.  The spring and summer tourism market for the Boston metropolitan area is expectedappears to have been strong versus the prior year with hotels reporting strong occupancy and room rate growth.  Residential real estate activity appears to be strong due in partmoderating somewhat versus the prior year even as prices continue to favorable weather and lower fuel costs.  Robust activity in the residential real estate sector continued into the second quarterrise as year-over-year sales volumes climbed in Massachusetts and Rhode Island.inventory falls.  Commercial construction activity in the Boston market continues to be strong even as construction costsprojects related to tariffs and labor rise on average.office space have increased relative to apartment projects.  Management believes that the overall economic outlook for the near term remains generally positive for the New England region.

Noninterest Income The following table sets forth information regarding noninterest income for the periods shown:
Table 1819 - Noninterest Income
Three Months EndedThree Months Ended
June 30 ChangeSeptember 30 Change
2019 2018 Amount %2019 2018 Amount %
(Dollars in thousands)  (Dollars in thousands)  
Deposit account fees$5,080
 $4,551
 $529
 11.62%$5,299
 $4,658
 $641
 13.76 %
Interchange and ATM fees5,794
 4,769
 1,025
 21.49%6,137
 4,947
 1,190
 24.05 %
Investment management7,153
 6,822
 331
 4.85%7,188
 6,564
 624
 9.51 %
Mortgage banking income3,410
 1,038
 2,372
 228.52%3,968
 1,222
 2,746
 224.71 %
Gain on life insurance benefits434
 1,463
 (1,029) (70.33)%
Increase in cash surrender value of life insurance policies1,296
 998
 298
 29.86%1,304
 984
 320
 32.52 %
Loan level derivative income932
 708
 224
 31.64%2,739
 392
 2,347
 598.72 %
Other noninterest income4,983
 3,001
 1,982
 66.04%4,747
 3,034
 1,713
 56.46 %
Total$28,648
 $21,887
 $6,761
 30.89%$31,816
 $23,264
 $8,552
 36.76 %
              
Six Months EndedNine Months Ended
June 30 ChangeSeptember 30 Change
2019 2018 Amount %2019 2018 Amount %
(Dollars in thousands)  (Dollars in thousands)  
Deposit account fees$9,486
 $8,982
 $504
 5.61%$14,785
 $13,640
 $1,145
 8.39 %
Interchange and ATM fees10,310
 8,942
 1,368
 15.30%16,447
 13,889
 2,558
 18.42 %
Investment management13,901
 12,964
 937
 7.23%21,089
 19,528
 1,561
 7.99 %
Mortgage banking income4,216
 1,908
 2,308
 120.96%8,184
 3,130
 5,054
 161.47 %
Gain on life insurance benefits434
 1,463
 (1,029) (70.33)%
Increase in cash surrender value of life insurance policies2,268
 1,945
 323
 16.61%3,572
 2,929
 643
 21.95 %
Loan level derivative income1,573
 1,155
 418
 36.19%4,312
 1,547
 2,765
 178.73 %
Other noninterest income8,427
 5,854
 2,573
 43.95%13,174
 8,888
 4,286
 48.22 %
Total$50,181
 $41,750
 $8,431
 20.19%$81,997
 $65,014
 $16,983
 26.12 %

The primary reasons for the variances in the noninterest income categories shown in the preceding table include:
Deposit account fees increased due to overall increased household accounts, including the impact of recent acquisitions as well as seasonal increases in overdraft fees.increased debit card usage.
Interchange and ATM fees have increased, driven mainly by increased account activity and a larger customer base from the BHB and MNB acquisitions.acquisitions as well as debit card branding incentives.
Investment management income growth was driven primarily by growth in overall assets under administration, which were $4.2$4.5 billion as of JuneSeptember 30, 2019, an increase of $650.9$879.1 million, or 18.2%24.1%, compared to JuneSeptember 30, 2018, along with seasonal tax preparation fees during the second quarter.2018.
Mortgage banking income grew due to the combination of a significantly increased production channel following the BHB acquisition, capitalizing on a strong rate-driven increase in refinance demand environment, combined with robust purchase volumes.
The Company received proceeds on life insurance policies during the third quarters of both 2019 and typical seasonal increases2018, resulting in volume.gains of $434,000 and $1.5 million, respectively.
The increase in cash surrender value of life insurance policies increased due to policies obtained from the BHB acquisition.
Loan level derivative income increased as a result of higher customer demand.

Other noninterest income increased mainly due to higher unrealized gains on equity securities and increased Federal Home Loan Bank dividends, and increased interest on cash collateral. Additionally, the Company recognized a gain associated withon the sale of residential loans in the third quarter of 2019 of $951,000, as well as a gain on the sale of a small a business credit card portfolio gains on equity securities, equity method investment income, and FHLB dividend income.of $431,000 in the second quarter of 2019.


Noninterest Expense The following table sets forth information regarding non-interest expense for the periods shown:
Table 1920 - Noninterest Expense
Three Months EndedThree Months Ended
June 30 ChangeSeptember 30 Change
2019 2018 Amount %2019 2018 Amount %
(Dollars in thousands)  (Dollars in thousands)  
Salaries and employee benefits$38,852
 $30,288
 $8,564
 28.28 %$39,432
 $31,095
 $8,337
 26.81 %
Occupancy and equipment expenses8,424
 6,497
 1,927
 29.66 %8,555
 6,310
 2,245
 35.58 %
Data processing & facilities management2,042
 1,264
 778
 61.55 %1,515
 1,287
 228
 17.72 %
FDIC assessment778
 691
 87
 12.59 %—
 725
 (725) (100.00)%
Advertising expense1,282
 1,166
 116
 9.95 %1,417
 1,395
 22
 1.58 %
Consulting expense1,384
 1,089
 295
 27.09 %1,338
 1,128
 210
 18.62 %
Core deposit amortization1,572
 512
 1,060
 207.03 %1,567
 507
 1,060
 209.07 %
Loss on sale of securities1,462
 —
 1,462
 100.00%
Merger and acquisition expenses24,696
 434
 24,262
 5,590.32 %705
 2,688
 (1,983) (73.77)%
Software maintenance1,363
 997
 366
 36.71 %1,385
 1,079
 306
 28.36 %
Other noninterest expenses11,177
 9,750
 1,427
 14.64 %11,619
 9,225
 2,394
 25.95 %
Total$93,032
 $52,688
 $40,344
 76.57 %$67,533
 $55,439
 $12,094
 21.81 %
              
Six Months EndedNine Months Ended
June 30 ChangeSeptember 30 Change
2019 2018 Amount %2019 2018 Amount %
(Dollars in thousands)  (Dollars in thousands)  
Salaries and employee benefits$71,969
 $61,388
 $10,581
 17.24 %$111,401
 $92,483
 $18,918
 20.46 %
Occupancy and equipment expenses15,554
 13,905
 1,649
 11.86 %24,109
 20,215
 3,894
 19.26 %
Data processing & facilities management3,368
 2,550
 818
 32.08 %4,883
 3,837
 1,046
 27.26 %
FDIC assessment1,394
 1,489
 (95) (6.38)%1,394
 2,214
 (820) (37.04)%
Advertising expense2,495
 2,289
 206
 9.00 %3,912
 3,684
 228
 6.19 %
Consulting expense2,148
 1,845
 303
 16.42 %3,486
 2,973
 513
 17.26 %
Core deposit amortization2,429
 1,162
 1,267
 109.04 %3,996
 1,670
 2,326
 139.28 %
Loss on sale of securities1,462
 —
 1,462
 100.00%
1,462
 —
 1,462
 100.00%
Merger and acquisition expenses25,728
 434
 25,294
 5,828.11 %26,433
 3,122
 23,311
 746.67 %
Software maintenance2,528
 1,969
 559
 28.39 %3,913
 3,048
 865
 28.38 %
Other noninterest expenses20,268
 19,108
 1,160
 6.07 %31,887
 28,332
 3,555
 12.55 %
Total$149,343
 $106,139
 $43,204
 40.71 %$216,876
 $161,578
 $55,298
 34.22 %

The primary reasons for the variances in the noninterest expense categories shown in the preceding table include:
The increase in salaries and employee benefits reflects overall increases in the employee base, including the BHB and MNB acquisitions, along with increases in expenses associated with incentives, payroll taxes, medical insurance, commissions and retirement benefit costs.
Occupancy and equipment expenses increased mainly due to the acquired BHB branch network.

Data processing increases reflect overall increased levels of transactional activity in conjunction with the Company's growth.

The FDIC assessment expense decrease in 2019 was due to the Company benefiting from the small bank assessment credits allocated in conjunction with the Deposit Insurance Fund's attainment of a 1.38 percent reserve ratio, which resulted in no expense for the third quarter of 2019.
The core deposit amortization increase is due to the BHB acquisition, and the recognition ofwhich resulted in a $19.9 million of core deposit intangible.
MergerThe increase in merger and acquisition costs were $25.7 million for the six months ended June 30,expenses in 2019 which is primarily attributable to the BHB acquisition, andwith a small remainder associated with the MNB acquisition. The majority of these costs include severance, contract termination and integrationsintegration costs. The majority of the merger and acquisition costs for the comparable 2018 period were contract terminations, severance and legal fees primarily associated with the MNB acquisition.
Software maintenance increased during 2019 due to the Company's continued investment in its technology infrastructure.
The increase in other noninterest expenses is primarily due to increases in the loss on sale of securities, marketing costs, debit card expense, card issuance costs and internet banking expenses, amortization of intangibles, exam and audit fees, and the provision for unfunded commitments.expenses.

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 2021 - Tax Provision and Applicable Tax Rates
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30 June 30September 30 September 30
2019 2018 2019 20182019 2018 2019 2018
(Dollars in thousands)(Dollars in thousands)
Combined federal and state income tax provision$10,007
 $9,249
 $21,529
 $16,077
$17,036
 $9,969
 $38,565
 $26,046
Effective income tax rate24.63% 22.91% 24.64% 21.51%24.73% 23.19% 24.68% 22.12%
Blended statutory tax rate28.23% 28.20% 28.23% 28.20%28.24% 28.22% 28.24% 28.22%

The Company's blended statutory and effective tax rates in 2019 are comparable to the year ago periods. The effective tax rate for the current quarter reflects lowerfewer tax credits associated with the New Market Tax Credit program as compared to the year ago period as well as higher pre-tax income amounts.  The effective tax rates in the table above are lower than the blended statutory tax rates 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 and investments in low income housing project investments.

The Company's subsidiaries have received several awards of tax credit allocation authority under the federal New Markets Tax Credit program which enable the Company to recognize federal tax credits over a seven year period totaling 39.0% of the total award.  The Company recognizes federal tax credits as capital investments that are made into its subsidiaries to fund below market interest rate loans to qualifying businesses in low income communities.  The Company's 2013 award is the only remaining award with a tax credit.  The Company will recognize this remaining tax credit of $2.6 million during 2019.
    
The Company invests in various low income housing projects which are real estate limited partnerships that acquire, develop, own and operate low and moderate-income housing developments. As a limited partner in these operating partnerships, the Company will receive tax credits and tax deductions for losses incurred by the underlying properties. The investments are accounted for using the proportional amortization method and will be amortized over various periods through 2036, which represents the period that the tax credits and other tax benefits will be utilized. The total committed investment in these partnerships is $59.8$75.5 million, of which $51.9$54.8 million has been funded as of JuneSeptember 30, 2019. It is expected that the limited partnership investments will generate a net tax benefit of approximately $1.6 million for the full calendar year of 2019 and a total of $14.1$32.6 million over the remaining life of the investments from the combination of the tax credits and operating losses.


Risk Management
    
The Board of Directors and Management have identified significant risks which affect the Company, including credit risk, market risk, liquidity risk, price risk, operations risk, cybersecurity risk, consumer compliance risk, reputation risk, and strategic risk. The Board of Directors has approved an Enterprise Risk Management Policy and Management has adopted a Risk Appetite Statement that addresses each risk category.  Management reviews key risks and their mitigation on an ongoing basis

and provides regular enterprise risk management reports to the Board of Directors. The Board of Directors, with the assistance of the Board’s Risk Committee, oversees Management’s enterprise risk assessment and management.
Credit Risk   Credit risk is the possibility that customers or other counterparties may not repay loans or other contractual obligations according to their terms. While the collateral securing loans may be sufficient in some cases to recover the amount due, in other cases the Company may experience significant credit losses which could have an adverse effect on its operating results. The Company makes assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of 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 5, “Loans, Allowance for Loan Losses, and Credit Quality” within Condensed Notes to Consolidated Financial Statements included in Item 1.
Operations Risk    Operations risk is the risk of loss from the Company’s operations due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, natural disasters, and security risks. Potential operational risk exposure exists throughout the Company. The continued effectiveness of colleagues, technical systems, operational infrastructure, and relationships with key third party service providers are integral to mitigating operations risk, and any shortcomings subject the Company to risks that vary in size, scale and scope. Operations risks include, but are not limited to, operational or technical failures, unlawful tampering with technical systems, cyber security, terrorist activities, ineffectiveness or exposure due to interruption in third party support, as well as the loss of key individuals or failure on the part of the key individuals to perform properly. Management maintains an Operations Risk Committee to assess and mitigate operations risk which contributes to periodic enterprise risk management reporting to the Board.
Compliance Risk    Compliance risk is the risk of regulatory sanctions or financial loss resulting from the failure to comply with rules and regulations issued by the various banking agencies, the U.S. Securities and Exchange Commission, the NASDAQ Stock Market, and good banking practices. Activities which may expose the Company to compliance risk include money laundering, privacy and data protection, adherence to laws and regulations, community reinvestment initiatives, and employment and tax matters. Compliance risk is mitigated through the use of written policies and procedures, staff training, and continuous monitoring of activities for adherence to policies and procedures. Management maintains a Compliance Committee to assess and mitigate compliance risk that contributes to periodic enterprise risk management reporting to the Board.
Strategic and Reputation Risk  Strategic and reputation risk is 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 and threats in business, markets, and products. Management seeks to mitigate strategic and reputational risk through annual strategic planning, frequent executive review of strategic plan progress, ongoing competitive and technological observation, assessment processes of new product, new branch,branches, and new business initiatives, adherence to ethical standards, a philosophy of customer advocacy, a structured process of customer complaint resolution, and ongoing reputational monitoring, crisis management planning, and management tools.

Market Risk Market risk is the sensitivity of income to changes in interest rates, equity prices, foreign exchange rates, commodity prices, and other market-driven rates or prices. The Company’s most significant market risk exposure is interest rate risk.
Interest Rate Risk     Interest rate risk is the sensitivity of income due to changes in interest rates. Interest rate changes, 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, and have other effects.
Management maintains an Asset Liability Committee to manage interest rate risk, which strives to control interest rate risk within limits approved by the Board of Directors that reflect the Company’s tolerance for interest rate risk over short-term and long-term horizons. The Company attempts to manage interest rate risk by identifying, quantifying, and, where appropriate, hedging exposure. If assets and liabilities do not re-price simultaneously and in equal volume, the potential for interest rate exposure exists. It is the Company'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 limits Management determines to be prudent, 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 an 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 non-maturity deposits (e.g., demand deposit, negotiable order of withdrawal, savings, and money market accounts). 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, interest rate sensitivity of loans cannot be determined exactly and actual behavior may differ from assumptions.
Based upon the net interest income simulation models, the Company currently forecasts that the Bank’s assets re-price faster than the liabilities. As a result, the net interest income of the Bank will benefit as market rates increase. Conversely,increase, and contract if market rates were to fall, the net interest margin of the Bank is expected to contract.decrease. The Company runs several scenarios to quantify and effectively assist in managing this position. These scenarios include instantaneous parallel shifts in market rates as well as gradual (12-24 months) shifts in market rates, and may also include other alternative scenarios as management deems necessary, given the interest rate environment.



The results of all scenarios and the impact to net interest income are outlined in the table below:
Table 2122 - Interest Rate Sensitivity
June 30September 30
2019 20182019 2018
Year 1 Year 2 Year 1 Year 2Year 1 Year 2 Year 1 Year 2
Parallel rate shocks (basis points)              
-200(8.3)% (13.6)% n/a
 n/a
-100(3.3)% (5.9)% (7.7)% (9.1)%(3.2)% (7.3)% (6.5)% (7.0)%
+1002.8 % 4.5 % 4.9 % 9.4 %3.2 % 4.1 % 4.3 % 9.4 %
+2005.2 % 8.4 % 9.3 % 15.9 %5.9 % 8.8 % 8.0 % 15.0 %
+3007.5 % 12.2 % 13.8 % 22.6 %8.4 % 13.3 % 11.8 % 21.0 %
+4009.7 % 16.0 % 18.3 % 29.1 %10.9 % 17.6 % 15.6 % 26.7 %
              
Gradual rate shifts (basis points)              
-200 over 12 months(3.5)% (11.9)% n/a
 n/a
-100 over 12 months(1.5)% (5.0)% (3.2)% (7.7)%(1.2)% (6.3)% (2.7)% (5.7)%
+200 over 12 months2.4 % 7.1 % 4.5 % 14.3 %2.7 % 7.3 % 3.9 % 13.7 %
+400 over 24 months2.4 % 9.0 % 4.5 % 18.6 %2.7 % 9.5 % 3.9 % 17.3 %
              
Alternative scenarios              
Yield Curve Twist0.8 % 5.0 % n/a
 n/a
1.0 % 4.7 % n/a
 n/a
Flat up 200 basis points scenarion/a
 n/a
 4.5 % 13.6 %n/a
 n/a
 3.9 % 12.9 %
    
The results depicted in the table above are dependent on material assumptions. For instance, asymmetrical rate behavior can have a material impact on the simulation results. If competition for deposits prompts the Company to raise rates on those liabilities more quickly than is assumed in the simulation analysis without a corresponding increase in asset yields, net interest income would 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 sixnine months ended JuneSeptember 30, 2019 were the shape of the U.S. Government securities and interest rate swap yield curve, the U.S. prime interest rate and LIBOR rates, and the 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 using 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 the other party. Interest rate caps and floors are agreements where 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. Additionally, the Company may manage the interest rate risk inherent in its mortgage banking operations by entering into forward sales contracts. In an effort to mitigate that risk, forward delivery sales commitments are executed, under which

the Company agrees to deliver whole mortgage loans to various investors. See Note 9, “Derivative and Hedging Activities” within Condensed Notes to Consolidated Financial Statements included in Item 1 hereof for additional information regarding the Company’s Derivative Financial Instruments.

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. See Note 4, “Securities” within Condensed Notes to Consolidated Financial Statements included in Item 1.
    
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 to meet its ongoing obligations to pay deposit withdrawals, repay borrowings, and fund loans. 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 base of in-market core deposits. These funds are principally comprised of demand deposits, interest checking accounts, savings accounts, and money market accounts. Deposit levels are greatly influenced by interest rates, economic conditions, and competitive factors.
Management maintains an Asset Liability Committee to manage liquidity risk. The Company’s primary measure of short-term liquidity is the Total Basic Surplus/Deficit as a percentage of assets. This ratio, which analyzes the relationship between liquid assets plus available funding at the FHLB, less short-term liabilities relative to total assets, was within policy limits at JuneSeptember 30, 2019. The Total Basic Surplus/Deficit 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 Total Basic Surplus/Deficit measure, whereas, an increase in loans, with no increase in deposits, will decrease the measure. Other factors affecting the Total Basic Surplus/Deficit measure include collateral requirements at the FHLB, changes in the securities portfolio, and the mix of deposits.
The Bank seeks 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 funding sources are a contingent source of liquidity and, when profitable lending and investment opportunities exist, access to them 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 lending decisions can also affect its liquidity position.
The Company can raise additional funds through the issuance of equity or unsecured debt privately or publicly and has done so in the past. 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. The Company monitors the 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 dates indicated:
Table 2223 - Sources of Liquidity
June 30, 2019 December 31, 2018September 30, 2019 December 31, 2018
Outstanding 
Additional
Borrowing
Capacity
 Outstanding 
Additional
Borrowing  Capacity
Outstanding 
Additional
Borrowing
Capacity
 Outstanding 
Additional
Borrowing  Capacity
(Dollars in thousands)(Dollars in thousands)
Federal Home Loan Bank of Boston (1)$277,671
 $1,242,574
 $147,806
 $953,539
$70,708
 $1,688,708
 $147,806
 $953,539
Federal Reserve Bank of Boston (2)—
 778,064
 —
 705,242
—
 963,280
 —
 705,242
Unpledged Securities—
 833,752
 —
 691,383
—
 826,889
 —
 691,383
Line of Credit—
 50,000
 —
 —
—
 50,000
 —
 —
Long-term borrowing (3)74,879
 —
 —
 —
74,894
 —
 —
 —
Junior subordinated debentures (3)62,847
 —
 76,173
 —
62,848
 —
 76,173
 —
Subordinated debt (3)84,305
 —
 34,728
 —
84,341
 —
 34,728
 —
Reciprocal deposits (3)198,982
 —
 180,514
 —
211,003
 —
 180,514
 —
Brokered deposits (3)260,245
 —
 6,000
 —
303,427
 —
 6,000
 —
$958,929
 $2,904,390
 $445,221
 $2,350,164
$807,221
 $3,528,877
 $445,221
 $2,350,164
 

(1)Loans with a carrying value of $2.4$2.6 billion and $1.6 billion at JuneSeptember 30, 2019 and December 31, 2018, respectively, have been pledged to the Federal Home Loan Bank of Boston resulting in this additional unused borrowing capacity.
(2)Loans with a carrying value of $1.3$1.6 billion and $1.2 billion at JuneSeptember 30, 2019 and December 31, 2018, respectively, have been pledged to the Federal Reserve Bank of Boston resulting in this additional unused borrowing capacity.
(3)The additional borrowing capacity has not been assessed for these categories.
In addition to policies used for managing operational liquidity, the Board of Directors and Management 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 Management 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. Management has established a Liquidity Contingency Plan 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 were no material changes in off-balance sheet financial instruments during the three months ended JuneSeptember 30, 2019.
See Note 9, "Derivative and Hedging Activities" and Note 15, "Commitments and Contingencies" within Condensed Notes to Consolidated Financial Statements included in Item 1 for more information relating to the Company's other off-balance sheet financial instruments.
Contractual Obligations, Commitments, and Contingencies There were no material changes in contractual obligations, commitments, or contingencies during the three months ended JuneSeptember 30, 2019. See Note 6 "Borrowings" within Condensed Notes to Consolidated Financial Statements included in Item 1.
Please refer to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for a complete table of contractual obligations, commitments and contingencies.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required by this Item 3 is included in the "Risk Management" section of Item 2 of Part I of this Form 10-Q, “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 Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. 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 the Company's internal controls over financial reporting that occurred during the secondthird quarter of 2019 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
At JuneSeptember 30, 2019, the Bank was involved in pending lawsuits that arose in the ordinary course of business. Management has reviewed these pending lawsuits with legal counsel and has taken into consideration the view of counsel as to their outcome. In the opinion of management, the final disposition of pending lawsuits is not expected to have a material adverse effect on the Company’s financial position or results of operations.

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 Annual Report on Form 10-K for the fiscal year ended December 31, 2018, 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 JuneSeptember 30, 2019:
 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       
April 1 to April 30, 2019—
 $—
 —
 —
May 1 to May 31, 201982
 $77.72
 —
 —
June 1 to June 30, 201951
 $71.68
 —
 —
Total133
   —
 —
 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, 2019—
 $—
 —
 —
August 1 to August 31, 2019—
 $—
 —
 —
September 1 to September 30, 201943
 $75.04
 —
 —
Total43
   —
 —
 

(1)Shares repurchased relate to the surrendering of shares in connection with the exercise and/or vesting of equity compensation grants to satisfy related tax withholding obligations.
(2)TheAs of September 30, 2019, the Company doesdid not currently have a stock repurchase program or plan in place. On October 17, 2019, the Company announced that its Board of Directors authorized a share repurchase program of up to 1.5 million shares of the Company's common stock.

Item  3. Defaults Upon Senior Securities - None

Item 4. Mine Safety Disclosures - Not Applicable

Item 5. Other Information - None


Item 6. Exhibits

Exhibit Index
 
No.Exhibit
10.1
Employment agreement between Mark J. Ruggiero and the Company and/or Rockland Trust, incorporated herein by reference to Exhibit 10.1 to Form 8-K filed on April 1,2019. #
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 heretohereto..*
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.+
101The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL documentdocument.
104Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101).

*Filed herewith
+Furnished herewith
  
#Management contract or compensatory plan or arrangement



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)
 
August 6,November 5, 2019 /s/ Christopher Oddleifson
  
Christopher Oddleifson
President and
Chief Executive Officer
(Principal Executive Officer)
 
August 6,November 5, 2019 /s/ Mark J. Ruggiero
  
Mark J. Ruggiero
Chief Financial Officer
(Principal Financial Officer)


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