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
For the quarterly period ended September 30, 20172018
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 Massachusetts 02339
Mailing Address: 288 Union Street, Rockland, Massachusetts 02370
(Address of principal executive offices, including zip code)
(781) 878-6100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, 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 FileroSmaller Reporting Companyo
    
  Emerging Growth Companyo
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 Acts. Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Act.    Yes  o    No  x
As of November 1, 2017,October 31, 2018, there were 27,443,14227,551,581 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 - September 30, 20172018 and December 31, 20162017
4
Consolidated Statements of Income - Three and nine months ended September 30, 20172018 and 20162017
6
Consolidated Statements of Comprehensive Income -Three and nine months ended September 30, 20172018 and 20162017
78
Consolidated Statements of Stockholders’ Equity - Nine months ended September 30, 20172018 and 20162017
89
Consolidated Statements of Cash Flows - Nine months ended September 30, 20172018 and 20162017
910
  
Condensed Notes to Consolidated Financial Statements - September 30, 20172018 
Note 1 - Basis of Presentation
1112
Note 2 - Recent Accounting Standards Updates
1112
Note 3 - AcquisitionsSecurities
14
Note 4 - Securities
16
Note 5 - Loans, Allowance for Loan Losses, and Credit Quality
1918
Note 5 - Earnings Per Share
30
Note 6 - Bank Premises and EquipmentStock Based Compensation
31
Note 7 - Repurchase Agreements
32
Note 78 - Earnings Per ShareDerivative and Hedging Activities
32
Note 89 - Stock Based CompensationBalance Sheet Offsetting
3337
Note 9 - Repurchase Agreements
33
Note 10 - Derivative and Hedging Activities
34
Note 11 - Balance Sheet OffsettingFair Value Measurements
38
Note 1211 - Fair Value Measurements
39
Note 13 - Comprehensive Income (Loss)Revenue Recognition
47
Note 1412 - Comprehensive Income (Loss)
50
Note 13 - Commitments and Contingencies
4952
Note 1514 - Low Income Housing Project Investments
5053
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
5154
Table 1 - Closed Residential Real Estate Loans
6265
Table 2 - Mortgage Servicing Asset
6366
Table 3 - Components of Loan Growth/(Decline)Nonperforming Assets
6470
Table 4 - Nonperforming Assets
67
Table 5 - Activity in Nonperforming Assets
6770
Table 65 - Troubled Debt Restructurings
6871
Table 76 - Activity in Troubled Debt Restructurings
6871
Table 87 - Interest Income - Nonaccrual Loans and Troubled Debt Restructurings
6871
Table 98 - Summary of Changes in the Allowance for Loan Losses
7073
Table 109 - Summary of Allocation of the Allowance for Loan Losses
71
Table 11 - Components of Deposit Growth/(Decline)
73
Table 12 - Borrowings
74
Table 1310 - Borrowings
76
Table 11 - Company and Bank’s Capital Amounts and Ratios
75
Table 14 - Summary of Results of Operations
77
Table 1512 - Summary of Results of Operations
79
Table 13 - Average Balance, Interest Earned/Paid & Average Yields Quarter-to-Date
7880
Table 14 - Average Balance, Interest Earned/Paid & Average Yields Year-to-Date
82
Table 15 - Volume Rate Analysis
84
Table 16 - Noninterest Income - Three and Nine Months Ended
86

Table of Contents
Table 16 - Average Balance, Interest Earned/Paid & Average Yields Year-to-Date
80
Table 17 - Volume Rate Analysis
82
Table 18 - Noninterest Income - Three and Nine Months Ended
85
Table 19 - Noninterest Expense - Three and Nine Months Ended
8687
Table 2018 - Tax Provision and Applicable Tax Rates
88
Table 2119 - New Markets Tax Credit Recognition Schedule
88
Table 2220 - Interest Rate Sensitivity
9091
Table 2321 - Sources of Liquidity
9293
Item 3. Quantitative and Qualitative Disclosures About Market Risk
9293
Item 4. Controls and Procedures
9394
  
PART II. OTHER INFORMATION
9394
Item 1. Legal Proceedings
9394
Item 1A. Risk Factors
9394
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
9395
Item 3. Defaults Upon Senior Securities
9395
Item 4. Mine Safety Disclosures
9395
Item 5. Other Information
9395
Item 6. Exhibits
9496
Signatures
9597
  
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)
 
September 30,
2017		 December 31
2016		September 30,
2018		 December 31
2017
Assets
Cash and due from banks$100,404
 $97,196
$102,540
 $103,485
Interest-earning deposits with banks158,861
 191,899
148,307
 109,631
Securities      
Securities - trading1,298
 804
Securities - available for sale429,125
 363,644
Securities - held to maturity (fair value $479,662 and $485,650)478,798
 487,076
Trading1,581
 1,324
Equities20,430
 —
Available for sale435,861
 447,498
Held to maturity (fair value $534,622 and $494,194)553,705
 497,688
Total securities909,221
 851,524
1,011,577
 946,510
Loans held for sale (at fair value)5,459
 6,139
10,431
 4,768
Loans      
Commercial and industrial858,522
 902,053
1,003,780
 888,528
Commercial real estate3,087,160
 3,010,798
3,132,491
 3,116,561
Commercial construction395,267
 320,391
352,491
 401,797
Small business130,656
 122,726
149,200
 132,370
Residential real estate756,130
 644,426
801,810
 754,329
Home equity - first position615,132
 577,006
647,132
 612,990
Home equity - subordinate positions437,163
 411,141
426,829
 439,098
Other consumer9,872
 11,064
13,669
 9,880
Total loans6,289,902
 5,999,605
6,527,402
 6,355,553
Less: allowance for loan losses(59,710) (61,566)(63,235) (60,643)
Net loans6,230,192
 5,938,039
6,464,167
 6,294,910
Federal Home Loan Bank stock11,597
 11,497
13,107
 11,597
Bank premises and equipment, net94,906
 78,480
95,941
 94,722
Goodwill231,806
 221,526
231,806
 231,806
Other intangible assets10,299
 9,848
7,379
 9,341
Cash surrender value of life insurance policies150,352
 144,503
153,186
 151,528
Other real estate owned and other foreclosed assets2,898
 4,173
190
 612
Other assets146,924
 154,551
136,866
 123,119
Total assets$8,052,919
 $7,709,375
$8,375,497
 $8,082,029
Liabilities and Stockholders' Equity
Deposits      
Demand deposits$2,183,760
 $2,057,086
$2,337,221
 $2,159,396
Savings and interest checking accounts2,568,620
 2,469,237
2,621,926
 2,599,922
Money market1,302,662
 1,236,778
1,353,641
 1,325,634
Time certificates of deposit of $100,000 and over260,404
 266,190
317,761
 278,531
Other time certificates of deposits367,496
 382,962
345,690
 365,770
Total deposits6,682,942
 6,412,253
6,976,239
 6,729,253
Borrowings      
Federal Home Loan Bank borrowings53,272
 50,819

Federal Home Loan Bank borrowings50,767
 53,264
Customer repurchase agreements179,670
 176,913
141,176
 162,679
Junior subordinated debentures (less unamortized debt issuance costs of $127 and $136)73,071
 73,107
Subordinated debentures (less unamortized debt issuance costs of $330 and $365)34,670
 34,635
Junior subordinated debentures (less unamortized debt issuance costs of $119 and $125)73,078
 73,073
Subordinated debentures (less unamortized debt issuance costs of $283 and $318)34,717
 34,682
Total borrowings340,683
 335,474
299,738
 323,698
Other liabilities98,070
 96,958
101,215
 85,269
Total liabilities7,121,695
 6,844,685
7,377,192
 7,138,220
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: 27,437,791 shares at September 30, 2017 and 27,005,813 shares at December 31, 2016 (includes 184,846 and 212,698 shares of unvested participating restricted stock awards, respectively)		273
 268
Value of shares held in rabbi trust at cost: 163,777 shares at September 30, 2017 and 170,036 shares at December 31, 2016(4,505) (4,277)
Common stock, $.01 par value, authorized: 75,000,000 shares,
issued and outstanding: 27,540,843 shares at September 30, 2018 and 27,450,190 shares at December 31, 2017 (includes 159,809 and 177,191 shares of unvested participating restricted stock awards, respectively)		274
 273
Value of shares held in rabbi trust at cost: 157,872 shares at September 30, 2018 and 164,438 shares at December 31, 2017(4,784) (4,590)
Deferred compensation and other retirement benefit obligations4,505
 4,277
4,784
 4,590
Additional paid in capital477,877
 451,664
483,222
 479,430
Retained earnings452,658
 414,095
527,473
 465,937
Accumulated other comprehensive income (loss), net of tax416
 (1,337)
Accumulated other comprehensive loss, net of tax(12,664) (1,831)
Total stockholders’ equity931,224
 864,690
998,305
 943,809
Total liabilities and stockholders' equity$8,052,919
 $7,709,375
$8,375,497
 $8,082,029
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 Nine Months EndedThree Months Ended Nine Months Ended
September 30 September 30September 30 September 30
2017 2016 2017 20162018 2017 2018 2017
Interest income              
Interest and fees on loans$65,667
 $56,778
 $186,747
 $166,683
$75,220
 $65,667
 $214,486
 $186,747
Taxable interest and dividends on securities5,642
 5,034
 16,618
 15,500
6,664
 5,642
 19,381
 16,618
Nontaxable interest and dividends on securities19
 28
 71
 89
14
 19
 46
 71
Interest on loans held for sale33
 81
 68
 170
61
 33
 110
 68
Interest on federal funds sold and short-term investments417
 387
 814
 767
916
 417
 1,768
 814
Total interest and dividend income71,778
 62,308
 204,318
 183,209
82,875
 71,778
 235,791
 204,318
Interest expense              
Interest on deposits3,331
 2,733
 9,010
 8,339
5,251
 3,331
 13,773
 9,010
Interest on borrowings1,374
 1,907
 4,280
 5,778
1,390
 1,374
 4,145
 4,280
Total interest expense4,705
 4,640
 13,290
 14,117
6,641
 4,705
 17,918
 13,290
Net interest income67,073
 57,668
 191,028
 169,092
76,234
 67,073
 217,873
 191,028
Provision for loan losses—
 950
 1,650
 2,075
1,075
 —
 3,575
 1,650
Net interest income after provision for loan losses67,073
 56,718
 189,378
 167,017
75,159
 67,073
 214,298
 189,378
Noninterest income              
Deposit account fees4,401
 4,766
 13,337
 13,979
4,658
 4,401
 13,640
 13,337
Interchange and ATM fees4,525
 4,190
 12,881
 12,050
4,947
 4,525
 13,889
 12,881
Investment management5,967
 5,446
 17,576
 16,183
6,564
 5,967
 19,528
 17,576
Mortgage banking income1,338
 1,963
 3,609
 4,458
1,222
 1,338
 3,130
 3,609
Gain on life insurance benefits1,463
 —
 1,463
 —
Gain on sale of equity securities12
 —
 19
 5
4
 12
 6
 19
Increase in cash surrender value of life insurance policies1,019
 984
 3,000
 2,980
984
 1,019
 2,929
 3,000
Loan level derivative income784
 810
 2,727
 4,627
392
 784
 1,547
 2,727
Other noninterest income2,724
 2,257
 7,931
 6,384
3,030
 2,724
 8,882
 7,931
Total noninterest income20,770
 20,416
 61,080
 60,666
23,264
 20,770
 65,014
 61,080
Noninterest expenses              
Salaries and employee benefits29,289
 27,395
 86,267
 81,561
31,095
 29,289
 92,483
 86,267
Occupancy and equipment expenses6,085
 5,433
 18,302
 16,927
6,310
 6,085
 20,215
 18,302
Data processing and facilities management1,272
 1,400
 3,732
 3,831
1,287
 1,272
 3,837
 3,732
FDIC assessment673
 725
 2,234
 2,655
725
 673
 2,214
 2,234
Advertising expense1,359
 1,654
 4,018
 4,134
1,395
 1,359
 3,684
 4,018
Consulting expense937
 770
 2,753
 2,235
1,128
 937
 2,973
 2,753
Debit card expense992
 730
 2,616
 2,162
755
 992
 2,405
 2,616
Legal fees1,423
 321
 2,074
 1,132
752
 1,423
 2,084

2,074
Loss on extinguishment of debt—
 —
 —
 437
Loss on sale of equity securities1
 —
 6
 32
—
 1
 —
 6
Merger and acquisition expense—
 151
 3,393
 691
2,688
 —
 3,122
 3,393
Mortgage operations expense723
 820
 1,896
 1,880
Software maintenance888
 765
 2,714
 2,254
1,079
 888
 3,048
 2,714
Other noninterest expenses7,668
 6,693
 22,887
 20,554
8,225
 8,391
 25,513
 24,783
Total noninterest expenses51,310
 46,857
 152,892
 140,485
55,439
 51,310
 161,578
 152,892
Income before income taxes36,533
 30,277
 97,566
 87,198
42,984
 36,533
 117,734
 97,566
Provision for income taxes12,681
 9,793
 32,426
 27,729
9,969
 12,681
 26,046
 32,426
Net income$23,852
 $20,484
 $65,140
 $59,469
$33,015
 $23,852
 $91,688
 $65,140
Basic earnings per share$0.87
 $0.78
 $2.39
 $2.26
$1.20
 $0.87
 $3.33
 $2.39
Diluted earnings per share$0.87
 $0.78
 $2.38
 $2.26
Weighted average common shares (basic)27,436,792
 26,324,316
 27,242,902
 26,301,340
Common share equivalents76,307
 53,072
 78,043
 48,354
Weighted average common shares (diluted)27,513,099
 26,377,388
 27,320,945
 26,349,694
Cash dividends declared per common share$0.32
 $0.29
 $0.96
 $0.87

Diluted earnings per share$1.20
 $0.87
 $3.32
 $2.38
Weighted average common shares (basic)27,537,841
 27,436,792
 27,517,210
 27,242,902
Common share equivalents63,499
 76,307
 62,596
 78,043
Weighted average common shares (diluted)27,601,340
 27,513,099
 27,579,806
 27,320,945
Cash dividends declared per common share$0.38
 $0.32
 $1.14
 $0.96
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 Nine Months EndedThree Months Ended Nine Months Ended
September 30 September 30September 30 September 30
2017 2016 2017 20162018 2017 2018 2017
Net income$23,852
 $20,484
 $65,140
 $59,469
$33,015
 $23,852
 $91,688
 $65,140
Other comprehensive income (loss), net of tax              
Net change in fair value of securities available for sale188
 (816) 1,511
 5,119
(2,262) 188
 (9,654) 1,511
Net change in fair value of cash flow hedges109
 674
 8
 653
(405) 109
 (302) 8
Net change in other comprehensive income for defined benefit postretirement plans78
 59
 234
 180
117
 78
 351
 234
Total other comprehensive income (loss)375
 (83) 1,753
 5,952
(2,550) 375
 (9,605) 1,753
Total comprehensive income$24,227
 $20,401
 $66,893
 $65,421
$30,465
 $24,227
 $82,083
 $66,893
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.



INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited—Dollars in thousands, except per share data)

Common Stock Outstanding Common Stock Value of Shares Held in Rabbi Trust at Cost Deferred Compensation 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, 201727,450,190
 $273
 $(4,590) $4,590
 $479,430
 $465,937
 $(1,831) $943,809
Opening balance reclassification (1)—
 —
 —
 —
 —
 397
 (397) —
Cumulative effect accounting adjustment (2)—
 —
 —
 —
 —
 831
 (831) —
Net income—
 —
 —
 —
 —
 91,688
 —
 91,688
Other comprehensive loss—
 —
 —
 —
 —
 —
 (9,605) (9,605)
Common dividend declared ($1.14 per share)—
 —
 —
 —
 —
 (31,380) —
 (31,380)
Proceeds from exercise of stock options, net of cash paid23,195
 —
 —
 —
 184
 —
 —
 184
Stock based compensation—
 —
 —
 —
 3,161
 —
 —
 3,161
Restricted stock awards issued, net of awards surrendered43,174
 1
 —
 —
 (1,345) —
 —
 (1,344)
Shares issued under direct stock purchase plan24,284
 —
 —
 —
 1,792
 —
 —
 1,792
Deferred compensation and other retirement benefit obligations—
 —
 (194) 194
 —
 —
 —
 —
Balance September 30, 201827,540,843
 $274
 $(4,784) $4,784
 $483,222
 $527,473
 $(12,664) $998,305
               
Balance December 31, 201627,005,813
 $268
 $(4,277) $4,277
 $451,664
 $414,095
 $(1,337) $864,690
27,005,813
 $268
 $(4,277) $4,277
 $451,664
 $414,095
 $(1,337) $864,690
Cumulative effect accounting adjustment (1)—
 —
 —
 —
 542
 (365) —
 177
Cumulative effect accounting adjustment (3)—
 —
 —
 —
 542
 (365) —
 177
Net income—
 —
 —
 —
 —
 65,140
 —
 65,140
—
 —
 —
 —
 —
 65,140
 —
 65,140
Other comprehensive income—
 —
 —
 —
 —
 —
 1,753
 1,753
—
 —
 —
 —
 —
 —
 1,753
 1,753
Common dividend declared ($0.96 per share)—
 —
 —
 —
 —
 (26,212) —
 (26,212)—
 —
 —
 —
 —
 (26,212) —
 (26,212)
Common stock issued for acquisition369,286
 4
 —
 —
 23,464
 —
 —
 23,468
369,286
 4
 —
 —
 23,464
 —
 —
 23,468
Proceeds from exercise of stock options, net of cash paid11,590
 —
 —
 —
 (5) —
 —
 (5)11,590
 —
 —
 —
 (5) —
 —
 (5)
Stock based compensation—
 —
 —
 —
 2,346
 —
 —
 2,346
—
 —
 —
 —
 2,346
 —
 —
 2,346
Restricted stock awards issued, net of awards surrendered32,476
 1
 —
 —
 (1,364) —
 —
 (1,363)32,476
 1
 —
 —
 (1,364) —
 —
 (1,363)
Shares issued under direct stock purchase plan18,626
 —
 —
 —
 1,230
 —
 —
 1,230
18,626
 —
 —
 —
 1,230
 —
 —
 1,230
Deferred compensation and other retirement benefit obligations—
 —
 (228) 228
 —
 —
 —
 —
—
 —
 (228) 228
 —
 —
 —
 —
Balance September 30, 201727,437,791
 $273
 $(4,505) $4,505
 $477,877
 $452,658
 $416
 $931,224
27,437,791
 $273
 $(4,505) $4,505
 $477,877
 $452,658
 $416
 $931,224
               
Balance December 31, 201526,236,352
 $260
 $(3,958) $3,958
 $405,486
 $368,169
 $(2,452) $771,463
Net income—
 —
 —
 —
 —
 59,469
 —
 59,469
Other comprehensive income—
 —
 —
 —
 —
 —
 5,952
 5,952
Common dividend declared ($0.87 per share)—
 —
 —
 —
 —
 (22,888) —
 (22,888)
Proceeds from exercise of stock options, net of cash paid9,022
 —
 —
 —
 160
 —
 —
 160
Tax benefit related to equity award activity—
 —
 —
 —
 354
 —
 —
 354
Stock based compensation—
 —
 —
 —
 2,308
 —
 —
 2,308
Restricted stock awards issued, net of awards surrendered32,567
 1
 —
 —
 (674) —
 —
 (673)
Shares issued under direct stock purchase plan42,526
 —
 —
 —
 1,918
 —
 —
 1,918
Deferred compensation and other retirement benefit obligations—
 —
 (241) 241
 —
 —
 —
 —
Tax benefit related to deferred compensation distributions—
 —
 —
 —
 179
 —
 —
 179
Balance September 30, 201626,320,467
 $261
 $(4,199) $4,199
 $409,731
 $404,750
 $3,500
 $818,242
(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.
(3)Represents adjustment needed to reflect the cumulative impact on retained earnings for previously recognized stock based compensation, which included an adjustment for estimated forfeitures. Pursuant to the Company's adoption of Accounting Standards Update 2016-09, the Company has elected to recognize stock based compensation without inclusion of a forfeiture estimate, and as such has recognized this adjustment to present retained earnings consistent with this election.
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)
 
Nine Months EndedNine Months Ended
September 30September 30
2017 20162018 2017
Cash flow from operating activities      
Net income$65,140
 $59,469
$91,688
 $65,140
Adjustments to reconcile net income to net cash provided by operating activities      
Depreciation and amortization11,497
 10,729
12,088
 11,497
Provision for loan losses1,650
 2,075
3,575
 1,650
Deferred income tax expense443
 314
176
 443
Net (gain) loss on sale of securities(13) 27
Net unrealized loss on equity securities113
 —
Net gain on sale of securities(6) (13)
Net (gain) loss on bank premises and equipment(93) 10
8
 (93)
Loss on extinguishment of debt—
 437
Net loss on other real estate owned and foreclosed assets308
 41
1
 308
Realized gain on sale leaseback transaction(775) (775)(585) (775)
Stock based compensation2,346
 2,308
3,161
 2,346
Excess tax benefit related to equity award activity—
 (354)
Increase in cash surrender value of life insurance policies(3,000) (2,980)(2,929) (3,000)
Gain on life insurance benefits(1,463) —
Change in fair value on loans held for sale102
 (60)(147) 102
Net change in:      
Trading assets(494) (453)(257) (494)
Loans held for sale578
 (7,284)(5,516) 578
Other assets4,561
 (42,044)(12,179) 4,561
Other liabilities6,177
 18,314
16,066
 6,177
Total adjustments23,287
 (19,695)12,106
 23,287
Net cash provided by operating activities88,427
 39,774
103,794
 88,427
Cash flows used in investing activities      
Proceeds from sales of equity securities30
 —
Purchases of equity securities(305) —
Proceeds from sales of securities available for sale523
 285
—
 523
Proceeds from maturities and principal repayments of securities available for sale40,228
 48,421
41,964
 40,228
Purchases of securities available for sale(104,284) (60,888)(63,844) (104,284)
Proceeds from maturities and principal repayments of securities held to maturity58,308
 62,005
62,650
 58,308
Purchases of securities held to maturity(49,802) (14,998)(118,256) (49,802)
Net redemption of Federal Home Loan Bank stock386
 3,127
Net redemption (purchases) of Federal Home Loan Bank stock(1,510) 386
Investments in low income housing projects(4,713) (5,473)(2,598) (4,713)
Purchases of life insurance policies(115) (116)(116) (115)
Proceeds from life insurance policies2,850
 —
Net increase in loans(138,622) (198,731)(173,224) (138,622)
Cash acquired in business combinations, net of cash paid6,289
 —
—
 6,289
Purchases of bank premises and equipment(18,643) (6,022)(8,123) (18,643)
Proceeds from the sale of bank premises and equipment1,919
 26
96
 1,919
Proceeds from the sale of other real estate owned and foreclosed assets1,531
 842
308
 1,531
Net payments relating to other real estate owned and foreclosed assets—
 (145)
Net cash used in investing activities(206,995) (171,667)(260,078) (206,995)
Cash flows provided by financing activities   
Net decrease in time deposits(35,947) (55,759)

Cash flows provided by financing activities   
Net increase (decrease) in time deposits19,226
 (35,947)
Net increase in other deposits147,331
 334,516
227,836
 147,331
Repayments of long-term Federal Home Loan Bank borrowings—
 (51,641)(2,475) —
Net increase in customer repurchase agreements2,757
 6,956
Net increase (decrease) in customer repurchase agreements(21,503) 2,757
Proceeds from exercise of stock options, net of cash paid(5) 160
184
 (5)
Restricted stock awards issued, net of awards surrendered(1,363) (673)(1,344) (1,363)
Excess tax benefit from stock based compensation—
 354
Tax benefit from deferred compensation distribution—
 179
Proceeds from shares issued under direct stock purchase plan1,230
 1,918
1,792
 1,230
Common dividends paid(25,265) (22,079)(29,701) (25,265)
Net cash provided by financing activities88,738
 213,931
194,015
 88,738
Net increase (decrease) in cash and cash equivalents(29,830) 82,038
37,731
 (29,830)
Cash and cash equivalents at beginning of year289,095
 275,765
213,116
 289,095
Cash and cash equivalents at end of period$259,265
 $357,803
$250,847
 $259,265
Supplemental schedule of noncash investing and financing activities      
Transfer of loans to other real estate owned & foreclosed assets$564
 $377
$—
 $564
Net increase in capital commitments relating to low income housing project investments$248
 $163
$65
 $248
In conjunction with the Company's acquisition of Island Bancorp, Inc., assets were acquired and liabilities were assumed as follows   
In conjunction with the Company's acquisitions, assets were acquired and liabilities were assumed as follows   
Common stock issued for acquisition$23,468
 $—
$—
 $23,468
Fair value of assets acquired, net of cash acquired$179,252
 $—
$—
 $179,252
Fair value of liabilities assumed$162,073
 $—
$—
 $162,073
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 September 30, 20172018 are not necessarily indicative of the results that may be expected for the year ending December 31, 20172018 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, 2016,2017, filed with the Securities and Exchange Commission.


NOTE 2 - RECENT ACCOUNTING STANDARDS UPDATES


Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718 "Compensation326 "Financial Instruments - Stock Compensation"Credit Losses" Update No. 2016-09. 2016-13. Update No. 2016-092016-13 was issued in MarchJune 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. This has included assessing the adequacy of existing loss data, developing models for default and loss estimates, and finalizing vendor selection. 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. The Company expects to validate its models and execute a parallel run beginning in early 2019.
FASB ASC Topic 842 "Leases" Update No. 2016-02. Update No. 2016-02 was issued in February 2016 and affects all entitiesany entity that issue share-based awards to their employees. This update was issued as part of the FASB’s simplification initiative. The areas for simplificationenters into a lease (as that term is defined in this update), with some specified scope exemptions. The core principle of this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification onis that a lessee should recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The recognition, measurement, and presentation of expenses and cash flows. Theflows arising from a lease have not significantly changed from previous GAAP. In addition, the accounting applied by a lessor is largely unchanged from that applied under previous GAAP. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2016,2018, including interim periods within those fiscal years. The Company adopted this standard effective January 1, 2017. Uponis currently in the process of reviewing its current lease agreements to assess the impact of the adoption the Company elected to no longer estimate forfeitures on stock compensation and instead recognize forfeitures when they occur. The election required a cumulative effect adjustment to retained earnings which did not materially impact the Company's consolidated financial position. Additionally, the disclosure requirements of this standard, however it has been determined that the Company will be applied on a prospective basis.elect the package of practical expedients offered within this update. The Company does not anticipate electing the hindsight practical expedient.
Since the issuance of Update 2016-02, the FASB has issued codification improvements to the standard in FASB ASC Topic 815 "Derivatives and Hedging"842 "Leases" Update No. 2017-12. 2018-10 and FASB ASC Topic 842 "Leases" Update No. 2017-122018-11. The amendments in Update 2018-10 affect narrow aspects of the guidance issued in the amendments in Update 2016-02 and provide improvements or clarification to the previously issued update. The amendments in update 2018-11 are related to the transition relief on comparative reporting at adoption, which allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This update applies to all entities with

lease contracts that choose the additional transition method. The Company plans to elect this method of transition upon implementation.
FASB ASC Topic 820 "Fair Value Measurement" Update No. 2018-13. Update No. 2018-13 was issued in August 2017 to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this Update are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted in any interim period after issuance of the Update. All transition requirements and elections should be appliedapplies to hedging relationshipsall entities that are required, under existing on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal period of adoption. The adoption of this standard is not expectedGAAP, to have a material impact on the Company's consolidated financial position.
FASB ASC Topic 718 "Compensation - Stock Compensation" Update No. 2017-09. Update No. 2017-09 was issued in May 2017add, modify, or remove various disclosures related to provide clarity and reduce diversity in practice when applying guidance about which changes to the termsrecurring or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: (1) Thenonrecurring fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this update.measurements. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued and all other entities for

reporting periods for which financial statements have not yet been made available for issuance. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.
FASB ASC Topic 310-20 "Receivables - Nonrefundable fees and Other Costs" Update No. 2017-08. Update No. 2017-08 was issued in March 2017 to shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.2019, with certain amendments to be applied prospectively while others are to be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted includingupon issuance of this update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of the update and delay adoption in an interim period.of the additional disclosures until their effective date. The Company early adoptedadoption of this standard effective January 1, 2017 and thewill not have an impact on the Company's consolidated financial position was immaterial.position.

FASB ASC Topic 715Subtopic 715-20 "Compensation - Retirement Benefits"Benefits - Defined Benefit Plans - General" Update No. 2017-07.2018-14. Update No. 2017-072018-14 was issued in March 2017August 2018 to improveremove disclosures that no longer are considered cost beneficial, clarify the presentationspecific requirements of net periodic pension costdisclosures, and net periodic postretirement benefit costs. This update requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable.add certain disclosure requirements. The amendments in this update are effective for annual periods beginningfiscal years ending after December 15, 2017, including interim periods within those annual periods.2020, for public business entities. Early adoption is permitted as of the beginning of an annual period for which the financial statements (interim or annual) have not been issued or made available for issuance. That is, early adoption should be within the first interim period if an employer issues interim financial statements. Disclosures of the nature of and reason for the change in accounting principle are required in the first interim and annual periods of adoption. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.
FASB ASC Subtopic 610-20 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets" Update No. 2017-05. Update No. 2017-05 was issued in February 2017 to clarify that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments define the term in substance nonfinancial asset, in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. The amendments in this update also clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. A contract that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets. For purposes of that evaluation, the amendments require an entity to evaluate the underlying assets in consolidated subsidiaries to determine whether those assets are within the scope of Subtopic 610-20. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The guidance may be applied earlier but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods in that reporting period. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position.
FASB ASC Topic 350 "Intangibles - Goodwill and Other " Update No. 2017-04. Update No. 2017-04 was issued in January 2017 to simplify the subsequent measurement of goodwill, by eliminating Step 2 for the goodwill impairment test. The amendments in this update modify the concept of impairment from the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity is no longer required to determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit has been acquired in a business combination.permitted. An entity should apply the amendments in this update on a prospective basis. An entity is requiredretrospective basis to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this update. A public business entity that is a U.S. Securities and Exchange Commission (SEC)filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.all periods presented. The adoption of this standard iswill not expected to have a materialan impact on the Company's consolidated financial position.

FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2014-09. Update No. 2014-09 was issued in May 2014 to address the previous revenue recognition requirements in GAAP that differ from those in International Financial Reporting Standards (IFRS).  Accordingly, the FASB and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS. The largely converged revenue recognition standards will supersede virtually all revenue recognition guidance in GAAP and IFRS. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Since the issuance of Update 2014-09, the FASB has finalized various amendments to the standard as summarized below:
FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2016-20
FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2016-12
FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2016-10
FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2016-08.
FASB ASC Topic 606 "Revenue from Contracts with Customers" Update No. 2015-14.

The amendments in Update 2016-20 make minor corrections or minor improvements to the codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities.

Through Updates 2016-12, 2016-10 and 2016-08, the FASB amended its new revenue guidance on licenses of intellectual property, identification of performance obligations, collectability, noncash consideration and the presentation of sales and other similar taxes. The FASB also clarified the definition of a completed contract at transition and added a practical expedient to ease transition for contracts that were modified prior to adoption. The FASB also amended the new revenue recognition guidance on determining whether an entity is a principal or an agent in an arrangement which affects whether revenue should be reported gross or net.
Following the issuance of Update 2015-14, Update 2014-09, as amended, is effective for the Company for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. A full or modified retrospective transition method is required. The Company's revenue is comprised of net interest income on financial assets and liabilities, and noninterest income.  Interest income, mortgage banking income, gain on sale of equity securities, increase in cash surrender value of life insurance policies and loan level derivative income are accounted for under other U.S. GAAP standards, and are therefore out of scope of the ASC 606 revenue standard. Deposit account fees, interchange and ATM fees, investment management and certain categories of other noninterest income are within the scope of the ASC 606 revenue standard. As such, the Company is currently reviewing contracts related to these revenue streams and at this point does not anticipate any material changes to revenue recognition upon adoption, however, the Company’s review is still ongoing. The Company plans to adopt the revenue recognition standard as of January 1, 2018 and anticipates using the modified retrospective transition method upon adoption.


NOTE 3 - ACQUISITIONS

Island Bancorp, Inc.

On May 12, 2017, the Company completed its acquisition of Island Bancorp, Inc., the parent of The Edgartown National Bank ("Island Bancorp"). The transaction qualified as a tax-free reorganization for federal income tax purposes and Island Bancorp shareholders received, for each share of Island Bancorp common stock, the right to receive either $500 in cash per share or 9.525 shares of the Company's stock (valued at $605.31 per share, based upon the highest trading value of the Company's stock on May 12, 2017 of $63.55). The total deal consideration was $28.3 million and was comprised of 20% cash and 80% stock consideration. The cash consideration was $4.8 million in the aggregate, inclusive of cash paid in lieu of fractional shares. The total stock consideration was $23.5 million resulting in an increase to the Company's outstanding shares of 369,286 shares.

The Company accounted for the acquisition using the acquisition method pursuant to the Business Combinations Topic of the FASB ASC. Accordingly, the Company recorded merger and acquisition expenses of $3.2 million during the nine months ended September 30, 2017. 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$11,137
Loans155,551
Premises and equipment5,828
Goodwill10,280
Core deposit and other intangibles2,964
Other assets4,629
Total assets acquired190,389
Liabilities 
Deposits159,580
Borrowings2,475
Other liabilities18
Total liabilities assumed162,073
     Purchase price$28,316
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.

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 overall 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 the loan had evidence of deterioration of credit quality at the purchase date and also reviewed to determine if it was probable that all contractually required payments will not be collected. Based on the review of the loan portfolio at the time of the acquisition it was deemed that there was no evidence to show that any of the acquired loans were purchased credit impaired.

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 were 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 Federal Home Loan Bank ("FHLB") advances 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 Island Bancorp on January 1, 2017 (2016 amounts represent combined results for the Company and Island Bancorp). 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 periods presented, nor does it indicate future results for any other interim or full-year period.
 Three Months Ended Nine Months Ended
 September 30 September 30
 2017 2016 2017 2016
 (Dollars in thousands)
Net interest income after provision for loan losses$67,073
 $58,119
 $191,485
 $171,221
Net income23,852
 20,769
 67,961
 60,257
There were no merger related costs excluded from the pro forma results of operations for the three months ended September 30, 2017 whereas the pro forma results of operations for the nine months ended September 30, 2017 exclude merger-related costs of $2.6 million, net of tax, recognized by both the Company and Island Bancorp in the aggregate. There were no merger and acquisition expenses recognized during the three and nine months ended September 30, 2016. These costs were primarily made up of contract terminations arising due to the change in control, the acceleration of certain compensation and benefit costs, and other merger expenses.


NOTE 4 - SECURITIES
Trading Securities

The Company had trading securities of $1.3$1.6 million and $804,000$1.3 million as of September 30, 20172018 and December 31, 2016,2017, respectively. These securities are held in a rabbi trust and will be used for future payments associated with the Company’s non-qualifiednonqualified 401(k) Restoration Plan and Non-QualifiedNonqualified Deferred Compensation Plan.
Equity Securities
The Company had equity securities of $20.4 million as of September 30, 2018. 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. These securities were previously classified as available for sale and were reclassified as equity securities due to a change in accounting guidance effective January 1, 2018. The equity securities had a fair value of $20.6 million as of December 31, 2017 and are reflected accordingly as available for sale in the table below.
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:
 September 30, 2018 December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 (Dollars in thousands)
Available for sale securities               
U.S. government agency securities$32,479
 $—
 $(907) $31,572
 $35,475
 $86
 $(131) $35,430
Agency mortgage-backed securities213,159
 874
 (6,510) 207,523
 214,934
 1,897
 (1,067) 215,764
Agency collateralized mortgage obligations143,764
 83
 (6,202) 137,645
 124,098
 78
 (2,164) 122,012
State, county, and municipal securities1,973
 8
 —
 1,981
 2,237
 37
 —
 2,274
Single issuer trust preferred securities issued by banks1,000
 4
 —
 1,004
 2,012
 4
 —
 2,016
Pooled trust preferred securities issued by banks and insurers2,159
 —
 (359) 1,800
 2,179
 —
 (539) 1,640
Small business administration pooled securities55,961
 —
 (1,625) 54,336
 47,852
 44
 (118) 47,778
Equity securities—
 —
 —
 —
 19,432
 1,594
 (442) 20,584
Total available for sale securities$450,495
 $969
 $(15,603) $435,861
 $448,219
 $3,740
 $(4,461) $447,498
Held to maturity securities               
U.S. Treasury securities$1,004
 $2
 $—
 $1,006
 $1,006
 $29
 $—
 $1,035
Agency mortgage-backed securities189,479
 136
 (5,527) 184,088
 204,768
 1,791
 (736) 205,823
Agency collateralized mortgage obligations336,346
 28
 (12,858) 323,516
 262,998
 397
 (4,987) 258,408
Single issuer trust preferred securities issued by banks1,500
 —
 (10) 1,490
 1,500
 29
 —
 1,529
Small business administration pooled securities25,376
 —
 (854) 24,522
 27,416
 183
 (200) 27,399
Total held to maturity securities$553,705
 $166
 $(19,249) $534,622
 $497,688
 $2,429
 $(5,923) $494,194
Total$1,004,200
 $1,135
 $(34,852) $970,483
 $945,907
 $6,169
 $(10,384) $941,692
 September 30, 2017 December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 (Dollars in thousands)
Available for sale securities               
U.S. government agency securities$23,010
 $218
 $—
 $23,228
 $24,006
 $238
 $—
 $24,244
Agency mortgage-backed securities211,757
 3,060
 (253) 214,564
 173,268
 2,852
 (736) 175,384
Agency collateralized mortgage obligations115,504
 405
 (1,080) 114,829
 101,094
 106
 (1,332) 99,868
State, county, and municipal securities2,492
 47
 —
 2,539
 3,743
 50
 —
 3,793
Single issuer trust preferred securities issued by banks2,025
 19
 —
 2,044
 2,311
 3
 (3) 2,311
Pooled trust preferred securities issued by banks and insurers2,182
 —
 (558) 1,624
 2,200
 —
 (616) 1,584
Small business administration pooled securities50,194
 45
 (53) 50,186
 37,561
 —
 (372) 37,189
Equity securities19,176
 1,334
 (399) 20,111
 19,183
 641
 (553) 19,271
Total available for sale securities$426,340
 $5,128
 $(2,343) $429,125
 $363,366
 $3,890
 $(3,612) $363,644
Held to maturity securities               
U.S. Treasury securities$1,006
 $42
 $—
 $1,048
 $1,007
 $47
 $—
 $1,054
Agency mortgage-backed securities171,664
 2,508
 (192) 173,980
 156,088
 2,274
 (858) 157,504
Agency collateralized mortgage obligations275,894
 1,244
 (2,905) 274,233
 297,445
 1,002
 (3,797) 294,650
Single issuer trust preferred securities issued by banks1,500
 39
 —
 1,539
 1,500
 44
 —
 1,544
Small business administration pooled securities28,734
 228
 (100) 28,862
 31,036
 189
 (327) 30,898
Total held to maturity securities$478,798
 $4,061
 $(3,197) $479,662
 $487,076
 $3,556
 $(4,982) $485,650
Total$905,138
 $9,189
 $(5,540) $908,787
 $850,442
 $7,446
 $(8,594) $849,294

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

The actual maturities of certain securities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. A schedule of the contractual maturities of securities available for sale and securities held to maturity as of September 30, 20172018 is presented below:

 Available for Sale Held to Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 (Dollars in thousands)
Due in one year or less$3,229
 $3,237
 $—
 $—
Due after one year to five years36,704
 37,152
 15,731
 15,917
Due after five to ten years105,842
 106,576
 18,158
 18,654
Due after ten years261,389
 262,049
 444,909
 445,091
Total debt securities$407,164
 $409,014
 $478,798
 $479,662
Equity securities$19,176
 $20,111
 $—
 $—
Total$426,340
 $429,125
 $478,798
 $479,662

 Due 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
 (Dollars in thousands)
Available for sale securities                   
U.S. government agency securities$—
 $—
 $20,012
 $19,728
 $12,467
 $11,844
 $—
 $—
 $32,479
 $31,572
Agency mortgage-backed securities278
 281
 44,914
 43,697
 99,439
 96,667
 68,528
 66,878
 213,159
 207,523
Agency collateralized mortgage obligations—
 —
 —
 —
 —
 —
 143,764
 137,645
 143,764
 137,645
State, county, and municipal securities—
 —
 1,022
 1,023
 951
 958
 —
 —
 1,973
 1,981
Single issuer trust preferred securities issued by banks—
 —
 —
 —
 —
 —
 1,000
 1,004
 1,000
 1,004
Pooled trust preferred securities issued by banks and insurers—
 —
 —
 —
 —
 —
 2,159
 1,800
 2,159
 1,800
Small business administration pooled securities—
 —
 —
 —
 —
 —
 55,961
 54,336
 55,961
 54,336
Total available for sale securities$278
 $281
 $65,948
 $64,448
 $112,857
 $109,469
 $271,412
 $261,663
 $450,495
 $435,861
Held to maturity securities                   
U.S. Treasury securities$—
 $—
 $1,004
 $1,006
 $—
 $—
 $—
 $—
 $1,004
 $1,006
Agency mortgage-backed securities—
 —
 12,442
 12,191
 37,473
 36,481
 139,564
 135,416
 189,479
 184,088
Agency collateralized mortgage obligations—
 —
 —
 —
 941
 936
 335,405
 322,580
 336,346
 323,516
Single issuer trust preferred securities issued by banks—
 —
 —
 —
 1,500
 1,490
 —
 —
 1,500
 1,490
Small business administration pooled securities—
 —
 —
 —
 —
 —
 25,376
 24,522
 25,376
 24,522
Total held to maturity securities$—
 $—
 $13,446
 $13,197
 $39,914
 $38,907
 $500,345
 $482,518
 $553,705
 $534,622
Inclusive in the table above are $9.7is $6.3 million of callable securities in the Company’s investment portfolio at September 30, 2017.2018.
The carrying value of securities pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law, was $514.2$523.6 million and $482.1$547.2 million at September 30, 20172018 and December 31, 2016,2017, respectively.
At September 30, 20172018 and December 31, 2016,2017, the Company had no investments in obligations of individual states, counties, or municipalities which exceeded 10% of stockholders’ equity.
Other-Than-Temporary Impairment ("OTTI")
The Company continually reviews investment securities for the existence of OTTI, taking into consideration current market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, the credit worthiness of the obligor of the security, volatility of earnings, current analysts’ evaluations, the Company’s intent to sell the security, 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 isare not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.

The following tables show the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position, which the Company has not deemed to be OTTI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
September 30, 2017September 30, 2018
  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 securities3
 $31,572
 $(907) $—
 $—
 $31,572
 $(907)
Agency mortgage-backed securities23
 $88,083
 $(438) $762
 $(7) $88,845
 $(445)154
 284,810
 (8,375) 77,412
 (3,662) 362,222
 (12,037)
Agency collateralized mortgage obligations25
 145,572
 (2,278) 52,466
 (1,707) 198,038
 (3,985)57
 294,626
 (8,847) 154,168
 (10,213) 448,794
 (19,060)
Single issuer trust preferred securities issued by banks and insurers1
 1,490
 (10) —
 —
 1,490
 (10)
Pooled trust preferred securities issued by banks and insurers1
 —
 —
 1,624
 (558) 1,624
 (558)1
 —
 —
 1,800
 (359) 1,800
 (359)
Small business administration pooled securities4
 46,925
 (153) —
 —
 46,925
 (153)8
 38,264
 (685) 40,594
 (1,794) 78,858
 (2,479)
Equity securities24
 897
 (17) 7,557
 (382) 8,454
 (399)
Total temporarily impaired securities77
 $281,477
 $(2,886) $62,409
 $(2,654) $343,886
 $(5,540)224
 $650,762
 $(18,824) $273,974
 $(16,028) $924,736
 $(34,852)


 December 31, 2017
   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 securities4
 $24,343
 $(131) $—
 $—
 $24,343
 $(131)
Agency mortgage-backed securities84
 235,411
 (1,493) 14,886
 (310) 250,297
 (1,803)
Agency collateralized mortgage obligations42
 178,142
 (1,579) 159,506
 (5,572) 337,648
 (7,151)
Pooled trust preferred securities issued by banks and insurers1
 —
 —
 1,640
 (539) 1,640
 (539)
Small business administration pooled securities4
 34,553
 (223) 9,647
 (95) 44,200
 (318)
Equity securities28
 3,290
 (39) 7,619
 (403) 10,909
 (442)
Total temporarily impaired securities163
 $475,739
 $(3,465) $193,298
 $(6,919) $669,037
 $(10,384)
 December 31, 2016
   Less than 12 months 12 months or longer Total
 # of holdings 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 (Dollars in thousands)
Agency mortgage-backed securities57
 $137,949
 $(1,594) $—
 $—
 $137,949
 $(1,594)
Agency collateralized mortgage obligations32
 243,051
 (3,140) 47,403
 (1,989) 290,454
 (5,129)
Single issuer trust preferred securities issued by banks and insurers1
 —
 —
 1,036
 (3) 1,036
 (3)
Pooled trust preferred securities issued by banks and insurers1
 —
 —
 1,583
 (616) 1,583
 (616)
Small business administration pooled securities5
 59,846
 (699) —
 —
 59,846
 (699)
Equity securities25
 3,625
 (77) 6,334
 (476) 9,959
 (553)
Total temporarily impaired securities121
 $444,471
 $(5,510) $56,356
 $(3,084) $500,827
 $(8,594)

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 theeach security before the recovery of its amortized cost basis. As a

result, the Company does not consider these investments to be OTTI.OTTI and accordingly, there was no OTTI recorded and no cumulative credit related component of OTTI for the three and nine months ended September 30, 2018 and 2017. The Company made this determination by reviewing various qualitative and quantitative factors regarding each investment category, such as current market conditions, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, and current analysts’ evaluations.
As a result of the Company’s review of these qualitative and quantitative factors, the causes of the impairments listed in the table above by category are as follows at September 30, 2017:2018:
•
U.S. Government Agency Securities, Agency Mortgage-Backed Securities, Agency Collateralized Mortgage Obligations and Small Business Administration Pooled Securities: 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 one security, which is investment grade. The unrealized loss on this 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.

Agency Mortgage-Backed Securities, Agency Collateralized Mortgage Obligations and Small Business Administration Pooled Securities: These portfolios have contractual terms that generally do not permit the issuer to settle the securities at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are either implicitly or explicitly guaranteed by the U.S. Government or one of its agencies.
Pooled Trust Preferred Securities: This portfolio consists of one below investment grade security which is performing. The unrealized loss on this security is attributable to the illiquid nature of the trust preferred market in the current economic and regulatory environment. Management evaluates collateral credit and instrument structure, including current and expected deferral and default rates and timing. In addition, discount rates are determined by evaluating comparable spreads observed currently in the market for similar instruments.
Equity Securities: This portfolio consists of mutual funds and other equity investments. During some periods, the mutual funds in the Company’s investment portfolio may have unrealized losses resulting from market fluctuations, as well as the risk premium associated with that particular asset class. For example, emerging market equities tend to trade at a higher risk premium than U.S. government bonds and thus, will fluctuate to a greater degree on both the upside and the downside. In the context of a well-diversified portfolio, however, the correlation amongst the various asset classes represented by the funds serves to minimize downside risk. The Company evaluates each mutual fund in the portfolio regularly and measures performance on both an absolute and relative basis. A reasonable recovery period for positions with an unrealized loss is based on management’s assessment of general economic data, trends within a particular asset class, valuations, earnings forecasts and bond durations. The Company has the ability and intent to hold these equity securities until a recovery of fair value.
For the three and nine months ended September 30, 2017 and 2016 there was no OTTI recorded and no cumulative credit related component of OTTI.



NOTE 54 - LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY
The following tables bifurcate the amount of loans and the allowance allocated to each loan category based on the type of impairment analysis as of the periods indicated:
September 30, 2017 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 
Financing receivables ending balance:                                
Collectively evaluated for impairment$823,007
 $3,060,211
 $395,267
 $129,676
 $735,454
 $1,045,445
 $9,550
 $6,198,610
  $972,842
 $3,114,414
 $352,491
 $148,609
 $784,533
 $1,067,389
 $13,425
 $6,453,703
  
Individually evaluated for impairment$35,515
 $19,018
 $—
 $980
 $13,649
 $6,636
 $322
 $76,120
  $30,938
 $13,023
 $—
 $591
 $12,825
 $6,410
 $244
 $64,031
  
Purchased credit impaired loans$—
 $7,931
 $—
 $—
 $7,027
 $214
 $—
 $15,172
 $—
 $5,054
 $—
 $—
 $4,452
 $162
 $—
 $9,668
 
Total loans by group$858,522
 $3,087,160
 $395,267
 $130,656
 $756,130
 $1,052,295
 $9,872
 $6,289,902
(1)$1,003,780
 $3,132,491
 $352,491
 $149,200
 $801,810
 $1,073,961
 $13,669
 $6,527,402
(1)
December 31, 2016 December 31, 2017 
(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$862,875
 $2,983,642
 $320,391
 $121,855
 $622,392
 $982,095
 $10,666
 $5,903,916
 $853,885
 $3,093,945
 $401,797
 $131,667
 $733,809
 $1,045,053
 $9,573
 $6,269,729
 
Individually evaluated for impairment$39,178
 $16,813
 $—
 $871
 $14,175
 $5,863
 $397
 $77,297
  $34,643
 $16,638
 $—
 $703
 $13,684
 $6,826
 $307
 $72,801
  
Purchased credit impaired loans$—
 $10,343
 $—
 $—
 $7,859
 $189
 $1
 $18,392
 $—
 $5,978
 $—
 $—
 $6,836
 $209
 $—
 $13,023
 
Total loans by group$902,053
 $3,010,798
 $320,391
 $122,726
 $644,426
 $988,147
 $11,064
 $5,999,605
(1)$888,528
 $3,116,561
 $401,797
 $132,370
 $754,329
 $1,052,088
 $9,880
 $6,355,553
(1)
(1)The amount of net deferred costs on originated loans included in the ending balance was $5.6$6.9 million and $5.1$6.1 million at September 30, 20172018 and December 31, 2016,2017, respectively. Net unamortized discounts on acquired loans not deemed to be purchased credit impaired ("PCI") included in the ending balance was $9.8$8.6 million and $8.6$9.4 million at September 30, 20172018 and December 31, 2016,2017, respectively.
    

























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

Three Months Ended September 30, 2017Three 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$13,544
 $30,947
 $4,814
 $1,613
 $2,693
 $5,353
 $515
 $59,479
$14,788
 $32,095
 $5,216
 $1,709
 $2,909
 $5,468
 $372
 $62,557
Charge-offs(124) —
 —
 (164) (43) (81) (405) (817)(218) (82) —
 (111) —
 (87) (349) (847)
Recoveries404
 286
 —
 17
 15
 65
 261
 1,048
108
 29
 —
 10
 9
 71
 223
 450
Provision (benefit)(994) (233) 806
 140
 111
 89
 81
 —
430
 226
 (189) 160
 153
 102
 193
 1,075
Ending balance$12,830
 $31,000
 $5,620
 $1,606
 $2,776
 $5,426
 $452
 $59,710
$15,108
 $32,268
 $5,027
 $1,768
 $3,071
 $5,554
 $439
 $63,235
                              
Three Months Ended September 30, 2016Three Months Ended September 30, 2017
(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$14,027
 $29,011
 $5,216
 $1,441
 $2,578
 $4,986
 $468
 $57,727
$13,544
 $30,947
 $4,814
 $1,613
 $2,693
 $5,353
 $515
 $59,479
Charge-offs(27) (341) —
 (98) —
 (154) (523) (1,143)(124) —
 —
 (164) (43) (81) (405) (817)
Recoveries63
 124
 —
 28
 130
 24
 302
 671
404
 286
 —
 17
 15
 65
 261
 1,048
Provision (benefit)(189) 609
 117
 113
 (44) 196
 148
 950
(994) (233) 806
 140
 111
 89
 81
 —
Ending balance$13,874
 $29,403
 $5,333
 $1,484
 $2,664
 $5,052
 $395
 $58,205
$12,830
 $31,000
 $5,620
 $1,606
 $2,776
 $5,426
 $452
 $59,710




 Nine Months Ended September 30, 2018
 (Dollars in thousands)
 Commercial and
Industrial		 Commercial
Real Estate		 Commercial
Construction		 Small
Business		 Residential
Real Estate		 
Home Equity		 Other Consumer Total
Allowance for loan losses               
Beginning balance$13,256
 $31,453
 $5,698
 $1,577
 $2,822
 $5,390
 $447
 $60,643
Charge-offs(355) (82) —
 (237) (148) (261) (926) (2,009)
Recoveries179
 67
 —
 29
 12
 128
 611
 1,026
Provision (benefit)2,028
 830
 (671) 399
 385
 297
 307
 3,575
Ending balance$15,108
 $32,268
 $5,027
 $1,768
 $3,071
 $5,554
 $439
 $63,235
Ending balance: collectively evaluated for impairment$15,101
 $32,234
 $5,027
 $1,767
 $2,197
 $5,386
 $426
 $62,138
Ending balance: individually evaluated for impairment$7
 $34
 $—
 $1
 $874
 $168
 $13
 $1,097
 Nine Months Ended September 30, 2017
 (Dollars in thousands)
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 Other Consumer Total
Allowance for loan losses               
Beginning balance$16,921
 $30,369
 $4,522
 $1,502
 $2,621
 $5,238
 $393
 $61,566
Charge-offs(3,715) —
 —
 (258) (182) (217) (1,151) (5,523)
Recoveries604
 343
 —
 96
 29
 167
 778
 2,017
Provision (benefit)(980) 288
 1,098
 266
 308
 238
 432
 1,650
Ending balance$12,830
 $31,000
 $5,620
 $1,606
 $2,776
 $5,426
 $452
 $59,710
Ending balance: collectively evaluated for impairment$12,759
 $30,951
 $5,620
 $1,605
 $1,756
 $5,169
 $433
 $58,293
Ending balance: individually evaluated for impairment$71
 $49
 $—
 $1
 $1,020
 $257
 $19
 $1,417
 Nine Months Ended September 30, 2017
 (Dollars in thousands)
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 Other Consumer Total
Allowance for loan losses               
Beginning balance$16,921
 $30,369
 $4,522
 $1,502
 $2,621
 $5,238
 $393
 $61,566
Charge-offs(3,715) —
 —
 (258) (182) (217) (1,151) (5,523)
Recoveries604
 343
 —
 96
 29
 167
 778
 2,017
Provision (benefit)(980) 288
 1,098
 266
 308
 238
 432
 1,650
Ending balance$12,830
 $31,000
 $5,620
 $1,606
 $2,776
 $5,426
 $452
 $59,710
Ending balance: individually evaluated for impairment$71
 $49
 $—
 $1
 $1,020
 $257
 $19
 $1,417
Ending balance: collectively evaluated for impairment$12,759
 $30,951
 $5,620
 $1,605
 $1,756
 $5,169
 $433
 $58,293
 Nine Months Ended September 30, 2016
 (Dollars in thousands)
 
Commercial and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 
Small
Business
 
Residential
Real Estate
 

Home Equity
 Other Consumer Total
Allowance for loan losses               
Beginning balance$13,802
 $27,327
 $5,366
 $1,264
 $2,590
 $4,889
 $587
 $55,825
Charge-offs(31) (365) —
 (191) (27) (491) (1,152) (2,257)
Recoveries850
 535
 —
 122
 182
 77
 796
 2,562
Provision (benefit)(747) 1,906
 (33) 289
 (81) 577
 164
 2,075
Ending balance$13,874
 $29,403
 $5,333
 $1,484
 $2,664
 $5,052
 $395
 $58,205
Ending balance: individually evaluated for impairment$134
 $355
 $—
 $2
 $1,156
 $223
 $23
 $1,893
Ending balance: collectively evaluated for impairment$13,740
 $29,048
 $5,333
 $1,482
 $1,508
 $4,829
 $372
 $56,312

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.
•
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.
•
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 of 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.  The Company does not originate or purchase sub-prime loans.
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. Each home equity line of credit has a variable rate and is billed in interest-only payments during the draw period. At the end of the draw period, each home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. 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.
•
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. Each home equity line of credit has a variable rate and is billed in interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the 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 commercialcredit risk-rating system, which assigns a risk-grade to each borrowerloan 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. Loan may be inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. However, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation.
9 Rating — Partial Loss Probable: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt with the added provision that the weaknesses make collection of the debt in full, on the basis of currently existing facts,
•
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. Loan may be inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. However, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation.

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.
•
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. BorrowersActively 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.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 table detailstables detail the amount of outstanding principal balances relative to each of the risk-rating categories for the Company’s commercial portfolio:
  September 30, 2017  September 30, 2018
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 $764,946
 $2,968,237
 $393,836
 $128,464
 $4,255,483
1 - 6 $935,769
 $3,041,551
 $352,190
 $146,809
 $4,476,319
Potential weakness7 23,477
 73,219
 —
 1,543
 98,239
7 17,655
 52,089
 301
 1,053
 71,098
Definite weakness-loss unlikely8 63,856
 45,240
 1,431
 646
 111,173
8 45,399
 38,453
 —
 1,338
 85,190
Partial loss probable9 6,243
 464
 —
 3
 6,710
9 4,957
 398
 —
 —
 5,355
Definite loss10 —
 —
 —
 —
 —
10 —
 —
 —
 —
 —
Total $858,522
 $3,087,160
 $395,267
 $130,656
 $4,471,605
 $1,003,780
 $3,132,491
 $352,491
 $149,200
 $4,637,962


   December 31, 2017
Category
Risk
Rating
 
Commercial  and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 Small Business Total
   (Dollars in thousands)
Pass1 - 6 $806,331
 $3,007,672
 $400,964
 $130,265
 $4,345,232
Potential weakness7 16,563
 69,788
 —
 1,471
 87,822
Definite weakness-loss unlikely8 59,415
 38,637
 833
 631
 99,516
Partial loss probable9 6,219
 464
 —
 3
 6,686
Definite loss10 —
 —
 —
 —
 —
Total  $888,528
 $3,116,561
 $401,797
 $132,370
 $4,539,256
   December 31, 2016
Category
Risk
Rating
 
Commercial  and
Industrial
 
Commercial
Real Estate
 
Commercial
Construction
 Small Business Total
   (Dollars in thousands)
Pass1 - 6 $783,825
 $2,876,570
 $317,099
 $120,304
 $4,097,798
Potential weakness7 46,176
 84,641
 1,363
 1,859
 134,039
Definite weakness-loss unlikely8 71,991
 47,164
 1,929
 556
 121,640
Partial loss probable9 61
 2,423
 —
 7
 2,491
Definite loss10 —
 —
 —
 —
 —
Total  $902,053
 $3,010,798
 $320,391
 $122,726
 $4,355,968


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:
September 30,
2017		 December 31,
2016		September 30,
2018		 December 31,
2017
Residential portfolio      
FICO score (re-scored)(1)745
 743
748
 745
LTV (re-valued)(2)61.0% 63.2%58.2% 59.2%
Home equity portfolio      
FICO score (re-scored)(1)766
 767
767
 766
LTV (re-valued)(2)(3)55.9% 55.9%48.9% 50.1%
(1)The average FICO scores forat September 30, 2018 are based upon rescores available from August 2018 and origination score data for loans booked in September 2018. The average FICO scores at December 31, 2017 are based upon rescores available from August 31, 2017 and origination score data for loans booked between September 1, 2017 and September 30, 2017. The average FICO scores for December 31, 2016 are based upon rescores available from November 30, 2016 and origination score data for loans booked between December 1, 2016 and December 31, 2016.2017.
(2)The combined LTV ratios for September 30, 2017 and December 31, 20162018 are based upon updated automated valuations as of MarchAugust 2018, when available or the most current valuation data available. The combined LTV ratios for December 31, 2015 and origination value2017 are based upon updated automated valuations as of August 2017, when available, or the most current valuation data foravailable. The updated automated valuations provide new information on loans booked between April 1, 2015 and throughthat may be available since the dates indicated. 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, position, 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 seasoned 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:
 September 30, 2018 December 31, 2017
 (Dollars in thousands)
Commercial and industrial$28,742
 $32,055
Commercial real estate1,960
 3,123
Small business191
 230
Residential real estate8,076
 8,129
Home equity6,367
 6,022
Other consumer49
 71
Total nonaccrual loans (1)$45,385
 $49,630

 September 30, 2017 December 31, 2016
 (Dollars in thousands)
Commercial and industrial$32,556
 $37,455
Commercial real estate3,052
 6,266
Small business403
 302
Residential real estate8,297
 7,782
Home equity5,903
 5,553
Other consumer59
 47
Total nonaccrual loans (1)$50,270
 $57,405
(1)Included in these amounts were $3.4 million and $6.1 million of nonaccruing TDRs at September 30, 2018 and December 31, 2017, respectively.

(1)Included in these amounts were $5.8 million and $5.2 million of nonaccruing TDRs at September 30, 2017 and December 31, 2016, respectively.
The following table shows information regarding foreclosed residential real estate property at the dates indicated:
 September 30, 2018 December 31, 2017
 (Dollars in thousands)
Foreclosed residential real estate property held by the creditor$190
 $612
Recorded investment in mortgage loans collateralized by residential real estate property that are in the process of foreclosure$3,880
 $2,971
 September 30, 2017 December 31, 2016
 (Dollars in thousands)
Foreclosed residential real estate property held by the creditor$2,538
 $3,775
Recorded investment in mortgage loans collateralized by residential real estate property that are in the process of foreclosure$1,608
 $1,715

The following table showstables show the age analysis of past due financing receivables as of the dates indicated:
 September 30, 2018
 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 
 (Dollars in thousands)
Loan Portfolio                     
Commercial and industrial3
 $265
 5
 $431
 10
 $28,694
 18
 $29,390
 $974,390
 $1,003,780
 $—
Commercial real estate7
 2,188
 5
 849
 6
 1,430
 18
 4,467
 3,128,024
 3,132,491
 —
Commercial construction—
 —
 —
 —
 —
 —
 —
 —
 352,491
 352,491
 —
Small business9
 483
 6
 60
 17
 139
 32
 682
 148,518
 149,200
 —
Residential real estate10
 1,129
 12
 2,367
 19
 3,367
 41
 6,863
 794,947
 801,810
 —
Home equity16
 909
 9
 797
 25
 2,825
 50
 4,531
 1,069,430
 1,073,961
 —
Other consumer (1)272
 118
 8
 20
 13
 46
 293
 184
 13,485
 13,669
 9
Total317
 $5,092
 45
 $4,524
 90
 $36,501
 452
 $46,117
 $6,481,285
 $6,527,402
 $9
 September 30, 2017
 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 
 (Dollars in thousands)
Loan Portfolio                     
Commercial and industrial12
 $839
 2
 $315
 45
 $32,490
 59
 $33,644
 $824,878
 $858,522
 $—
Commercial real estate10
 4,413
 —
 —
 8
 1,755
 18
 6,168
 3,080,992
 3,087,160
 —
Commercial construction1
 566
 —
 —
 —
 —
 1
 566
 394,701
 395,267
 —
Small business11
 130
 5
 14
 17
 107
 33
 251
 130,405
 130,656
 —
Residential real estate12
 1,125
 10
 2,392
 20
 2,843
 42
 6,360
 749,770
 756,130
 —
Home equity20
 1,016
 9
 516
 20
 2,559
 49
 4,091
 1,048,204
 1,052,295
 —
Other consumer (1)229
 226
 10
 38
 12
 14
 251
 278
 9,594
 9,872
 7
Total295
 $8,315
 36
 $3,275
 122
 $39,768
 453
 $51,358
 $6,238,544
 $6,289,902
 $7

 December 31, 2017
 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 
 (Dollars in thousands)
Loan Portfolio                     
Commercial and industrial2
 $195
 2
 $370
 14
 $32,007
 18
 $32,572
 $855,956
 $888,528
 $—
Commercial real estate7
 3,060
 —
 —
 9
 1,793
 16
 4,853
 3,111,708
 3,116,561
 —
Commercial construction—
 —
 —
 —
 —
 —
 —
 —
 401,797
 401,797
 —
Small business17
 339
 11
 144
 10
 57
 38
 540
 131,830
 132,370
 —
Residential real estate6
 870
 13
 2,385
 22
 3,471
 41
 6,726
 747,603
 754,329
 —
Home equity22
 1,310
 6
 451
 20
 2,025
 48
 3,786
 1,048,302
 1,052,088
 —
Other consumer (1)265
 197
 16
 27
 17
 45
 298
 269
 9,611
 9,880
 8
Total319
 $5,971
 48
 $3,377
 92
 $39,398
 459
 $48,746
 $6,306,807
 $6,355,553
 $8

 December 31, 2016
 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 
 (Dollars in thousands)
Loan Portfolio                     
Commercial and industrial8
 $100
 32
 $253
 6
 $2,480
 46
 $2,833
 $899,220
 $902,053
 $—
Commercial real estate5
 1,518
 8
 1,957
 8
 3,105
 21
 6,580
 3,004,218
 3,010,798
 —
Commercial construction—
 —
 —
 —
 —
 —
 —
 —
 320,391
 320,391
 —
Small business9
 323
 —
 —
 19
 140
 28
 463
 122,263
 122,726
 —
Residential real estate11
 1,277
 9
 1,950
 27
 3,507
 47
 6,734
 637,692
 644,426
 —
Home equity19
 1,117
 11
 767
 16
 1,209
 46
 3,093
 985,054
 988,147
 —
Other consumer (1)249
 184
 12
 17
 15
 7
 276
 208
 10,856
 11,064
 2
Total301
 $4,519
 72
 $4,944
 91
 $10,448
 464
 $19,911
 $5,979,694
 $5,999,605
 $2


(1) 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:
 September 30, 2018 December 31, 2017
 (Dollars in thousands)
TDRs on accrual status$24,554
 $25,852
TDRs on nonaccrual3,370
 6,067
Total TDRs$27,924
 $31,919
Amount of specific reserves included in the allowance for loan losses associated with TDRs$1,097
 $1,342
Additional commitments to lend to a borrower who has been a party to a TDR$1,224
 $487
 September 30, 2017 December 31, 2016
 (Dollars in thousands)
TDRs on accrual status$26,731
 $27,093
TDRs on nonaccrual5,776
 5,199
Total TDRs$32,507
 $32,292
Amount of specific reserves included in the allowance for loan losses associated with TDRs$1,417
 $1,417
Additional commitments to lend to a borrower who has been a party to a TDR$1,084
 $1,378

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 table showstables show the modifications which occurred during the periods indicated and the change in the recorded investment subsequent to the modifications occurring:
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30, 2017 September 30, 2017September 30, 2018 September 30, 2018
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment (1)
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment (1)
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment (1)
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment (1)
(Dollars in thousands)(Dollars in thousands)
Troubled debt restructurings                      
Commercial and industrial1
 $196
 $196
 9
 $1,575
 $1,575
2
 $126
 $126
 2
 $126
 $126
Commercial real estate—
 —
 —
 6
 1,884
 1,884
1
 205
 205
 2
 650
 650
Small business2
 183
 183
 10
 447
 447
Residential real estate—
 —
 —
 5
 889
 900
3
 503
 523
 4
 652
 672
Home equity4
 436
 436
 14
 1,427
 1,430
2
 74
 74
 8
 546
 546
Total7
 $815
 $815
 44
 $6,222
 $6,236
8
 $908
 $928
 16
 $1,974
 $1,994
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30, 2016 September 30, 2016September 30, 2017 September 30, 2017
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment (1)
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment (1)
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment (1)
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment (1)
(Dollars in thousands)(Dollars in thousands)
Troubled debt restructurings                      
Commercial and industrial—
 $—
 $—
 7
 $528
 $528
1
 $196
 $196
 9
 $1,575
 $1,575
Commercial real estate3
 986
 986
 9
 2,329
 2,329
—
 —
 —
 6
 1,884
 1,884
Small business1
 59
 59
 3
 168
 168
2
 183
 183
 10
 447
 447
Residential real estate—
 —
 —
 5
 1,167
 1,209
—
 —
 —
 5
 889
 900
Home equity4
 328
 328
 8
 632
 632
4
 436
 436
 14
 1,427
 1,430
Other consumer—
 —
 —
 5
 107
 107
Total8
 $1,373
 $1,373
 37
 $4,931
 $4,973
7
 $815
 $815
 44
 $6,222
 $6,236
(1)The post-modification balances represent the legal principal balance of the loan on the date of modification. These amounts may show an increase when modifications include a capitalization of interest.

The following table shows the Company’s post-modification balance of TDRs listed by type of modification during the periods indicated:
 Three Months Ended Nine Months Ended
 September 30 September 30
 2018 2017 2018 2017
 (Dollars in thousands) (Dollars in thousands)
Extended maturity$617
 $486
 $1,062
 $4,565
Combination rate and maturity237
 196
 237
 196
Court ordered concession74
 133
 695
 1,475
Total$928
 $815
 $1,994
 $6,236
 Three Months Ended September 30 Nine Months Ended September 30
 2017 2016 2017 2016
 (Dollars in thousands) (Dollars in thousands)
Extended maturity$486
 $256
 $4,565
 $2,638
Adjusted interest rate—
 —
 —
 92
Combination rate and maturity196
 730
 196
 990
Court ordered concession133
 387
 1,475
 1,253
Total$815
 $1,373
 $6,236
 $4,973


The Company considers a loan to have defaulted when it reaches 90 days past due. As of September 30, 2018, there were no loans modified during the past twelve months that subsequently defaulted during the three and nine month periods ended September 30, 2018. There were no loans modified during the preceding twelve months that had subsequently defaulted during the three monthsmonth period ended September 30, 2017. There was one residential real estate loan modified during the pastpreceding twelve months with a recorded investment of $205,000, which has subsequently defaulted during the nine monthsmonth period ended September 30, 2017. There was one home equity loan modified during the preceding twelve months with a recorded investment of $141,000 that had subsequently defaulted during the three and nine months ended September 30, 2016.
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:
September 30, 2017September 30, 2018
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$33,824
 $38,181
 $—
$30,618
 $38,297
 $—
Commercial real estate14,462
 15,476
 —
11,329
 11,962
 —
Small business678
 762
 —
445
 523
 —
Residential real estate3,908
 4,066
 —
4,783
 4,925
 —
Home equity4,880
 4,984
 —
4,973
 5,181
 —
Other consumer97
 97
 —
60
 61
 —
Subtotal57,849
 63,566
 —
52,208
 60,949
 —
With an allowance recorded          
Commercial and industrial$1,691
 $1,691
 $71
$320
 $320
 $7
Commercial real estate4,556
 4,670
 49
1,694
 1,694
 34
Small business302
 315
 1
146
 152
 1
Residential real estate9,741
 10,421
 1,020
8,042
 8,921
 874
Home equity1,756
 1,977
 257
1,437
 1,620
 168
Other consumer225
 227
 19
184
 187
 13
Subtotal18,271
 19,301
 1,417
11,823
 12,894
 1,097
Total$76,120
 $82,867
 $1,417
$64,031
 $73,843
 $1,097
 December 31, 2017
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 (Dollars in thousands)
With no related allowance recorded     
Commercial and industrial$34,267
 $38,329
 $—
Commercial real estate13,245
 14,374
 —
Small business556
 619
 —
Residential real estate4,264
 4,397
 —
Home equity4,950
 5,056
 —
Other consumer91
 92
 —
Subtotal57,373
 62,867
 —
With an allowance recorded     
Commercial and industrial$376
 $376
 $10
Commercial real estate3,393
 3,399
 42
Small business147
 153
 1
Residential real estate9,420
 10,154
 1,007
Home equity1,876
 2,110
 265
Other consumer216
 217
 17
Subtotal15,428
 16,409
 1,342
Total$72,801
 $79,276
 $1,342
 December 31, 2016
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 (Dollars in thousands)
With no related allowance recorded     
Commercial and industrial$28,776
 $29,772
 $—
Commercial real estate11,628
 12,891
 —
Small business494
 569
 —
Residential real estate4,216
 4,427
 —
Home equity4,485
 4,572
 —
Other consumer146
 146
 —
Subtotal49,745
 52,377
 —
With an allowance recorded     
Commercial and industrial$10,402
 $10,440
 $3,661
Commercial real estate5,185
 5,533
 196
Small business377
 392
 8
Residential real estate9,959
 10,530
 1,086
Home equity1,378
 1,547
 242
Other consumer251
 252
 21
Subtotal27,552
 28,694
 5,214
Total$77,297
 $81,071
 $5,214


The following tables set forth information regarding interest income recognized on impaired loans, by portfolio, for the periods indicated:
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30, 2017 September 30, 2017September 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$33,935
 $18
 $36,329
 $179
$31,376
 $28
 $32,424
 $89
Commercial real estate14,569
 151
 14,798
 460
12,040
 135
 12,423
 428
Small business682
 5
 702
 17
432
 4
 478
 13
Residential real estate3,928
 51
 3,962
 152
4,798
 56
 4,826
 173
Home equity4,883
 50
 4,935
 146
5,078
 58
 5,185
 168
Other consumer99
 2
 104
 5
62
 1
 66
 3
Subtotal58,096
 277
 60,830
 959
53,786
 282
 55,402
 874
With an allowance recorded              
Commercial and industrial$1,698
 $21
 $1,768
 $65
$324
 $4
 $330
 $11
Commercial real estate4,569
 65
 4,599
 195
1,701
 24
 1,715
 71
Small business305
 3
 315
 11
148
 3
 154
 8
Residential real estate9,752
 79
 9,838
 234
8,057
 69
 8,194
 207
Home equity1,765
 14
 1,782
 41
1,453
 14
 1,467
 39
Other consumer229
 2
 237
 5
187
 1
 194
 4
Subtotal18,318
 184
 18,539
 551
11,870
 115
 12,054
 340
Total$76,414
 $461
 $79,369
 $1,510
$65,656
 $397
 $67,456
 $1,214





 Three Months Ended Nine Months Ended
 September 30, 2017 September 30, 2017
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 (Dollars in thousands)
With no related allowance recorded       
Commercial and industrial$33,935
 $18
 $36,329
 $179
Commercial real estate14,569
 151
 14,798
 460
Small business682
 5
 702
 17
Residential real estate3,928
 51
 3,962
 152
Home equity4,883
 50
 4,935
 146
Other consumer99
 2
 104
 5
Subtotal58,096
 277
 60,830
 959
With an allowance recorded       
Commercial and industrial$1,698
 $21
 $1,768
 $65
Commercial real estate4,569
 65
 4,599
 195
Small business305
 3
 315
 11
Residential real estate9,752
 79
 9,838
 234
Home equity1,765
 14
 1,782
 41
Other consumer229
 2
 237
 5
Subtotal18,318
 184
 18,539
 551
Total$76,414
 $461
 $79,369
 $1,510

 Three Months Ended Nine Months Ended
 September 30, 2016 September 30, 2016
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 (Dollars in thousands)
With no related allowance recorded       
Commercial and industrial$2,444
 $16
 $2,584
 $48
Commercial real estate11,549
 115
 11,775
 348
Small business646
 5
 679
 18
Residential real estate4,255
 42
 4,286
 134
Home equity4,616
 45
 4,677
 138
Other consumer162
 3
 168
 9
Subtotal23,672
 226
 24,169
 695
With an allowance recorded       
Commercial and industrial$2,097
 $4
 $2,135
 $13
Commercial real estate6,854
 42
 6,977
 126
Small business367
 6
 384
 17
Residential real estate10,004
 92
 10,071
 272
Home equity1,299
 13
 1,310
 36
Other consumer265
 2
 272
 6
Subtotal20,886
 159
 21,149
 470
Total$44,558
 $385
 $45,318
 $1,165


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:
 September 30, 2018 December 31, 2017
 (Dollars in thousands)
Outstanding balance$10,725
 $14,485
Carrying amount$9,668
 $13,023

 September 30, 2017 December 31, 2016
 (Dollars in thousands)
Outstanding balance$17,025
 $20,477
Carrying amount$15,172
 $18,392


The following table summarizes activity in the accretable yield for the PCI loan portfolio:
 Three Months Ended September 30 Nine Months Ended September 30
 2018 2017 2018 2017
 (Dollars in thousands)
Beginning balance$1,604
 $2,185
 $1,791
 $2,370
Accretion(518) (359) (931) (968)
Other change in expected cash flows (1)104
 167
 308
 573
Reclassification from nonaccretable difference for loans which have paid off (2)203
 70
 225
 88
Ending balance$1,393
 $2,063
 $1,393
 $2,063

 Three Months Ended September 30 Nine Months Ended September 30
 2017 2016 2017 2016
 (Dollars in thousands)
Beginning balance$2,185
 $2,625
 $2,370
 $2,827
Accretion(359) (359) (968) (1,188)
Other change in expected cash flows (1)167
 213
 573
 744
Reclassification from nonaccretable difference for loans which have paid off (2)70
 —
 88
 96
Ending balance$2,063
 $2,479
 $2,063
 $2,479


(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 - BANK PREMISES AND EQUIPMENT

During 2017, the Company purchased equipment that was subject to a master lease agreement with a third party lessee.  As such, the Company assumed the role of lessor in conjunction with the purchase, which was deemed to be an operating lease for accounting purposes.  The Company purchased a total of $10.6 million of equipment subject to the lease agreement in 2017.  In addition, the Company recognized rental income of $412,000 and $860,000 for the three and nine months ended September 30, 2017, respectively, as well as depreciation expense of $325,000 and $614,000 for the same time periods.


NOTE 75 -EARNINGS PER SHARE
Earnings per share consisted of the following components for the periods indicated:


 Three Months Ended Nine Months Ended
 September 30 September 30
 2018 2017 2018 2017
 (Dollars in thousands, except per share data)
Net income$33,015
 $23,852
 $91,688
 $65,140
        
Weighted Average Shares   
Basic shares27,537,841
 27,436,792
 27,517,210
 27,242,902
Effect of dilutive securities63,499
 76,307
 62,596
 78,043
Diluted shares27,601,340
 27,513,099
 27,579,806
 27,320,945
        
Net income per share       
Basic EPS$1.20
 $0.87
 $3.33
 $2.39
Effect of dilutive securities—
 —
 (0.01) (0.01)
Diluted EPS$1.20
 $0.87
 $3.32
 $2.38

 Three Months Ended Nine Months Ended
 September 30 September 30
 2017 2016 2017 2016
 (Dollars in thousands, except per share data)
Net income$23,852
 $20,484
 $65,140
 $59,469
        
Weighted Average Shares   
Basic shares27,436,792
 26,324,316
 27,242,902
 26,301,340
Effect of dilutive securities76,307
 53,072
 78,043
 48,354
Diluted shares27,513,099
 26,377,388
 27,320,945
 26,349,694
        
Net income per share       
Basic EPS$0.87
 $0.78
 $2.39
 $2.26
Effect of dilutive securities—
 —
 (0.01) —
Diluted EPS$0.87
 $0.78
 $2.38
 $2.26

The following table illustratesDuring the three and nine months ended September 30, 2018 and 2017 there were no options to purchase common stock or shares of performance-based restricted stock that were excluded from the calculation of diluted earnings per share because they were anti-dilutive for the periods indicated:anti-dilutive.
 Three Months Ended Nine Months Ended
 September 30 September 30
 2017 2016 2017 2016
Stock options—
 4,293
 —
 1,441
Performance-based restricted stock—
 —
 —
 —




NOTE 86 - STOCK BASED COMPENSATION
Time Vested Restricted Stock Awards
During the nine months ended September 30, 2017,2018, the Company made the following awards of restricted stock:
Date Shares Granted Plan Grant Date Fair Value Per Share Vesting Period
2/15/2018 39,950
 2005 Employee Stock Plan $71.75
 Ratably over 5 years from grant date
2/27/2018 1,150
 2005 Employee Stock Plan $72.60
 Ratably over 5 years from grant date
5/15/2018 530
 2005 Employee Stock Plan $74.00
 Ratably over 5 years from grant date
5/22/2018 6,000
 2018 Non-Employee Director Stock Plan $76.58
 Shares vested immediately

Date Shares Granted Plan Grant Date Fair Value Per Share Vesting Period
2/13/2017 1,200
 2005 Employee Stock Plan $62.53
 Ratably over 5 years from grant date
2/16/2017 34,150
 2005 Employee Stock Plan $63.10
 Ratably over 5 years from grant date
3/31/2017 500
 2005 Employee Stock Plan $65.63
 Ratably over 5 years from grant date
4/3/2017 1,500
 2005 Employee Stock Plan $64.14
 Ratably over 5 years from grant date
5/15/2017 1,000
 2005 Employee Stock Plan $64.03
 Ratably over 5 years from grant date
5/23/2017 7,000
 2010 Non-Employee Director Stock Plan $61.95
 At the end of 5 years from grant date (1)
6/15/2017 950
 2005 Employee Stock Plan $66.18
 Ratably over 5 years from grant date

(1)These restricted stock grants will vest at the end of a five year period, or earlier if the director ceases to be a director for any reason other than cause, such as, for example, by retirement.
The fair value of the restricted stock awards is based upon the average of the high and low price at which the Company’s common stock traded on the date of grant. The holders of restricted stock awards participate fully in the rewards of stock ownershipare entitled to receive dividends and to vote from and as of the Company, including voting and dividend rights.date of grant.

Performance-Based Restricted Stock Awards
On February 16, 2017,15, 2018, the Company granted 14,40016,300 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 $63.10,$71.75, 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 will be 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, 20172018 through December 31, 2019.2020. 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, 2020.2021. These awards will beare 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 28, 2017,27, 2018, the performance-based restricted stock awards that were awarded on March 20, 2014February 12, 2015 vested at 94%100% of the maximum target shares awarded, or 15,28916,427 shares.
Stock Options
The Company did not grant anyhas made the following awards of nonqualified options to purchase shares of common stock during the nine months ended September 30, 2017.2018:
 Nine Months Ended
September 30, 2018
Date of grant4/3/2018
Plan2010 Non-Employee Director Stock Plan
Options granted5,000
Vesting period (1)21 months
Expiration date4/3/2028
Expected volatility21.15%
Expected life (years)5.5
Expected dividend yield1.94%
Risk free interest rate2.62%
Fair value per option$13.46
(1)    Vesting period began on the grant date.


NOTE 97 - REPURCHASE AGREEMENTS


The Company can raise additional liquidity by entering into repurchase agreements at its discretion. These repurchases are accounted for as a secured borrowing transaction for accounting purposes. Payments on such borrowings are interest only until the scheduled repurchase date. In a repurchase agreement the Company is subject to the risk that the purchaser may default at maturity and not return the securities underlying the agreements. In order to minimize this potential risk, the Company enters into repurchase agreements that stipulate that the securities underlying the agreement are not delivered to the customer and instead are held in segregated safekeeping accounts by the Company's safekeeping agents.



The table below sets forth information regarding the Company’s repurchase agreements allocated by source of collateral at the dates indicated:    
September 30, 2017
Remaining Contractual Maturity of the Agreements
Overnight and Continuous TotalSeptember 30,
2018		 December 31,
2017
(Dollars in thousands)(Dollars in thousands)
Sources of collateral  
U.S. government agency securities$20,219
 $20,219
$14,664
 $16,867
Agency mortgage-backed securities63,931
 63,931
57,378
 51,273
Agency collateralized mortgage obligations95,520
 95,520
69,134
 94,539
Total borrowings$179,670
 $179,670
Total customer repurchase agreements (1)$141,176
 $162,679


(1)    All customer repurchase agreements have an overnight and continuous maturity date.
 December 31, 2016
 Remaining Contractual Maturity of the Agreements
 Overnight and Continuous Total
 (Dollars in thousands)
Sources of collateral 
U.S. government agency securities$20,233
 $20,233
Agency mortgage-backed securities79,079
 79,079
Agency collateralized mortgage obligations77,601
 77,601
Total borrowings$176,913
 $176,913


Certain counterparties monitor collateral, and may request additional collateral to be posted from time to time. For further information regarding the Company's repurchase agreements see Note 119 - Balance Sheet Offsetting.


NOTE 108 - DERIVATIVE AND HEDGING ACTIVITIES
The Company early adopted ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities as of January 1, 2018 to incorporate the new standard’s alignment of hedge accounting qualifications with the Company’s interest rate risk management with respect to new hedges entered into during the first quarter of 2018.  This new standard was adopted under a modified retrospective transition, resulting in no changes to the accounting for hedge positions entered in to prior to January 1, 2018. 
The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally to manage the Company’s interest rate risk. Additionally, the Company enters into interest rate derivatives and foreign exchange contracts to accommodate the business requirements of its customers (“customer related positions”). The Company minimizes the market and liquidity risks of customer related positions by entering into similar offsetting positions with broker-dealers. Derivative instruments are carried at fair value in the Company’s financial statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship.
The Company does not enter into proprietary trading positions for any derivatives.
Interest Rate Positions
The Company currently utilizesmay utilize various interest rate swap agreementsderivatives as hedging instruments against interest rate risk associated with the Company’s borrowings.borrowings and loan portfolios. An interest rate swapderivative 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:
September 30, 2018
Notional Amount Trade Date Effective Date Maturity Date Receive (Variable) Index Current Rate Received 
Pay Fixed
Swap Rate
 Fair Value
(Dollars in thousands)
$25,000
 12/9/2008 12/10/2008 12/10/2018 3 Month LIBOR 2.33% 2.94% $(29)
25,000
 4/1/2016 1/17/2017 12/15/2021 3 Month LIBOR 2.33% 1.36% 1,260
25,000
 4/1/2016 1/17/2017 12/15/2021 3 Month LIBOR 2.33% 1.36% 1,251
25,000
 7/18/2017 8/15/2017 8/15/2022 3 Month LIBOR 2.31% 1.88% 1,041
               
Notional Amount Trade Date Effective Date Maturity Date Pay (Variable) Index Current Rate Paid 
Receive Fixed
Swap Rate
 Fair Value
50,000
 1/9/2018 1/16/2018 1/15/2023 1 Month LIBOR 2.16% 2.24% $(1,347)
50,000
 7/31/2018 8/15/2018 8/15/2023 1 Month LIBOR 2.16% 2.82% (189)
               
Notional Amount Trade Date Effective Date Maturity Date Pay (Variable) Index Current Rate Paid 
Receive Fixed Swap Rate
Cap - Floor
 Fair Value
50,000
 1/9/2018 1/16/2018 1/15/2022 1 Month LIBOR 2.16% 2.75% - 1.80%
 $(516)
50,000
 7/31/2018 8/15/2018 8/15/2022 1 Month LIBOR 2.16% 3.08% - 2.50%
 (128)
50,000
 9/24/2018 10/15/2018 4/15/2023(1)1 Month LIBOR N/A
 3.09% - 2.75%
 32
               


             $1,375
               
December 31, 2017
Notional Amount Trade Date Effective Date Maturity Date Receive (Variable) Index Current Rate Received Pay Fixed
Swap Rate		 Fair Value
(Dollars in thousands)
$25,000
 12/9/2008 12/10/2008 12/10/2018 3 Month LIBOR 1.54% 2.94% $(264)
25,000
 4/1/2016 1/17/2017 12/15/2021 3 Month LIBOR 1.59% 1.36% 772
25,000
 4/1/2016 1/17/2017 12/15/2021 3 Month LIBOR 1.59% 1.36% 763
25,000
 7/18/2017 8/15/2017 8/15/2022 3 Month LIBOR 1.42% 1.88% 345
              $1,616

(1)In September 2018, the Company entered into a forward-starting interest rate collar with a notional amount of $50.0 million, with the intention of hedging against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest income on the Company's variable-rate loans.     
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 five years.

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

September 30, 2017
Notional Amount Trade Date Effective Date Maturity Date Receive (Variable) Index Current Rate Received Pay Fixed Swap Rate Fair Value
(Dollars in thousands)
$25,000
 9-Dec-08 10-Dec-08 10-Dec-18 3 Month LIBOR 1.32% 2.94% $(407)
25,000
 1-Apr-16 17-Jan-17 15-Dec-21 3 Month LIBOR 1.32% 1.36% 568
25,000
 1-Apr-16 17-Jan-17 15-Dec-21 3 Month LIBOR 1.32% 1.36% 560
25,000
 18-Jul-17 15-Aug-17 15-Aug-22 3 Month LIBOR 1.31% 1.88% 101
$100,000
             $822
December 31, 2016
Notional Amount Trade Date Effective Date Maturity Date Receive (Variable) Index Current Rate Received Pay Fixed Swap Rate Fair Value
      (Dollars in thousands)      
$25,000
 9-Dec-08 10-Dec-08 10-Dec-18 3 Month LIBOR 0.95% 2.94% $(740)
25,000
 1-Apr-16 17-Jan-17 15-Dec-21 3 Month LIBOR N/A
 1.36% 689
25,000
 1-Apr-16 17-Jan-17 15-Dec-21 3 Month LIBOR N/A
 1.36% 675
$75,000
             $624

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 $103,000$17,000 (pre-tax) to be reclassified to interest income and $912,000 (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 September 30, 2017.2018.
The Company recognized $61,000 and $183,000 of net amortization income that was an offset to interest expense related to previously terminated swaps for each of the three and nine month periods ended September 30, 20172018 and 2016,2017, respectively.
The Company had no fair value hedges as of September 30, 20172018 or December 31, 2016.2017.



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.
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 table reflectstables 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 ValueNumber of  Positions (1) Less than 1 year Less than 2 years Less than 3 years Less than 4 years Thereafter Total Fair Value
September 30, 2017September 30, 2018
(Dollars in thousands)(Dollars in thousands)
Loan level swaps                              
Receive fixed, pay variable238
 $10,533
 $73,428
 $68,458
 $177,864
 $575,721
 $906,004
 $11,271
246
 $47,115
 $65,256
 $168,249
 $57,508
 $619,232
 $957,360
 $(22,233)
Pay fixed, receive variable223
 $10,533
 $73,428
 $68,458
 $177,864
 $575,721
 $906,004
 $(11,272)231
 $47,115
 $65,256
 $168,249
 $57,508
 $619,232
 $957,360
 $22,219
Foreign exchange contracts                              
Buys foreign currency, sells U.S. currency17
 $32,390
 $3,780
 $—
 $—
 $—
 $36,170
 $1,683
24
 $43,013
 $2,796
 $—
 $—
 $—
 $45,809
 $(1,021)
Buys U.S. currency, sells foreign currency17
 $32,390
 $3,780
 $—
 $—
 $—
 $36,170
 $(1,668)24
 $43,013
 $2,796
 $—
 $—
 $—
 $45,809
 $1,043
December 31, 2016December 31, 2017
(Dollars in thousands)(Dollars in thousands)
Loan level swaps                              
Receive fixed, pay variable222
 $30,245
 $21,708
 $63,771
 $165,783
 $567,897
 $849,404
 $12,005
246
 $36,023
 $61,500
 $152,287
 $111,147
 $591,385
 $952,342
 $3,875
Pay fixed, receive variable207
 $30,245
 $21,708
 $63,771
 $165,783
 $567,897
 $849,404
 $(12,008)231
 $36,023
 $61,500
 $152,287
 $111,147
 $591,385
 $952,342
 $(3,880)
Foreign exchange contracts                              
Buys foreign currency, sells U.S. currency33
 $45,711
 $—
 $—
 $—
 $—
 $45,711
 $(2,250)15
 $26,382
 $3,780
 $—
 $—
 $—
 $30,162
 $1,202
Buys U.S. currency, sells foreign currency33
 $45,711
 $—
 $—
 $—
 $—
 $45,711
 $2,277
15
 $26,382
 $3,780
 $—
 $—
 $—
 $30,162
 $(1,188)
(1)The Company may enter into one dealer swap agreement which offsets multiple commercial borrower swap agreements.

Mortgage Derivatives

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, forward delivery sales commitments are executed, under which the Company agrees to deliver whole mortgage loans to various investors. These forward commitments carry a market price that has a strong inverse relationship to that of mortgage prices. 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 the economic hedges rely on the accuracy of these assumptions.any hedging strategies.

The change in fair value on the interest rate lock commitments and forward delivery sale commitments are recorded in current period earnings as a component of mortgage banking income. In addition, the Company has elected the fair value option

to carry loans held for sale at fair value. The change in fair value of loans held for sale is recorded in current period earnings as a component of mortgage banking income in accordance with the Company's fair value election. The change in fair value associated with loans held for sale was an increase of $103,000 and a decrease of $108,000 and an increase of $47,000 for the three month periods ended September 30, 2018 and 2017, respectively, and 2016, respectively,an increase of $147,000 and a decrease of $102,000 and an increase of $60,000 for the nine month periodsmonths ended September 30, 20172018 and 2016,2017, respectively. These amounts were offset in earnings by the change in the fair value of mortgage derivatives. Additionally, the aggregate amount of net realized gains or losses on sales of such loans included within mortgage banking income was $1.4$1.1 million and $1.7$1.4 million for the three month periods ended September 30, 20172018 and 2016,2017, respectively and $3.4$2.6 million and $3.9$3.4 million for the nine month periodsmonths ended September 30, 2018 and 2017, and 2016, 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 Derivatives
   Fair Value at Fair Value at   Fair Value at Fair Value at
 Balance Sheet
Location		 September 30
2018		 December 31
2017		 Balance Sheet
Location		 September 30
2018		 December 31
2017
 (Dollars in thousands)
Derivatives designated as hedges           
Interest rate derivativesOther assets $3,584
 $1,880
 Other liabilities $2,209
 $264
Derivatives not designated as hedges           
Customer Related Positions           
Loan level derivativesOther assets $25,041
 $14,236
 Other liabilities $25,055
 $14,241
Foreign exchange contractsOther assets 1,143
 1,202
 Other liabilities 1,121
 1,188
Mortgage Derivatives           
Interest rate lock commitmentsOther assets 233
 149
 Other liabilities —
 —
Forward sales agreementsOther assets —
 9
 Other liabilities 61
 —
   $26,417
 $15,596
   $26,237
 $15,429
Total  $30,001
 $17,476
   $28,446
 $15,693

 Asset Derivatives Liability Derivatives
   Fair Value at Fair Value at   Fair Value at Fair Value at
 Balance Sheet
Location		 September 30
2017		 December 31
2016		 Balance Sheet
Location		 September 30
2017		 December 31
2016
 (Dollars in thousands)
Derivatives designated as hedges           
Interest rate derivativesOther assets $1,229
 $1,364
 Other liabilities $407
 $740
Derivatives not designated as hedges           
Customer Related Positions           
Loan level derivativesOther assets $16,991
 $18,629
 Other liabilities $16,992
 $18,632
Foreign exchange contractsOther assets 1,809
 2,338
 Other liabilities 1,794
 2,311
Mortgage Derivatives           
Interest rate lock commitmentsOther assets 274
 430
 Other liabilities —
 —
Forward sales agreementsOther assets —
 —
 Other liabilities 6
 233
   $19,074
 $21,397
   $18,792
 $21,176
Total  $20,303
 $22,761
   $19,199
 $21,916


The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated:
 Three Months Ended Nine Months Ended
 September 30 September 30
 2018 2017 2018 2017
 (Dollars in thousands)
Derivatives designated as hedges       
Gain (loss) in OCI on derivatives (effective portion), net of tax$(405) $109
 $(302) $8
Gain (loss) reclassified from OCI into interest income or interest expense (effective portion)$268
 $(91) $525
 $(264)
Loss recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)       
Interest expense$—
 $—
 $—
 $—
Other expense—
 —
 —
 —
Total$—
 $—
 $—
 $—
Derivatives not designated as hedges       
Changes in fair value of customer related positions       
Other income$3
 $7
 $27
 $7
Other expense(10) (7) (28) (17)
Changes in fair value of mortgage derivatives       
Mortgage banking income(139) (33) 14
 71
Total$(146) $(33) $13
 $61

 Three Months Ended Nine Months Ended
 September 30 September 30
 2017 2016 2017 2016
 (Dollars in thousands)
Derivatives designated as hedges       
Loss in OCI on derivatives (effective portion), net of tax$109
 $674
 $8
 $653
Loss reclassified from OCI into interest expense (effective portion)$(91) $(648) $(264) $(1,949)
Loss recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)       
Interest expense$—
 $—
 $—
 $—
Other expense—
 —
 —
 —
Total$—
 $—
 $—
 $—
Derivatives not designated as hedges       
Changes in fair value of customer related positions       
Other income$7
 $(42) $7
 $71
Other expense(7) (12) (17) (46)
Changes in fair value of mortgage derivatives       
Mortgage banking income(33) 115
 71
 419
Total$(33) $61
 $61
 $444


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 $10.5 million$34,000 and $12.8$4.2 million at September 30, 20172018 and December 31, 2016,2017, respectively. Although none of the contingency provisions have applied as of

September 30, 20172018 and December 31, 2016,2017, the Company has posted collateral to offset the majority of 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 thoseinstitutional counterparties is remote. The Company's exposure relating to institutional counterparties was $4.1$27.3 million and $4.7$7.1 million at September 30, 20172018 and December 31, 2016,2017, respectively. The Company’s exposure relating to customer counterparties was approximately $14.7$1.5 million and $16.1$9.5 million at September 30, 20172018 and December 31, 2016,2017, respectively. Credit exposure may be reduced by the amountvalue of collateral pledged by the counterparty.


NOTE 119 - BALANCE SHEET OFFSETTING
The Company does not offset fair value amounts recognized for derivative instruments or repurchase agreements. 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 PositionFinancial 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
September 30, 2017September 30, 2018
(Dollars in thousands)(Dollars in thousands)
Derivative Assets  
Interest rate swaps$1,229
$—
$1,229
$1,229
$—
$—
$3,584
$—
$3,584
$2,189
$(1,133)$262
Loan level derivatives16,991
—
16,991
2,858
—
14,133
25,041
—
25,041
1,409
(12,605)11,027
Customer foreign exchange contracts1,809
—
1,809
—
—
1,809
1,143
—
1,143
—
—
1,143
$20,029
$—
$20,029
$4,087
$—
$15,942
$29,768
$—
$29,768
$3,598
$(13,738)$12,432
  
Derivative Liabilities  
Interest rate swaps$407
$—
$407
$—
$407
$—
$2,209
$—
$2,209
$2,189
$20
$—
Loan level derivatives16,992
—
16,992
4,087
9,854
3,051
25,055
—
25,055
1,409
2
23,644
Customer foreign exchange contracts1,794
—
1,794
—
—
1,794
1,121
—
1,121
—
—
1,121
Repurchase agreements 
$28,385
$—
$28,385
$3,598
$22
$24,765
 
Customer repurchase agreements179,670
—
179,670
—
179,670
—
141,176
—
141,176
—
141,176
—
$198,863
$—
$198,863
$4,087
$189,931
$4,845
(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, 2017
 (Dollars in thousands)
Derivative Assets 
Interest rate swaps$1,880
$—
$1,880
$805
$—
$1,075
Loan level derivatives14,236
—
14,236
4,578
—
9,658
Customer foreign exchange contracts1,202
—
1,202
—
—
1,202
 $17,318
$—
$17,318
$5,383
$—
$11,935
       
Derivative Liabilities 
Interest rate swaps$264
$—
$264
$—
$264
$—
Loan level derivatives14,241
—
14,241
5,383
3,675
5,183
Customer foreign exchange contracts1,188
—
1,188
—
—
1,188
 $15,693
$—
$15,693
$5,383
$3,939
$6,371
       
Customer repurchase agreements162,679
—
162,679
—
162,679
—
    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, 2016
 (Dollars in thousands)
Derivative Assets 
Interest rate swaps$1,364
$—
$1,364
$961
$—
$403
Loan level derivatives18,629
—
18,629
3,261
—
15,368
Customer foreign exchange contracts2,338
—
2,338
—
—
2,338
 $22,331
$—
$22,331
$4,222
$—
$18,109
       
Derivative Liabilities 
Interest rate swaps$740
$—
$740
$—
$740
$—
Loan level derivatives18,632
—
18,632
4,222
11,106
3,304
Customer foreign exchange contracts2,311
—
2,311
—
—
2,311
Repurchase agreements      
Customer repurchase agreements176,913
—
176,913
—
176,913
—
 $198,596
$—
$198,596
$4,222
$188,759
$5,615

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


NOTE 1210 - FAIR VALUE MEASUREMENTS
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set toapplied by the Company when determining fair value reflect those that the Company determines market participants would use in pricingto 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 sell an assetbe sold or that would be or paid if the liability were to transfer a liabilitybe 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. TheWhen determining fair value, the Company uses pricesconsiders 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 many instruments. This conditioncertain 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 transaction,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 September 30, 20172018 and December 31, 2016,2017, 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 thereforein 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
The fair values are generally estimated based upon recent appraisal values of the property less costs to sell the property, as 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, and othernecessary. Other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. To estimate the fair value of goodwill and, if necessary, other intangible assets, the Company utilizes both a comparable analysis of relevant price multiples in recent market transactions and discounted cash flow analysis. Both valuation models require a significant degree of management judgment. In the event the fair value as determined by the valuation model is less than the carrying value, the intangibles may be impaired. If the impairment testing resulted in impairment, the Company would classify the impaired goodwill and other intangible assets subjected to nonrecurring fair value adjustments as Level 3.

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)
September 30, 2017September 30, 2018
(Dollars in thousands)(Dollars in thousands)
Recurring fair value measurements              
Assets              
Trading securities$1,298
 $1,298
 $—
 $—
$1,581
 $1,581
 $—
 $—
Equity securities20,430
 20,430
 —
 —
Securities available for sale              
U.S. Government agency securities23,228
 —
 23,228
 —
31,572
 —
 31,572
 —
Agency mortgage-backed securities214,564
 —
 214,564
 —
207,523
 —
 207,523
 —
Agency collateralized mortgage obligations114,829
 —
 114,829
 —
137,645
 —
 137,645
 —
State, county, and municipal securities2,539
 —
 2,539
 —
1,981
 —
 1,981
 —
Single issuer trust preferred securities issued by banks and insurers2,044
 —
 2,044
 —
1,004
 —
 1,004
 —
Pooled trust preferred securities issued by banks and insurers1,624
 —
 —
 1,624
1,800
 —
 —
 1,800
Small business administration pooled securities50,186
 —
 50,186
 —
54,336
 —
 54,336
 —
Equity securities20,111
 20,111
 —
 —
Loans held for sale5,459
 —
 5,459
 —
10,431
 —
 10,431
 —
Derivative instruments20,303
 —
 20,303
 —
30,001
 —
 30,001
 —
Liabilities              
Derivative instruments19,199
 —
 19,199
 —
28,446
 —
 28,446
 —
Total recurring fair value measurements$436,986
 $21,409
 $413,953
 $1,624
$469,858
 $22,011
 $446,047
 $1,800
              
Nonrecurring fair value measurements              
Assets              
Collateral dependent impaired loans$33,974
 $—
 $—
 $33,974
$32,009
 $—
 $—
 $32,009
Other real estate owned and other foreclosed assets2,898
 —
 —
 2,898
190
 —
 —
 190
Total nonrecurring fair value measurements$36,872
 $—
 $—
 $36,872
$32,199
 $—
 $—
 $32,199



   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, 2017
 (Dollars in thousands)
Recurring fair value measurements       
Assets       
Trading securities$1,324
 $1,324
 $—
 $—
Equity securities20,584
 20,584
 —
 —
Securities available for sale       
U.S. Government agency securities35,430
 —
 35,430
 —
Agency mortgage-backed securities215,764
 —
 215,764
 —
Agency collateralized mortgage obligations122,012
 —
 122,012
 —
State, county, and municipal securities2,274
 —
 2,274
 —
Single issuer trust preferred securities issued by banks and insurers2,016
 —
 2,016
 —
Pooled trust preferred securities issued by banks and insurers1,640
 —
 —
 1,640
Small business administration pooled securities47,778
 —
 47,778
 —
Loans held for sale4,768
 —
 4,768
 —
Derivative instruments17,476
 —
 17,476
 —
Liabilities       
Derivative instruments15,693
 —
 15,693
 —
Total recurring fair value measurements$455,373
 $21,908
 $431,825
 $1,640
        
Nonrecurring fair value measurements:       
Assets       
Collateral dependent impaired loans$33,567
 $—
 $—
 $33,567
Other real estate owned and other foreclosed assets612
 —
 —
 612
Total nonrecurring fair value measurements$34,179
 $—
 $—
 $34,179

   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, 2016
 (Dollars in thousands)
Recurring fair value measurements       
Assets       
Trading securities$804
 $804
 $—
 $—
Securities available for sale       
U.S. Government agency securities24,244
 —
 24,244
 —
Agency mortgage-backed securities175,384
 —
 175,384
 —
Agency collateralized mortgage obligations99,868
 —
 99,868
 —
State, county, and municipal securities3,793
 —
 3,793
 —
Single issuer trust preferred securities issued by banks and insurers2,311
 —
 2,311
 —
Pooled trust preferred securities issued by banks and insurers1,584
 —
 —
 1,584
Small business administration pooled securities37,189
 —
 37,189
 —
Equity securities19,271
 19,271
 —
 —
Loans held for sale6,139
 —
 6,139
 —
Derivative instruments22,761
 —
 22,761
 —
Liabilities       
Derivative instruments21,916
 —
 21,916
 —
Total recurring fair value measurements$371,432
 $20,075
 $349,773
 $1,584
        
Nonrecurring fair value measurements:       
Assets       
Collateral dependent impaired loans$33,974
 $—
 $—
 $33,974
Other real estate owned and other foreclosed assets4,173
 —
 —
 4,173
Total nonrecurring fair value measurements$38,147
 $—
 $—
 $38,147

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 Ended
 September 30
 2018 2017
 (Dollars in thousands)
Pooled Trust Preferred Securities   
Beginning balance$1,751
 $1,593
Gains and (losses) (realized/unrealized)   
Included in other comprehensive income55
 51
Settlements(6) (20)
Ending balance$1,800
 $1,624
    
 Nine Months Ended
 September 30
 2018 2017
 (Dollars in thousands)
Pooled Trust Preferred Securities   
Beginning balance$1,640
 $1,584
Gains and (losses) (realized/unrealized)   
Included in other comprehensive income180
 58
Settlements(20) (18)
Ending balance$1,800
 $1,624
    
 Three Months Ended
 September 30
 2017 2016
 (Dollars in thousands)
Pooled Trust Preferred Securities   
Beginning balance$1,593
 $1,506
Gains and (losses) (realized/unrealized)   
Included in other comprehensive income51
 41
Settlements(20) (9)
Ending balance$1,624
 $1,538

 Nine Months Ended
 September 30
 2017 2016
 (Dollars in thousands)
Pooled Trust Preferred Securities   
Beginning balance$1,584
 $1,572
Gains and (losses) (realized/unrealized)   
Included in other comprehensive income58
 (17)
Settlements(18) (17)
Ending balance$1,624
 $1,538

It is the Company’s policy to recognize the transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers between the levels of the fair value hierarchy for any assets or liabilities measured at fair value on a recurring basis during the nine month periods ended September 30, 20172018 or 2016.2017.

The following table sets forth certain unobservable inputs regarding the Company’s investment in securities that are classified as Level 3 for the periods indicated:
 September 30
2017		 December 31
2016		 September 30
2017		 December 31
2016		 September 30
2017		 December 31
2016		 September 30
2018		 December 31
2017		 September 30
2018		 December 31
2017		 September 30
2018		 December 31
2017
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 $1,624
 $1,584
 Cumulative prepayment 0% - 61% 0% - 62% 2.5% 2.5% $1,800
 $1,640
 Cumulative prepayment 0% - 59% 0% - 61% 2.4% 2.5%
     Cumulative default 5% - 100% 5% - 100% 12.5% 12.8%     Cumulative default 5% - 100% 5% - 100% 13.5% 12.4%
     Loss given default 85% - 100% 85% - 100% 94.3% 94.2%     Loss given default 85% - 100% 85% - 100% 94.4% 94.3%
     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 $33,974
 $33,974
  $32,009
 $33,567
 
Other real estate owned and foreclosed assets $2,898
 $4,173
  $190
 $612
 
(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments may vary.
For the fair value measurements in the table above, which are classified as Level 3 within the fair value hierarchy, the Company’s Treasury and Finance groups determine the valuation policies and procedures. For the pricing of the securities, the Company uses third-party pricing information, without adjustment. Depending on the type of the security, management employs various techniques to analyze the pricing it receives from third parties, such as analyzing changes in market yields and in certain instances reviewing the underlying collateral of the security. Management reviews changes in fair value from period to period and performs testing to ensure that prices received from the third parties are consistent with their expectation of the market. For the securities whose market is deemed to be inactive and which are categorized as Level 3, the fair value models are calibrated and significant inputs are back tested on a quarterly basis, to the extent possible. This testing is done by the third party service provider, who performs this testing by comparing anticipated inputs to actual results. Significant changes in fair value from period to period are closely scrutinized to ensure fair value models are not flawed. The driver(s) of the respective change in fair value and the method for forecasting the driver(s) isare closely considered by management.

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

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)
September 30, 2017September 30, 2018
(Dollars in thousands)(Dollars in thousands)
Financial assets      
Securities held to maturity(a)                  
U.S. Treasury securities$1,006
 $1,048
 $—
 $1,048
 $—
$1,004
 $1,006
 $—
 $1,006
 $—
Agency mortgage-backed securities171,664
 173,980
 —
 173,980
 —
189,479
 184,088
 —
 184,088
 —
Agency collateralized mortgage obligations275,894
 274,233
 —
 274,233
 —
336,346
 323,516
 —
 323,516
 —
Single issuer trust preferred securities issued by banks1,500
 1,539
 —
 1,539
 —
1,500
 1,490
 —
 1,490
 —
Small business administration pooled securities28,734
 28,862
 —
 28,862
 —
25,376
 24,522
 —
 24,522
 —
Loans, net of allowance for loan losses(b)6,196,218
 6,072,612
 —
 —
 6,072,612
6,432,158
 6,229,090
 —
 —
 6,229,090
Federal Home Loan Bank stock(c)11,597
 11,597
 —
 11,597
 —
13,107
 13,107
 —
 13,107
 —
Cash surrender value of life insurance policies(d)150,352
 150,352
 —
 150,352
 —
153,186
 153,186
 —
 153,186
 —
Financial liabilities                  
Deposit liabilities, other than time deposits(e)$6,055,042
 $6,055,042
 $—
 $6,055,042
 $—
$6,312,788
 $6,312,788
 $—
 $6,312,788
 $—
Time certificates of deposits(f)627,900
 625,275
 —
 625,275
 —
663,451
 654,685
 —
 654,685
 —
Federal Home Loan Bank borrowings(f)53,272
 52,125
 —
 52,125
 —
50,767
 49,974
 —
 49,974
 —
Customer repurchase agreements and other short-term borrowings(f)179,670
 179,670
 —
 —
 179,670
141,176
 141,176
 —
 —
 141,176
Junior subordinated debentures(g)73,071
 74,320
 —
 74,320
 —
73,078
 70,720
 —
 70,720
 —
Subordinated debentures(f)34,670
 32,857
 —
 —
 32,857
34,717
 31,360
 —
 —
 31,360

     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, 2017
 (Dollars in thousands)
Financial assets 
Securities held to maturity(a)         
U.S. Treasury securities$1,006
 $1,035
 $—
 $1,035
 $—
Agency mortgage-backed securities204,768
 205,823
 —
 205,823
 —
Agency collateralized mortgage obligations262,998
 258,408
 —
 258,408
 —
Single issuer trust preferred securities issued by banks1,500
 1,529
 —
 1,529
 —
Small business administration pooled securities27,416
 27,399
 —
 27,399
 —
Loans, net of allowance for loan losses(b)6,261,343
 6,116,051
 —
 —
 6,116,051
Federal Home Loan Bank stock(c)11,597
 11,597
 —
 11,597
 —
Cash surrender value of life insurance policies(d)151,528
 151,528
 —
 151,528
 —
Financial liabilities         
Deposit liabilities, other than time deposits(e)$6,084,952
 $6,084,952
 $—
 $6,084,952
 $—
Time certificates of deposits(f)644,301
 639,060
 —
 639,060
 —
Federal Home Loan Bank borrowings(f)53,264
 52,111
 —
 52,111
 —
Customer repurchase agreements and other short-term borrowings(f)162,679
 162,679
 —
 —
 162,679
Junior subordinated debentures(g)73,073
 74,680
 —
 74,680
 —
Subordinated debentures(f)34,682
 32,707
 —
 —
 32,707
     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, 2016
 (Dollars in thousands)
Financial assets 
Securities held to maturity(a)         
U.S. Treasury securities$1,007
 $1,054
 $—
 $1,054
 $—
Agency mortgage-backed securities156,088
 157,504
 —
 157,504
 —
Agency collateralized mortgage obligations297,445
 294,650
 —
 294,650
 —
Single issuer trust preferred securities issued by banks1,500
 1,544
 —
 1,544
 —
Small business administration pooled securities31,036
 30,898
 —
 30,898
 —
Loans, net of allowance for loan losses(b)5,904,065
 5,784,778
 —
 —
 5,784,778
Federal Home Loan Bank stock(c)11,497
 11,497
 —
 11,497
 —
Cash surrender value of life insurance policies(d)144,503
 144,503
 —
 144,503
 —
Financial liabilities         
Deposit liabilities, other than time deposits(e)$5,763,101
 $5,763,101
 $—
 $5,763,101
 $—
Time certificates of deposits(f)649,152
 647,038
 —
 647,038
 —
Federal Home Loan Bank borrowings(f)50,819
 50,898
 —
 50,898
 —
Customer repurchase agreements and other short-term borrowings(f)176,913
 176,913
 —
 —
 176,913
Junior subordinated debentures(g)73,107
 72,510
 —
 72,510
 —
Subordinated debentures(f)34,635
 34,241
 —
 —
 34,241

(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)FairIn accordance with recent accounting guidance, the fair value isof loans as of September 30, 2018 was 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. Previously the fair value of loans as of December 31, 2017 was estimated solely 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. 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 financial instruments' current use of financial instruments to be the highest and best use of the instruments.



NOTE 1311 - REVENUE RECOGNITION

The Company adopted the new revenue recognition standard under Accounting Standards Codification Topic 606 ("ASC 606") as of January 1, 2018 and is using the modified retrospective transition method upon adoption. The Company determined that there were no material changes to be made to revenue recognition upon adoption and that there were no practical expedients to apply to its contracts.

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 Nine Months Ended
 September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017
 (Dollars in thousands)
Deposit account fees (inclusive of cash management fees)$4,658
 $4,401
 $13,640
 $13,337
Interchange fees3,943
 3,597
 11,267
 10,279
ATM fees825
 815
 2,215
 2,261
Investment management - wealth management and advisory services5,912
 5,402
 17,577
 16,027
Investment management - retail investments and insurance revenue652
 565
 1,951
 1,549
Merchant processing income227
 337
 1,006
 904
Other noninterest income1,152
 1,188
 3,186
 3,269
Total noninterest income in-scope of ASC 60617,369
 16,305
 50,842
 47,626
Total noninterest income out-of-scope of ASC 6065,895
 4,465
 14,172
 13,454
Total noninterest income23,264
 20,770
 65,014
 61,080

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 the 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:
 September 30, 2018 December 31, 2017
 (Dollars in thousands)
Receivables, included in other assets$1,892
 $1,934


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 12 - COMPREHENSIVE INCOME (LOSS)
The following table presentstables 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
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
 (Dollars in thousands)
Change in fair value of securities available for sale$(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(2,988) 726
 (2,262) (12,761) 3,107
 (9,654)
            
Change in fair value of cash flow hedges(296) 83
 (213) 100
 (25) 75
Less: net cash flow hedge gains reclassified into interest income or interest expense (1)268
 (76) 192
 525
 (148) 377
Net change in fair value of cash flow hedges(564) 159
 (405) (425) 123
 (302)
            
Amortization of net actuarial losses94
 (26) 68
 281
 (79) 202
Amortization of net prior service costs69
 (20) 49
 207
 (58) 149
Net change in other comprehensive income for defined benefit postretirement plans (2)163
 (46) 117
 488
 (137) 351
Total other comprehensive loss$(3,389) $839
 $(2,550) $(12,698) $3,093
 $(9,605)
 Three Months Ended
September 30, 2017		 Nine Months Ended
September 30, 2017
 Pre Tax
Amount		 Tax (Expense)
Benefit		 After Tax
Amount		 Pre Tax
Amount		 Tax (Expense)
Benefit		 After Tax
Amount
 (Dollars in thousands)
Change in fair value of securities available for sale$347
 $(152) $195
 $2,520
 $(1,001) $1,519
Less: net security gains reclassified into other noninterest income (expense)11
 (4) 7
 13
 (5) 8
Net change in fair value of securities available for sale336
 (148) 188
 2,507
 (996) 1,511
            
Change in fair value of cash flow hedges91
 (36) 55
 (250) 102
 (148)
Less: net cash flow hedge losses reclassified into interest on borrowings expense (1)(91) 37
 (54) (264) 108
 (156)
Net change in fair value of cash flow hedges182
 (73) 109
 14
 (6) 8
            
Net unamortized loss related to defined benefit pension and other postretirement adjustments arising during the period(6) 2
 (4) (20) 8
 (12)
Amortization of net actuarial losses69
 (28) 41
 208
 (85) 123
Amortization of net prior service costs70
 (29) 41
 208
 (85) 123
Net change in other comprehensive income for defined benefit postretirement plans (2)133
 (55) 78
 396
 (162) 234
Total other comprehensive income$651
 $(276) $375
 $2,917
 $(1,164) $1,753

Three Months Ended
September 30, 2016		 Nine Months Ended
September 30, 2016		Three Months Ended
September 30, 2017		 Nine Months Ended
September 30, 2017
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$(1,315) $499
 $(816) $8,351
 $(3,248) $5,103
$347
 $(152) $195
 $2,520
 $(1,001) $1,519
Less: net security losses reclassified into other noninterest income—
 —
 —
 (27) 11
 (16)
Less: net security gains reclassified into other noninterest income (expense)11
 (4) 7
 13
 (5) 8
Net change in fair value of securities available for sale(1,315) 499
 (816) 8,378
 (3,259) 5,119
336
 (148) 188
 2,507
 (996) 1,511
                      
Change in fair value of cash flow hedges486
 (196) 290
 (852) 352
 (500)91
 (36) 55
 (250) 102
 (148)
Less: net cash flow hedge losses reclassified into interest on borrowings expense (1)(648) 264
 (384) (1,949) 796
 (1,153)
Less: net cash flow hedge losses reclassified into interest income or interest expense (1)(91) 37
 (54) (264) 108
 (156)
Net change in fair value of cash flow hedges1,134
 (460) 674
 1,097
 (444) 653
182
 (73) 109
 14
 (6) 8
                      
Net unamortized loss related to defined benefit pension and other postretirement adjustments arising during the period(28) 11
 (17) (84) 33
 (51)(6) 2
 (4) (20) 8
 (12)
Amortization of net actuarial losses61
 (25) 36
 183
 (75) 108
69
 (28) 41
 208
 (85) 123
Amortization of net prior service credits69
 (29) 40
 207
 (84) 123
Amortization of net prior service costs70
 (29) 41
 208
 (85) 123
Net change in other comprehensive income for defined benefit postretirement plans (2)102
 (43) 59
 306
 (126) 180
133
 (55) 78
 396
 (162) 234
Total other comprehensive income (loss)$(79) $(4) $(83) $9,781
 $(3,829) $5,952
Total other comprehensive income$651
 $(276) $375
 $2,917
 $(1,164) $1,753
 

(1)Includes the amortization of the remaining balance of a realized but unrecognized gain, net of tax, from the termination of interest rate swaps in 2009. The original gain of $1.4 million, net of tax, is being recognized in earnings through December 2018, the original maturity date of the swap. The balance of this gain has amortized to $173,000$34,000 and $281,000$137,000 at September 30, 20172018 and December 31, 2016,2017, respectively.


(2)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, 2016,2017, 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)
 (Dollars in thousands)
 2018
Beginning balance: January 1, 2018$(504) $948
 $137
 $(2,412) $(1,831)
Opening balance reclassification(111) 205
 29
 (520) (397)
Cumulative effect accounting adjustment(831) —
 —
 —
 (831)
Net change in other comprehensive income (loss)(9,654) (170) (132) 351
 (9,605)
Ending balance: September 30, 2018$(11,100) $983
 $34
 $(2,581) $(12,664)
 2017
Beginning balance: January 1, 2017$173
 $361
 $281
 $(2,152) $(1,337)
Net change in other comprehensive income (loss)1,511
 116
 (108) 234
 1,753
Ending balance: September 30, 2017$1,684
 $477
 $173
 $(1,918) $416

 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)
 2017
Beginning balance: January 1, 2017$173
 $361
 $281
 $(2,152) $(1,337)
Net change in other comprehensive income (loss)1,511
 116
 (108) 234
 1,753
Ending balance: September 30, 2017$1,684
 $477
 $173
 $(1,918) $416
 2016
Beginning balance: January 1, 2016$1,306
 $(1,955) $427
 $(2,230) $(2,452)
Net change in other comprehensive income (loss)5,119
 763
 (110) 180
 5,952
Ending balance: September 30, 2016$6,425
 $(1,192) $317
 $(2,050) $3,500



NOTE 1413 - 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 itsthe 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:
 September 30, 2018 December 31, 2017
 (Dollars in thousands)
Commitments to extend credit$2,551,217
 $2,443,478
Standby letters of credit16,704
 15,534
Deferred standby letter of credit fees128
 102
 September 30, 2017 December 31, 2016
 (Dollars in thousands)
Commitments to extend credit$2,436,512
 $2,227,955
Standby letters of credit15,883
 18,190
Deferred standby letter of credit fees130
 108

Lease Commitments
The Company leases office space, space for ATM locations, and certain branch locations under noncancelable operating leases. Several of these leases have renewal options that typically range from 5 to 10 years.
Rent expense incurred under operating leases was approximately $2.3 million and $2.1 million for both the three months ended September 30, 20172018 and 2016,2017, respectively, and $6.3$7.1 million and $6.4$6.3 million for the nine months ended September 30, 2018 and 2017, and 2016, respectively. Renewal options ranging from 4 months to 10 years exist for several of these leases.
There has been no significant change in the future minimum lease payments payable by the Company since December 31, 2016.2017. See the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20162017 for information regarding our leases and other commitments.
Other Contingencies
At September 30, 2017,2018, Rockland Trust was involved in pending lawsuits that arose in the ordinary course of business. Management has reviewed these pending lawsuits with legal counsel and has taken into consideration the view of counsel as to their outcome. In the opinion of management, the final disposition of pending lawsuits is not expected to have a material adverse effect on the Company’s financial position or results of operations.
The Bank is required to maintain certain reserve requirements of vault cash and/or deposits with the Federal Reserve Bank of Boston. The amount of this reserve requirement was $6.7$34.9 million and $31.8$35.8 million at September 30, 20172018 and December 31, 2016,2017, respectively.



NOTE 1514 - 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:
September 30, 2017 December 31, 2016September 30
2018		 December 31
2017		 
(Dollars in thousands)(Dollars in thousands) 
Original investment value$47,627
 $47,379
$47,464
 $47,399
 
Current recorded investment36,868
 39,606
32,032
 35,225
 
Unfunded liability obligation7,696
 12,161
2,003
 4,536
 
Tax credits and benefits5,705
(1)5,366
5,458
(1)5,654
 
Amortization of investments3,988
(2)3,725
4,334
(2)4,402
(4)
Net income tax benefit1,718
(3)1,641
1,124
(3)1,253
 
(1) This amount reflects anticipated tax credits and tax benefits for the full year ended December 31, 2017.2018.
(2) The amortization amount reduces the tax credits and benefits anticipated for the full year ended December 31, 2017.2018.
(3) This amount represents the net tax benefit expected to be realized for the full year ended December 31, 20172018 in determining the Company's effective tax rate.

(4) The 2017 amount is inclusive of $466,000 related to the revaluation of LIHTC investments as a result of the Tax Act.


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, 2016,2017, 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, 2016,2017, 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 anticipated 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;
unexpected changes in market interest rates for interest earning assets and/or interest bearing liabilities;
unexpected 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;
our 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;
failure to consummate or a delay in consummating the acquisitions of MNB Bancorp and Blue Hills Bancorp, which are subject to certain standard conditions, including regulatory approvals and shareholder approval for the Blue Hills Bancorp transaction;
the inability to realize expected synergies from merger transactions in the amounts or in the timeframe anticipated;
inability to retain customers and employees, including those acquired in previousthe MNB Bancorp and Blue Hills Bancorp 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  
September 30,
2017		 June 30,
2017		 March 31,
2017		 December 31,
2016		 September 30,
2016		September 30,
2018		 June 30,
2018		 March 31,
2018		 December 31,
2017		 September 30,
2017
(Dollars in thousands, except per share data)(Dollars in thousands, except per share data)
Financial condition data                  
Securities available for sale$429,125
 $415,943
 $401,837
 $363,644
 $387,008
Securities held to maturity478,798
 498,392
 502,123
 487,076
 430,763
Securities$1,011,578
 $1,002,921
 $996,287
 $946,510
 $909,221
Loans6,289,902
 6,269,696
 6,064,366
 5,999,605
 5,746,133
6,527,402
 6,479,271
 6,362,056
 6,355,553
 6,289,902
Allowance for loan losses(59,710) (59,479) (62,318) (61,566) (58,205)(63,235) (62,557) (60,862) (60,643) (59,710)
Goodwill and other intangible assets242,105
 243,005
 230,613
 231,374
 210,834
239,185
 239,724
 240,268
 241,147
 242,105
Total assets8,052,919
 8,017,293
 7,738,114
 7,709,375
 7,502,009
8,375,497
 8,381,002
 8,090,410
 8,082,029
 8,052,919
Total deposits6,682,942
 6,695,380
 6,470,674
 6,412,253
 6,269,460
6,976,239
 7,013,490
 6,751,511
 6,729,253
 6,682,942
Total borrowings340,683
 320,378
 304,297
 335,474
 299,521
299,739
 300,792
 298,939
 323,698
 340,683
Stockholders’ equity931,224
 914,584
 877,480
 864,690
 818,242
998,305
 977,065
 956,059
 943,809
 931,224
Nonperforming loans50,277
 51,783
 55,052
 57,407
 24,793
45,394
 47,112
 47,713
 49,638
 50,277
Nonperforming assets53,175
 54,812
 58,456
 61,580
 26,591
45,584
 47,357
 48,071
 50,250
 53,175
Income statement                  
Interest income$71,778
 $68,133
 $64,407
 $63,428
 $62,308
$82,875
 $79,167
 $73,749
 $72,876
 $71,778
Interest expense4,705
 4,378
 4,207
 4,676
 4,640
6,641
 5,999
 5,278
 5,044
 4,705
Net interest income67,073
 63,755
 60,200
 58,752
 57,668
76,234
 73,168
 68,471
 67,832
 67,073
Provision for loan losses—
 1,050
 600
 4,000
 950
1,075
 2,000
 500
 1,300
 —
Noninterest income20,770
 21,398
 18,912
 21,762
 20,416
23,264
 21,887
 19,863
 21,914
 20,770
Noninterest expenses51,310
 52,809
 48,773
 51,637
 46,857
55,439
 52,688
 53,451
 51,467
 51,310
Net income23,852
 20,563
 20,725
 17,179
 20,484
33,015
 31,118
 27,555
 22,064
 23,852
Per share data                  
Net income—basic$0.87
 $0.75
 $0.77
 $0.64
 $0.78
$1.20
 $1.13
 $1.00
 $0.80
 $0.87
Net income—diluted0.87
 0.75
 0.76
 0.64
 0.78
1.20
 1.13
 1.00
 0.80
 0.87
Cash dividends declared0.32
 0.32
 0.32
 0.29
 0.29
0.38
 0.38
 0.38
 0.32
 0.32
Book value per share33.94
 33.34
 32.44
 32.02
 31.09
36.25
 35.49
 34.75
 34.38
 33.94
Tangible book value per share (1)25.12
 24.48
 23.92
 23.45
 23.08
27.56
 26.78
 26.02
 25.60
 25.12
Performance ratios                  
Return on average assets1.18% 1.06% 1.10% 0.89% 1.09%1.57% 1.52% 1.39% 1.08% 1.18%
Return on average common equity10.18% 9.15% 9.59% 8.07% 9.98%13.19% 12.85% 11.73% 9.28% 10.18%
Net interest margin (on a fully tax equivalent basis)3.65% 3.60% 3.51% 3.36% 3.40%
Equity to assets11.56% 11.41% 11.34% 11.22% 10.91%
Dividend payout ratio36.80% 42.09% 37.79% 44.43% 37.25%
Asset Quality Ratios         
Nonperforming loans as a percent of gross loans0.80% 0.83% 0.91% 0.96% 0.43%
Nonperforming assets as a percent of total assets0.66% 0.68% 0.76% 0.80% 0.35%

Net interest margin (on a fully tax equivalent basis)3.94% 3.89% 3.77% 3.64% 3.65%
Equity to assets11.92% 11.66% 11.82% 11.68% 11.56%
Dividend payout ratio31.69% 33.60% 31.88% 39.79% 36.80%
Asset Quality Ratios         
Nonperforming loans as a percent of gross loans0.70% 0.73% 0.75% 0.78% 0.80%
Nonperforming assets as a percent of total assets0.54% 0.57% 0.59% 0.62% 0.66%
Allowance for loan losses as a percent of total loans0.95% 0.95% 1.03% 1.03% 1.01%0.97% 0.97% 0.96% 0.95% 0.95%
Allowance for loan losses as a percent of nonperforming loans118.76% 114.86% 113.20% 107.24% 234.76%139.30% 132.78% 127.56% 122.17% 118.76%
Capital ratios                  
Tier 1 leverage capital ratio10.03% 10.07% 9.92% 9.77% 9.59%10.49% 10.39% 10.32% 10.04% 10.03%
Common equity tier 1 capital ratio11.13% 10.95% 10.89% 10.82% 10.78%11.98% 11.64% 11.47% 11.20% 11.13%
Tier 1 risk-based capital ratio12.24% 12.07% 12.05% 11.99% 12.01%13.07% 12.73% 12.57% 12.31% 12.24%
Total risk-based capital ratio13.75% 13.58% 13.66% 13.60% 13.63%14.58% 14.24% 14.08% 13.82% 13.75%


(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. The Company completed the acquisition of Island Bancorp Inc. ("Island Bancorp") inDuring the second quarter of 2017.2018, the Company announced the signing of a definitive merger agreement with MNB Bancorp ("MNB"), which is expected to close in the fourth quarter of 2018. During the third quarter of 2018, the Company announced the signing of a definitive merger agreement with Blue Hills Bancorp ("BHB"), which is expected to close in the first half of 2019.


Interest-Earning Assets


Management’s balance sheet strategy emphasizes commercial and home equity lending. The results depicted in the following table reflect an overall increase in total loans over the past five quarters due to the results of that strategy, as well as the impact from acquisitions. For the 2016 Q4 New England Bancorp, Inc. ("NEB") acquisition and 2017 Q2 Island Bancorp acquisition. Modestthird quarter of 2018, the Company experienced loan growth in the quarter was driven primarily by increases in the commercial construction, home equity and residential categories, partly offset by a decline in commercial and industrial related balances.across all major categories.

chart-efb31574317f5742bdb.jpg
q215-chartx40209a10.jpg


Management strives to be disciplined about loan pricing and considers interest rate sensitivity when generating loan assets. The Company has gradually and intentionally shifted its balance sheet composition so that its interest-rate risk position is fundamentally asset-sensitive.

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, supporting management's emphasis on core deposit growth to fund loans, as depicted by the following chart:


q215-chartx42023a10.jpgchart-5a136dcfe06c5517aaf.jpg



As of September 30, 2017,2018, core deposits comprised 90.2%90.25% of total deposits. The continued emphasis on core deposits has resulted in a cost of deposits of only 0.20%0.30% for the 20172018 third quarter, which increased by twothree basis points when compared to the second quarter of 2017.2018.


The Company's net interest margin was 3.65%3.94% for the quarter ended September 30, 2017,2018, a 5five basis point increase from the second quarter of 2017,2018, reflecting the Company's asset sensitive position, as shown by the following chart:


indb063020_chart-54819a01.jpgchart-6d0f2366ffcd5319b1e.jpg

Noninterest Income


Management continues to focus on noninterest income growth, which can often experience volatility due to seasonality and overall economic related conditions. Noninterest income 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:
q215-chartx43975a10.jpgchart-13229c7c0eda57a09e0.jpg




Expense Control


Management seeks to take a balanced approach to noninterest expense control by monitoring the management of 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, andas 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:


q215-chartx45101a10.jpgchart-86d70639af99515f8b9.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 createscreate a competitive advantage for Rockland Trust and its community development subsidiaries. During the third quarter of 2017,2018, the Company’s effective tax rate was 34.71%, representing a slight increase from the prior quarter rate of 34.29%23.19%.


Capital


The Company's disciplined approach with respect to revenue, expense, and tax effectiveness is designed to promote long-term earnings growth. Strong earnings growthretention has contributed to healthy capital growth. Book value per share increased 1.8%2.1% in the third quarter of 20172018 and 9.2%6.8% over the past four quarters. In addition, tangible book value per share rose 2.9% in the third quarter of 2018 and was higher by 9.7% over the past four quarters (see "Non-GAAP Measures" below for a reconciliation of non-GAAP measures). In addition, tangible book value per share increased 2.6% in the third quarter of 2017 and has increased by 8.8% over the past four quarters. Stockholders' equity as a percentage of total assets was 11.56%11.92% for the third quarter of 2017,2018, compared to 11.41%11.66% in the second quarter of 2017.2018. The Company's tangible common equity ratio (or tangible common equity as a percentage of tangible assets) increasedrose to 8.82%9.33% for the third quarter of 2017,2018, as compared to 8.64%9.06% in the second quarter of 2017.2018. See "Non-GAAP Measures" below for a reconciliation of non-GAAP measures. The following chart shows the Company's book value and tangible book value per share over the past five quarters:


q215-chartx46228a10.jpgchart-60e2c5c8d07f554395c.jpg
*See "Non-GAAP Measures" below for a reconciliation to GAAP financial measures.


The Company's strong growth in capital enables the payment of cash dividends. The Company paiddeclared quarterly cash dividends duringof $0.38 per share for the first three quarters of 2018, representing an increase of 18.8% from the 2017 quarterly dividend rate of $0.32 per share, representing a 10.3% increase from the 2016 quarterly cash dividends of $0.29 per share.


Third Quarter 20172018 Results


Net income for the third quarter of 20172018 was $33.0 million, or $1.20 on a diluted earnings per share basis, an increase of 38.4% and 37.9%, respectively, as compared to $23.9 million, or $0.87 on a diluted earnings per share basis, an increase of 16.4% and 11.5%, respectively, as compared to $20.5 million, or $0.78 per diluted share, for the prior year third quarter. ThirdThe third quarter 2017of 2018 included merger and acquisition costs which the Company deems to be noncore. Excluding these merger and acquisition expenses, third quarter 2018 operating net income of $23.9was $34.9 million (which included no adjustments) compared to the operating net income from the third quarter of 20162017 of $20.6$23.9 million, reflected an increase of 15.9%46.5%. See "Non-GAAP Measures" below for a reconciliation of non-GAAP measures.



20172018 Outlook


During the Company’s third quarter 20172018 earnings call, the Company stated that it anticipates the following for the full year ending December 31, 2017 (as compared with2018:

Loan and deposit growth for the full year ending December 31, 2016 and as of December 31, 2016, as applicable):2018 to be in the low to mid-single digit range, excluding the MNB acquisition;

Organic loan growthAssuming no further federal funds rate increases, the full year 2018 net interest margin is expected to expand by 30 to 32 basis points versus the full year 2017;
Net interest margin will increase 4 to 6 basis points in the fourth quarter;
Most noninterest income categories (with the exception of gain on life insurance benefits) are expected to be higher during the fourth quarter as compared to the third quarter;
Noninterest expense is expected to up slightly in the fourth quarter, compared to third quarter results, but full year growth will be lower thaneven when including the mid-to-upper single digit pace anticipated;
Organic deposit growth will likely resume inMNB acquisition with the fourth quarter following a third quarter decrease;
Net interest marginoperating efficiency ratio improving for the full year expected to improve approximately 20 basis points as compared toremainder of the 3.40% reportedyear; and
The effective tax rate for the fullremainder of the year 2016;
Fee income growth expected in the fourth quarter, but subject to volatility in loan level derivative income;
Efficiency ratio for the fourth quarter(excluding discrete items) is expected to be in the mid 50s range; and
A fourth quarter effective tax rate of approximately 34.5%23.0%.


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 table that follows. There are items that impact the Company's results that management believes are unrelated to its core banking business such as gains or losses on the sales of securities, merger and acquisition expenses loss on extinguishment of debt, impairment and other items.items, such as one-time adjustments as a result of changes in laws and regulations. Management, therefore, computes the Company’scertain 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 an analysis 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 with the Company's tangible common equity ratio (which is computed by dividing tangible common equity by tangible assets) which are non- GAAPnon-GAAP measures. The Company has included information on these tangible ratios because management believes that investors may find it useful to have access to the same analytical tools used by management to assess performance and identify trends.  The Company has recognized goodwill and other intangible assets in conjunction with merger and acquisition activities.  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, facilitates comparison of 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 financial results 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 period. The Company’s non-GAAP performance measures are not necessarily comparable to similarly named 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 reconcilesreconcile non-GAAP measures:
Three Months Ended September 30Three Months Ended September 30
Net Income 
Diluted
Earnings Per Share
Net Income 
Diluted
Earnings Per Share
2017 2016 2017 20162018 2017 2018 2017
(Dollars in thousands, except per share data)(Dollars in thousands, except per share data)
Net income available to common shareholders (GAAP)$23,852
 $20,484
 $0.87
 $0.78
$33,015
 $23,852
 $1.20
 $0.87
Non-GAAP adjustments              
Noninterest expense components              
Merger and acquisition expenses—
 151
 —
 0.01
2,688
 —
 0.10
 —
Total impact of noncore items—
 151
 —
 0.01
2,688
 —
 0.10
 —
Net tax benefit associated with noncore items (1)—
 (61) —
 (0.01)(756) —
 (0.03) —
Net operating earnings (Non-GAAP)$23,852
 $20,574
 $0.87
 $0.78
Noncore items, net of tax$1,932
 $—
 $0.07
 $—
Operating net income (Non-GAAP)$34,947
 $23,852
 $1.27
 $0.87
              
Nine Months Ended September 30Nine Months Ended September 30
Net Income 
Diluted
Earnings Per Share
Net Income 
Diluted
Earnings Per Share
2017 2016 2017 20162018 2017 2018 2017
(Dollars in thousands, except per share data)(Dollars in thousands, except per share data)
Net income available to common shareholders (GAAP)$65,140
 $59,469
 $2.38
 $2.26
$91,688
 $65,140
 $3.32
 $2.38
Non-GAAP adjustments              
Noninterest expense components      

      

Loss on extinguishment of debt—
 437
 —
 0.02
Merger and acquisition expenses3,393
 691
 0.12
 0.03
3,122
 3,393
 0.12
 0.12
Total impact of noncore items3,393
 1,128
 0.12
 0.05
3,122
 3,393
 0.12
 0.12
Net tax benefit associated with noncore items (1)(1,241) (461) (0.04) (0.03)(878) (1,241) (0.03) (0.04)
Net operating earnings (Non-GAAP)$67,292
 $60,136
 $2.46
 $2.28
Operating net income (Non-GAAP)$93,932
 $67,292
 $3.41
 $2.46
       
(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 
September 30
2017		 June 30
2017		 March 31
2017		 December 31
2016		 September 30
2016		  September 30
2018		 June 30
2018		 March 31
2018		 December 31
2017		 September 30
2017		  
(Dollars in thousands) (Dollars in thousands) 
Net interest income (GAAP)$67,073
 $63,755
 $60,200
 $58,752
 $57,668
 (a)$76,234
 $73,168
 $68,471
 $67,832
 $67,073
 (a)
                    
Noninterest income (GAAP)$20,770
 $21,398
 $18,912
 $21,762
 $20,416
 (b)$23,264
 $21,887
 $19,863
 $21,914
 $20,770
 (b)
Noninterest income on an operating basis (Non-GAAP)*$20,770
 $21,398
 $18,912
 $21,762
 $20,416
 (c)$23,264
 $21,887
 $19,863
 $21,914
 $20,770
 (c)
                    
Noninterest expense (GAAP)$51,310
 $52,809
 $48,773
 $51,637
 $46,857
 (d)$55,439
 $52,688
 $53,451
 $51,467
 $51,310
 (d)
Less:                    
Merger and acquisition expense—
 2,909
 484
 4,764
 151
 2,688
 434
 —
 —
 —
 
Noninterest expense on an operating basis (Non-GAAP)$51,310
 $49,900
 $48,289
 $46,873
 $46,706
 (e)$52,751
 $52,254
 $53,451
 $51,467
 $51,310
 (e)
                    
Total revenue (GAAP)$87,843
 $85,153
 $79,112
 $80,514
 $78,084
 (a+b)$99,498
 $95,055
 $88,334
 $89,746
 $87,843
 (a+b)
Total operating revenue (Non-GAAP)$87,843
 $85,153
 $79,112
 $80,514
 $78,084
 (a+c)
Total operating revenue (Non-GAAP)*$99,498
 $95,055
 $88,334
 $89,746
 $87,843
 (a+c)
                    
Ratios                    
Noninterest income as a % of revenue (GAAP based)23.64% 25.13% 23.91% 27.03% 26.15% (b/(a+b))23.38% 23.03% 22.49% 24.42% 23.64% (b/(a+b))
Noninterest income as a % of revenue on an operating basis (Non-GAAP)23.64% 25.13% 23.91% 27.03% 26.15% (c/(a+c))
Noninterest income as a % of revenue on an operating basis (Non-GAAP)*23.38% 23.03% 22.49% 24.42% 23.64% (c/(a+c))
Efficiency ratio (GAAP based)58.41% 62.02% 61.65% 64.13% 60.01% (d/(a+b))55.72% 55.43% 60.51% 57.35% 58.41% (d/(a+b))
Efficiency ratio on an operating basis (Non-GAAP)58.41% 58.60% 61.04% 58.22% 59.82% (e/(a+c))53.02% 54.97% 60.51% 57.35% 58.41% (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:
September 30,
2017		 June 30
2017		 March 31
2017		 December 31
2016		 September 30,
2016		 September 30,
2018		 June 30
2018		 March 31
2018		 December 31
2017		 September 30,
2017		 
(Dollars in thousands, except per share data) (Dollars in thousands, except per share data) 
Tangible common equity                    
Stockholders' equity (GAAP)$931,224
 $914,584
 $877,480
 $864,690
 $818,242
(a)$998,305
 $977,065
 $956,059
 $943,809
 $931,224
(a)
Less: Goodwill and other intangibles242,105
 243,005
 230,613
 231,374
 210,834
 239,185
 239,724
 240,268
 241,147
 242,105
 
Tangible common equity (Non-GAAP)689,119
 671,579
 646,867
 633,316
 607,408
(b)759,120
 737,341
 715,791
 702,662
 689,119
(b)
Tangible assets        
         
 
Assets (GAAP)8,052,919
 8,017,293
 7,738,114
 7,709,375
 7,502,009
(c)8,375,498
 8,381,002
 8,090,410
 8,082,029
 8,052,919
(c)
Less: Goodwill and other intangibles242,105
 243,005
 230,613
 231,374
 210,834
 239,185
 239,724
 240,268
 241,147
 242,105
 
Tangible assets (Non-GAAP)$7,810,814
 $7,774,288
 $7,507,501
 $7,478,001
 $7,291,175
(d)$8,136,313
 $8,141,278
 $7,850,142
 $7,840,882
 $7,810,814
(d)
Common shares27,437,791

27,431,171

27,046,768
 27,005,813
 26,320,467
(e)27,540,843

27,532,524

27,512,328
 27,450,190
 27,437,791
(e)
                    
Common equity to assets ratio (GAAP)11.56% 11.41% 11.34% 11.22% 10.91%(a/c)11.92% 11.66% 11.82% 11.68% 11.56%(a/c)
Tangible common equity to tangible assets ratio (Non-GAAP)8.82% 8.64% 8.62% 8.47% 8.33%(b/d)9.33% 9.06% 9.12% 8.96% 8.82%(b/d)
Book value per share (GAAP)$33.94
 $33.34
 $32.44
 $32.02
 $31.09
(a/e)$36.25
 $35.49
 $34.75
 $34.38
 $33.94
(a/e)
Tangible book value per share (Non-GAAP)$25.12
 $24.48
 $23.92
 $23.45
 $23.08
(b/e)$27.56
 $26.78
 $26.02
 $25.60
 $25.12
(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 nine months of 2017.2018. Please refer to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20162017 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 $57.7$65.1 million, or 6.8%6.9%, at September 30, 20172018 as compared to December 31, 2016,2017, reflecting new purchases of $182.4 million made during the nine month period, partially offset by paydowns on existing securities. The ratio of securities to total assets was 11.3%12.08% and 11.1%11.71% at September 30, 20172018 and December 31, 2016,2017, 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 43 “Securities” within Condensed Notes to Consolidated Financial Statements included in Item 1 hereof.


Residential Mortgage Loan SalesThe Company’s primary loan sale activity arises from the sale of government sponsored enterprise eligible residential mortgage loans. During the nine months ended September 30, 20172018 and 2016,2017, the Bank 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 minimalno losses during the three and nine month periods ended September 30, 20172018 and September 30, 20162017 related to these activities.


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 periodperiods indicated:
Table 1 - Closed Residential Real Estate Loans
Three Months Ended September 30 Nine Months Ended September 30Three Months Ended September 30 Nine Months Ended September 30
2017 2016 2017 20162018 2017 2018 2017
(Dollars in thousands)(Dollars in thousands)
Held in portfolio$31,766
 $45,786
 $116,537
 $97,065
$52,125
 $31,766
 $132,711
 $116,537
Sold or held for sale in the secondary market64,924
 84,571
 164,458
 198,003
58,320
 64,924
 142,262
 164,458
Total closed loans$96,690
 $130,357
 $280,995
 $295,068
$110,445
 $96,690
 $274,973
 $280,995


The Company sold $68.3$61.9 million and $84.1$68.3 million in residential loans during the three months ended September 30, 20172018 and 2016,2017, respectively, and $166.1$141.0 million and $190.7$166.1 million during the nine months ended September 30, 20172018 and 2016,2017, respectively. All loans sold during these periods were sold with servicing rights released.



Currently, the Bank sells the servicing of sold loans for a servicing release premium, simultaneous with the sale of the loan. In the past, the Bank may have opted to sell loans 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 $292.2$244.9 million, $311.3$277.8 million and $329.2$292.2 million at September 30, 2017,2018, December 31, 2016,2017, and September 30, 2016,2017, respectively. The following table shows the adjusted cost of the servicing rights associated with these loans and the changes for the periods indicated:

Table 2 - Mortgage Servicing Asset
Three Months Ended September 30 Nine Months Ended September 30Three Months Ended September 30 Nine Months Ended September 30
2017 2016 2017 20162018 2017 2018 2017
(Dollars in thousands)(Dollars in thousands)
Balance at beginning of period$1,876
 $2,121
 $2,048
 $2,581
$1,559
 $1,876
 $1,697
 $2,048
Acquired portfolio—
 —
 28
 —
—
 —
 —
 28
Amortization(100) (140) (309) (419)(71) (100) (230) (309)
Change in valuation allowance9
 (21) 18
 (202)(10) 9
 11
 18
Balance at end of period$1,785
 $1,960
 $1,785
 $1,960
$1,478
 $1,785
 $1,478
 $1,785
Forward sale contracts 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 one-to-four family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans, resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments are executed, under which the Company agrees to deliver whole mortgage loans to investors which economically hedges this market risk. See Note 10,8, “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 PortfolioManagement continues to focus on growth in the commercial and home equity lending categories. Management believes this emphasis is prudent, given the prevailing interest rate and economic environment, as well as strategic priorities. The Company’s loan portfolio increased by $290.3$171.8 million during the first nine months of 2017, due in part to2018, primarily driven by the acquiredcommercial and industrial portfolio which increased by $115.3 million and by the residential real estate portfolio which increased by $47.5 million.

The Company's commercial loan portfolio related to the Island Bancorp acquisition.

Excluding the effects of the Island Bancorp acquisition, the Company has experienced organic loan growth across most major loan categories, with the exceptionis comprised primarily of commercial and industrial which has declined due to lower utilization rates. The following table summarizes loan growth/decline during the periods indicated:
Table 3 - Components of Loan Growth/(Decline)
  September 30
2017		 December 31
2016		 Island Bancorp Acquisition Organic Growth/(Decline) Organic Growth/ (Decline) %
  (Dollars in thousands)
Commercial and industrial $858,522
 $902,053
 $4,271
 $(47,802) (5.30)%
Commercial real estate 3,087,160
 3,010,798
 44,510
 31,852
 1.06 %
Commercial construction 395,267
 320,391
 106
 74,770
 23.34 %
Small business 130,656
 122,726
 57
 7,873
 6.42 %
Total commercial 4,471,605
 4,355,968
 48,944
 66,693
 1.53 %
Residential real estate 756,130
 644,426
 87,450
 24,254
 3.76 %
Home equity 1,052,295
 988,147
 18,921
 45,227
 4.58 %
Total consumer real estate 1,808,425
 1,632,573
 106,371
 69,481
 4.26 %
Total other consumer 9,872
 11,064
 236
 (1,428) (12.91)%
Total loans $6,289,902
 $5,999,605
 $155,551
 $134,746
 2.25 %
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 September 30, 2017:2018:
q215-chartx39821a10.jpgchart-ea64a099535b50bcb1f.jpg
(Dollars in thousands)(Dollars in thousands)
Average loan size$221
$253
Largest individual commercial and industrial loan outstanding$20,000
$25,448
Commercial and industrial nonperforming loans/commercial and industrial loans3.79%2.86%
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, industrial development bonds, and other special purpose properties, such as hotels, motels, nursing homes, restaurants, churches, recreational facilities, marinas, and golf courses. Commercial real estate also includes loans secured by certain residential-related property types including multi-family apartment buildings, residential development tracts and condominiums. The following pie chart shows the diversification of the commercial real estate loan portfolio as of September 30, 2017:2018:
q215-chartx41636a10.jpg
chart-985a9f841bd65553ac0.jpg
(Dollars in thousands)(Dollars in thousands)
Average loan size$850
$876
Largest individual commercial real estate mortgage outstanding$27,496
$27,522
Commercial real estate nonperforming loans/commercial real estate loans0.09%0.06%
Owner occupied commercial real estate loans/commercial real estate loans15.7%16.0%


In addition to the commercial portfolios, the Company also originates both fixed-rate and adjustable-rate residential real estate loans as well as residential construction lending related to single-home residential development within the 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 $1.8$1.9 billion at September 30, 2017.2018.


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").
DelinquencyThe 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 RestructuringsIn 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 its return to accrual status. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. Loans that are considered TDRs are classified as performing, unless they are on nonaccrual status or greater than 90 days delinquent. Loans classified as TDRs remain classified as such for the life of the loan, except in limited circumstances, when it may be determined that the borrower is performing under modified terms and the restructuring agreement specified an interest rate greater than or equal to an acceptable market rate for a comparable new loan at the time of the restructuring.
Purchased Credit Impaired Loans Purchased Credit Impaired (“PCI”) loans are acquired loans which had evidence of deterioration in credit quality 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 5,4,"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 comprised of nonperformingnonaccrual loans, loans past due 90 days or more but still accruing interest, and other real estate owned (“OREO”("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 43 - Nonperforming Assets


September 30,
2017		 December 31,
2016		 September 30,
2016		September 30,
2018		 December 31,
2017		 September 30,
2017
(Dollars in thousands)(Dollars in thousands)
Loans accounted for on a nonaccrual basis          
Commercial and industrial (1)$32,556
 $37,455
 $3,065
$28,742
 $32,055
 $32,556
Commercial real estate3,052
 6,266
 7,399
1,960
 3,123
 3,052
Small business403
 302
 288
191
 230
 403
Residential real estate8,297
 7,782
 7,684
8,076
 8,129
 8,297
Home equity5,903
 5,553
 6,311
6,367
 6,022
 5,903
Other consumer59
 47
 44
49
 71
 59
Total (2)(1)$50,270
 $57,405
 $24,791
$45,385
 $49,630
 $50,270
Loans past due 90 days or more but still accruing          
Other consumer7
 2
 2
9
 8
 7
Total$7
 $2
 $2
$9
 $8
 $7
Total nonperforming loans$50,277
 $57,407
 $24,793
$45,394
 $49,638
 $50,277
Other real estate owned2,898
 4,173
 1,798
190
 612
 2,898
Total nonperforming assets$53,175
 $61,580
 $26,591
$45,584
 $50,250
 $53,175
Nonperforming loans as a percent of gross loans0.80% 0.96% 0.43%0.70% 0.78% 0.80%
Nonperforming assets as a percent of total assets0.66% 0.80% 0.35%0.54% 0.62% 0.66%


(1)Included in the September 30, 2017 and December 31, 2016 amounts are loans related to one large relationship that was place on nonaccrual status in December 2016.
(2)Inclusive of TDRs on nonaccrual status of $5.8$3.4 million, $5.2$6.1 million, and $0.0$5.8 million at September 30, 2017,2018, December 31, 2016,2017, and September 30, 2016,2017, respectively.
The following table summarizes the changes in nonperforming assets for the periods indicated:
Table 54 - Activity in Nonperforming Assets
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30,
2017		 September 30,
2016		 September 30, 2017 September 30, 2016September 30,
2018		 September 30,
2017		 September 30, 2018 September 30, 2017
(Dollars in thousands)(Dollars in thousands)
Nonperforming assets beginning balance$54,812
 $27,473
 $61,580
 $29,849
$47,357
 $54,812
 $50,250
 $61,580
New to nonperforming3,573
 2,630
 11,140
 9,732
4,984
 3,573
 10,627
 11,140
Loans charged-off(817) (1,143) (5,523) (2,256)(847) (817) (2,009) (5,523)
Loans paid-off(3,679) (2,049) (9,548) (7,698)(4,932) (3,679) (9,833) (9,548)
Loans transferred to other real estate owned and foreclosed assets(107) —
 (564) (377)—
 (107) —
 (564)
Loans restored to performing status(557) (288) (2,828) (2,450)(921) (557) (3,101) (2,828)
New to other real estate owned107
 —
 564
 377
—
 107
 —
 564
Valuation write down(238) (5) (333) (158)—
 (238) —
 (333)
Sale of other real estate owned—
 (42) (1,505) (725)—
 —
 (254) (1,505)
Capital improvements to other real estate owned—
 —
 —
 144
Other81
 15
 192
 153
(57) 81
 (96) 192
Nonperforming assets ending balance$53,175
 $26,591
 $53,175
 $26,591
$45,584
 $53,175
 $45,584
 $53,175



The following table sets forth information regarding troubled debt restructured loans as of the dates indicated:
Table 65 - Troubled Debt Restructurings


September 30,
2017		 December 31,
2016		 September 30,
2016		September 30,
2018		 December 31,
2017		 September 30,
2017
(Dollars in thousands)(Dollars in thousands)
Performing troubled debt restructurings$26,731
 $27,093
 $27,644
$24,554
 $25,852
 $26,731
Nonaccrual troubled debt restructurings5,776
 5,199
 5,910
3,370
 6,067
 5,776
Total$32,507
 $32,292
 $33,554
$27,924
 $31,919
 $32,507
Performing troubled debt restructurings as a % of total loans0.42% 0.45% 0.48%0.38% 0.41% 0.42%
Nonaccrual troubled debt restructurings as a % of total loans0.09% 0.09% 0.10%0.05% 0.10% 0.09%
Total troubled debt restructurings as a % of total loans0.51% 0.54% 0.58%0.43% 0.50% 0.51%
The following table summarizes changes in TDRs for the periods indicated:
Table 76 - Activity in Troubled Debt Restructurings


Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30
2017		 September 30
2016		 September 30
2017		 September 30
2016		September 30
2018		 September 30
2017		 September 30
2018		 September 30
2017
(Dollars in thousands)(Dollars in thousands)
TDRs beginning balance$32,636
 $33,440
 $32,292
 $38,074
$29,623
 $32,636
 $31,919
 $32,292
New to TDR status799
 1,367
 4,006
 3,398
432
 799
 1,045
 4,006
Transfer to OREO(107) —
 (322) —
—
 (107) —
 (322)
Paydowns(821) (1,194) (3,450) (7,844)(1,952) (821) (4,612) (3,450)
Charge-offs—
 (59) (19) (74)(179) —
 (428) (19)
TDRs ending balance$32,507
 $33,554
 $32,507
 $33,554
$27,924
 $32,507
 $27,924
 $32,507
    
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 87 - Interest Income - Nonaccrual Loans and Troubled Debt Restructurings
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
2017 2016 2017 20162018 2017 2018 2017
(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$639
 $280
 $1,670
 $857
$650
 $639
 $1,918
 $1,670
The amount of interest income on nonaccrual loans and performing TDRs that was included in net income$434
 $552
 $1,148
 $1,457
$519
 $434
 $1,301
 $1,148
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 September 30, 20172018 and December 31, 20162017 were $76.1$64.0 million and $77.3$72.8 million, respectively. For additional information regarding the Company’s asset quality, including delinquent loans, nonaccruals, TDRs, and impaired loans, see Note 5,4, “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 September 30, 2017,2018, there were 5949 relationships, with an aggregate balance of $84.7$44.7 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 LossesThe 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 ensure itsaccess 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 September 30, 2017,2018, the allowance for loan losses totaled $59.7$63.2 million, or 0.97% of total loans, as compared to $60.6 million, or 0.95% of total loans, as compared to $61.6 million, or 1.03% of total loans, at December 31, 2016.2017.

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


Table 98 - Summary of Changes in the Allowance for Loan Losses


Three Months EndedThree Months Ended
September 30,
2017		 June 30,
2017		 March 31,
2017		 December 31,
2016		 September 30,
2016		September 30,
2018		 June 30,
2018		 March 31,
2018		 December 31,
2017		 September 30,
2017
(Dollars in thousands)(Dollars in thousands)
Average total loans$6,275,200
 $6,158,997
 $6,017,713
 $5,841,546
 $5,660,271
$6,500,907
 $6,432,287
 $6,334,295
 $6,308,374
 $6,275,200
Allowance for loan losses, beginning of period$59,479
 $62,318
 $61,566
 $58,205
 $57,727
$62,557
 $60,862
 $60,643
 $59,710
 $59,479
Charged-off loans                  
Commercial and industrial124
 3,591
 —
 562
 27
218
 4
 133
 176
 124
Commercial real estate—
 —
 —
 49
 341
82
 —
 —
 39
 —
Small business164
 24
 70
 37
 98
111
 102
 24
 44
 164
Residential real estate43
 116
 23
 1
 —
—
 109
 39
 25
 43
Home equity81
 122
 14
 111
 154
87
 95
 79
 59
 81
Other consumer405
 345
 401
 455
 523
349
 259
 318
 343
 405
Total charged-off loans817
 4,198
 508
 1,215
 1,143
847
 569
 593
 686
 817
Recoveries on loans previously charged-off                  
Commercial and industrial404
 13
 187
 9
 63
108
 59
 12
 11
 404
Commercial real estate286
 26
 31
 29
 124
29
 18
 20
 42
 286
Small business17
 13
 66
 73
 28
10
 10
 9
 18
 17
Residential real estate15
 2
 12
 117
 130
9
 1
 2
 2
 15
Home equity65
 26
 76
 64
 24
71
 23
 34
 31
 65
Other consumer261
 229
 288
 284
 302
223
 153
 235
 215
 261
Total recoveries1,048
 309
 660
 576
 671
450
 264
 312
 319
 1,048
Net loans charged-off (recovered)                  
Commercial and industrial(280) 3,578
 (187) 553
 (36)110
 (55) 121
 165
 (280)
Commercial real estate(286) (26) (31) 20
 217
53
 (18) (20) (3) (286)
Small business147
 11
 4
 (36) 70
101
 92
 15
 26
 147
Residential real estate28
 114
 11
 (116) (130)(9) 108
 37
 23
 28
Home equity16
 96
 (62) 47
 130
16
 72
 45
 28
 16
Other consumer144
 116
 113
 171
 221
126
 106
 83
 128
 144
Total net loans charged-off (recovered)(231) 3,889
 (152) 639
 472
397
 305
 281
 367
 (231)
Provision for loan losses—
 1,050
 600
 4,000
 950
1,075
 2,000
 500
 1,300
 —
Total allowance for loan losses, end of period$59,710
 $59,479
 $62,318
 $61,566
 $58,205
$63,235
 $62,557
 $60,862
 $60,643
 $59,710
Net loans charged-off (recovered) as a percent of average total loans (annualized)(0.01)% 0.25% (0.01)% 0.04% 0.03%0.02% 0.02% 0.02% 0.02% (0.01)%
Allowance for loan losses as a percent of total loans0.95 % 0.95% 1.03 % 1.03% 1.01%0.97% 0.97% 0.96% 0.95% 0.95 %
Allowance for loan losses as a percent of nonperforming loans118.76 % 114.86% 113.20 % 107.24% 234.76%139.30% 132.78% 127.56% 122.17% 118.76 %
For purposes of the allowance for loan losses, management segregates the loan portfolio into the portfolio segments detailed in the table below. The allocation of the allowance for loan losses is made to each loan category using the analytical techniques and estimation methods described herein. While these amounts represent management’s best estimate of the distribution of probable losses at the evaluation dates, they are not necessarily indicative of either the categories in which actual losses may occur or the extent of such actual losses that may be recognized within each category. Each of these loan categories possess unique risk

characteristics that are considered when determining the appropriate level of allowance for each segment. The total allowance is available to absorb losses from any segment of the loan portfolio.


The following table sets forth the allocation of the allowance for loan losses by loan category at the dates indicated:
Table 109 - Summary of Allocation of Allowance for Loan Losses
 
September 30,
2017		 December 31,
2016		September 30,
2018		 December 31,
2017
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$12,830
 13.6% $16,921
 15.0%$15,108
 15.4% $13,256
 14.0%
Commercial real estate31,000
 49.1% 30,369
 50.2%32,268
 47.9% 31,453
 48.9%
Commercial construction5,620
 6.3% 4,522
 5.3%5,027
 5.4% 5,698
 6.3%
Small business1,606
 2.1% 1,502
 2.1%1,768
 2.3% 1,577
 2.1%
Residential real estate2,776
 12.0% 2,621
 10.7%3,071
 12.3% 2,822
 11.9%
Home equity5,426
 16.7% 5,238
 16.5%5,554
 16.5% 5,390
 16.6%
Other consumer452
 0.2% 393
 0.2%439
 0.2% 447
 0.2%
Total allowance for loan losses$59,710
 100.0% $61,566
 100.0%$63,235
 100.0% $60,643
 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 5,4, “Loans, Allowance for Loan Losses, and Credit Quality” within Condensed Notes to Consolidated Financial Statements included in Item 1 hereof.

Federal Home Loan Bank StockThe Bank held an investment in Federal Home Loan Bank (“FHLB”) of Boston of $11.6$13.1 million and $11.5$11.6 million at September 30, 20172018 and December 31, 2016,2017, 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, particularly term funding, as a tool to manage interest rate risk. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. The Company purchases 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 purposes of balance sheet liquidity and not for investment return.
Goodwill and Other Intangible Assets Goodwill and other intangible assets were $242.1$239.2 million and $231.4$241.1 million as of September 30, 20172018 and December 31, 2016,2017, respectively. The increase isdecrease in 2018 was due to the Island Bancorp acquisition 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. TheAccordingly, the Company performed its annual goodwill impairment testing during the third quarter of 20172018 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 $150.4$153.2 million and $144.5$151.5 million at September 30, 20172018 and December 31, 2016, respectively, with $2.7 million of the increase attributable to policies obtained in the Island Bancorp acquisition.2017, respectively. The Company recorded tax exempt income from the life insurance policies of $984,000 and $1.0 million and $984,000 for the three months ended September 30, 2018 and 2017, respectively, and 2016, respectively,$2.9 million and $3.0 million for both the nine month periods ended September 30, 2018 and 2017, and 2016.respectively. In addition, the Company received proceeds on life insurance policies in the amount of $2.9 million during the third quarter of 2018, resulting in a gain of $1.5 million.
Deposits As of September 30, 2017,2018, total deposits were $6.7$7.0 billion, representing a $270.7$247.0 million, or 4.2%3.7%, increase from December 31, 2016.2017. The increase is attributable to the Island Bancorp acquisition combinedCompany experienced growth in all categories with growth ina continued emphasis on core deposits, which represent 90.2%90.25% of total deposits as of September 30, 2017.2018. The total cost of deposits was 0.30% and 0.20% for the third quarter ofthree months ended September 30, 2018 and 2017, representing an increase fromrespectively, and 0.27% and 0.19%, for the prior quarter of two basis points.
Excluding the effects of the Island Bancorp acquisition, the Company has experienced organic deposit growth as summarized in the table below during the periods indicated:
Table 11 - Components of Deposit Growth/(Decline)
 September 30
2017		 December 31
2016		 Island Bancorp Acquisition Organic Growth/(Decline) Organic Growth/ (Decline)%
 (Dollars in thousands)  
Demand deposits$2,183,760
 $2,057,086
 $33,599
 $93,075
 4.5 %
Savings and interest checking2,568,620
 2,469,237
 47,095
 52,288
 2.1 %
Money market1,302,662
 1,236,778
 63,915
 1,969
 0.2 %
Time certificates of deposits627,900
 649,152
 14,971
 (36,223) (5.6)%
Total$6,682,942
 $6,412,253
 $159,580
 $111,109
 1.7 %
nine months ended September 30, 2018 and 2017, respectively.
The BankCompany 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. In addition, the Company may occasionally raise funds through brokered certificates of deposit. This channel allows the Company to seek additional funding in potentially large quantities by attracting deposits from outside the Bank’s core market. Atmarket and amounted to $51.7 million and $48.5 million, at September 30, 20172018 and December 31, 2016,2017, respectively. During the second quarter of 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 hadmay occasionally raise funds through the use of brokered deposits outside of $44.9 million and $14.7 million, respectively, primarily consisting of deposits associated with the Promontory Network.Interfinancial Network, which amounted to $6.0 million at both September 30, 2018 and December 31, 2017.



BorrowingsThe 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.


The Company’s borrowings, net of applicable debt issuance costs, consisted of the following as of the periods indicated:
Table 1210 - Borrowings
September 30,
2017		 December 31,
2016		September 30,
2018		 December 31,
2017
(Dollars in thousands)(Dollars in thousands)
Federal Home Loan Bank borrowings$53,272
 $50,819
$50,767
 $53,264
Short-term borrowings - one year and under (1)      
Customer repurchase agreements179,670
 176,913
141,176
 162,679
Long-term borrowings - over one year (1)      
Junior subordinated debentures:      
Capital Trust V51,502
 51,500
51,504
 51,503
Slades Ferry Trust I10,228
 10,224
10,233
 10,229
Central Trust I5,258
 5,256
5,258
 5,258
Central Trust II6,083
 6,127
6,083
 6,083
Subordinated debentures34,670
 34,635
34,717
 34,682
Total long-term borrowings$107,741
 $107,742
$107,795
 $107,755
Total borrowings$340,683
 $335,474
$299,738
 $323,698
(1) Classification is based upon duration at origination and not predicated upon remaining time to maturity.
The Bank had $2.9 billion and $2.8 billion of assets pledged as collateral against borrowings as ofat both September 30, 20172018 and December 31, 2016, respectively.2017. These assets are primarily pledged to the FHLB of Boston and the Federal Reserve Bank of Boston. Assets are also pledged as collateral for customer repurchase agreements.

Capital Resources On September 22, 2017,20, 2018, the Company’s Board of Directors declared a cash dividend of $0.32$0.38 per share to stockholders of record as of the close of business on October 2, 2017.1, 2018. This dividend was paid on October 6, 2017.5, 2018.
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 classification 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 September 30, 20172018 and December 31, 2016,2017, 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 1311 - 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
September 30, 2017September 30, 2018
(Dollars in thousands)(Dollars in thousands)
Company (consolidated)                      
Total capital (to risk weighted assets)$876,292
 13.75% $509,974
 ≥ 8.0% N/A N/A$954,622
 14.58% $523,794
 ≥ 8.0% N/A N/A
Common equity tier 1 capital
(to risk weighted assets)
709,355
 11.13% 286,860
 ≥ 4.5% N/A N/A784,427
 11.98% 294,634
 ≥ 4.5% N/A N/A
Tier 1 capital (to risk weighted assets)780,352
 12.24% 382,480
 ≥ 6.0% N/A N/A855,427
 13.07% 392,845
 ≥ 6.0% N/A N/A
Tier 1 capital (to average assets)780,352
 10.03% 311,310
 ≥ 4.0% N/A N/A855,427
 10.49% 335,151
 ≥ 4.0% N/A N/A
Bank                      
Total capital (to risk weighted assets)$838,627
 13.16% $509,801
 ≥ 8.0% $637,252
 ≥ 10.00%$902,696
 13.79% $523,579
 ≥ 8.0% $654,474
 ≥ 10.00%
Common equity tier 1 capital
(to risk weighted assets)
777,357
 12.20% 286,763
 ≥ 4.5% 414,213
 ≥ 6.50%838,218
 12.81% 294,513
 ≥ 4.5% 425,408
 ≥ 6.50%
Tier 1 capital (to risk weighted assets)777,357
 12.20% 382,351
 ≥ 6.0% 509,801
 ≥ 8.00%838,218
 12.81% 392,684
 ≥ 6.0% 523,579
 ≥ 8.00%
Tier 1 capital (to average assets)777,357
 9.99% 311,178
 ≥ 4.0% 388,972
 ≥ 5.00%838,218
 10.28% 326,079
 ≥ 4.0% 407,598
 ≥ 5.00%
December 31, 2016December 31, 2017
(Dollars in thousands)(Dollars in thousands)
Company (consolidated)                      
Total capital (to risk weighted assets)$824,265
 13.60% $484,942
 ≥ 8.0% N/A N/A$886,807
 13.82% $513,398
 ≥ 8.0% N/A N/A
Common equity tier 1 capital
(to risk weighted assets)
656,080
 10.82% 272,780
 ≥ 4.5% N/A N/A718,995
 11.20% 288,787
 ≥ 4.5% N/A N/A
Tier 1 capital (to risk weighted assets)727,070
 11.99% 363,706
 ≥ 6.0% N/A N/A789,992
 12.31% 385,049
 ≥ 6.0% N/A N/A
Tier 1 capital (to average assets)727,070
 9.77% 297,748
 ≥ 4.0% N/A N/A789,992
 10.04% 314,756
 ≥ 4.0% N/A N/A
Bank                      
Total capital (to risk weighted assets)$788,320
 13.01% $484,834
 ≥ 8.0% $606,042
 ≥ 10.00%$846,147
 13.19% $513,175
 ≥ 8.0% $641,469
 ≥ 10.00%
Common equity tier 1 capital
(to risk weighted assets)
725,760
 11.98% 272,719
 ≥ 4.5% 393,927
 ≥ 6.50%784,014
 12.22% 288,661
 ≥ 4.5% 416,955
 ≥ 6.50%
Tier 1 capital (to risk weighted assets)725,760
 11.98% 363,625
 ≥ 6.0% 484,834
 ≥ 8.00%784,014
 12.22% 384,881
 ≥ 6.0% 513,175
 ≥ 8.00%
Tier 1 capital (to average assets)725,760
 9.76% 297,589
 ≥ 4.0% 371,986
 ≥ 5.00%784,014
 9.97% 314,630
 ≥ 4.0% 393,288
 ≥ 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 being phased-in, beginning at 0.625% on January 1, 2016 and ultimately increasing to 2.5% on January 1, 2019. At September 30, 20172018 the Company's capital levels exceeded the fully-phased in buffer of 2.5%.
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 $11.8$15.5 million and $11.1$11.8 million for the three months ended September 30, 20172018 and 2016,2017, respectively, and totaled $35.2$44.5 million and $33.4$35.2 million for the nine months ended September 30, 2018 and 2017, and 2016, respectively.
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 havehas not been included in the consolidated financial statements of the Company. At both September 30, 20172018 and 2016,2017, $71.0 million in trust preferred securities have been included in the Tier 1 capital of the Company for regulatory reporting purposes pursuant to the Federal Reserve's capital adequacy guidelines.

Community Reinvestment Act In September 2017, the FDIC and the Massachusetts Division of Banks assigned the Bank a CRA rating of Satisfactory.

Investment ManagementAs of September 30, 2017,2018, the Rockland Trust Investment Management Group had assets under administration of $3.3$3.6 billion, representing approximately 5,5855,710 trust, fiduciary, and agency accounts. At December 31, 2016,2017, assets under administration were $2.9$3.5 billion, representing approximately 5,4315,616 trust, fiduciary, and agency accounts. Included in these amounts as of September 30, 20172018 and December 31, 20162017 are assets under administration of $284.3$307.2 million and $266.5$303.7 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 $5.4$5.9 million and $5.0$5.4 million for the three months ended September 30, 20172018 and 2016,2017, respectively, and $16.0$17.6 million and $14.7$16.0 million for the nine months ended September 30, 2018 and 2017, and 2016, respectively.
Retail investments and insurance revenue was $565,000$652,000 and $451,000$565,000 for the three months ended September 30, 2018 and 2017, respectively, and 2016, respectively,$2.0 million and $1.5 million for both the nine months ended September 30, 20172018 and 2016,2017, respectively. Retail investments and insurance revenue includes commission revenue from LPL Financial (“LPL”) and its affiliates and their insurance subsidiary, LPL Insurance Associates, Inc., Savingswhich 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 Life Insuranceand 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 purposes of Massachusetts, Highland Capital Brokerage, and Smith Companies LTD, a division of Capitas Financial, LLC.processing insurance solutions for clients.

RESULTS OF OPERATIONS
The following table provides a summary of results of operations for the three and nine months ended September 30, 20172018 and 2016:2017:
Table 1412 - Summary of Results of Operations
Three Months Ended September 30 Nine Months Ended September 30Three Months Ended September 30 Nine Months Ended September 30
2017 2016 2017 20162018 2017 2018 2017
(Dollars in thousands, except per share data)(Dollars in thousands, except per share data)
Net Income$23,852
 $20,484
 $65,140
 $59,469
$33,015
 $23,852
 $91,688
 $65,140
Diluted earnings per share$0.87
 $0.78
 $2.38
 $2.26
$1.20
 $0.87
 $3.32
 $2.38
Return on average assets1.18% 1.09% 1.11% 1.09%1.57% 1.18% 1.49% 1.11%
Return on average equity10.18% 9.98% 9.65% 9.92%13.19% 10.18% 12.60% 9.65%
Net interest margin3.65% 3.40% 3.59% 3.42%3.94% 3.65% 3.87% 3.59%
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 third quarter of 20172018 was $67.4$76.4 million, representing an increase of $9.4$9.0 million, or 16.2%13.3%, when compared to the third quarter of 2016. The overall increase in2017. Net interest earning assets is driven by both recent acquisitions and organic growth. Additionally, net interest margin has been impacted by increased market rates on short-term indexed assets, lower borrowings cost, andincome benefited from the reinvestment of excess liquidity.Company's sustained asset sensitive position.

The following tables present the Company’s average balances, net interest income, interest rate spread, and net interest margin for the three and nine months ending September 30, 20172018 and 2016,2017, 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 1513 - Average Balance, Interest Earned/Paid & Average Yields Quarter-to-Date
Three Months Ended September 30Three Months Ended September 30
2017 20162018 2017
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$132,327
 $417
 1.25% $305,728
 $387
 0.50%$180,802
 $916
 2.01% $132,327
 $417
 1.25%
Securities                      
Securities - trading1,299
 —
 —% 805
 —
 —%1,608
 —
 —% 1,299
 —
 —%
Securities - taxable investments908,560
 5,642
 2.46% 815,889
 5,034
 2.45%1,005,787
 6,664
 2.63% 908,560
 5,642
 2.46%
Securities - nontaxable investments (1)2,817
 29
 4.08% 4,382
 43
 3.90%1,992
 18
 3.58% 2,817
 29
 4.08%
Total securities912,676
 5,671
 2.47% 821,076
 5,077
 2.46%$1,009,387
 $6,682
 2.63% $912,676
 $5,671
 2.47%
Loans held for sale5,766
 33
 2.27% 11,652
 81
 2.77%8,340
 61
 2.90% 5,766
 33
 2.27%
Loans (2)                      
Commercial and industrial868,358
 9,173
 4.19% 851,497
 8,420
 3.93%975,980
 11,936
 4.85% 868,358
 9,173
 4.19%
Commercial real estate (1)3,104,098
 32,875
 4.20% 2,723,832
 28,466
 4.16%3,144,613
 37,048
 4.67% 3,104,098
 32,875
 4.20%
Commercial construction365,143
 4,177
 4.54% 370,085
 3,881
 4.17%356,091
 4,572
 5.09% 365,143
 4,177
 4.54%
Small business130,275
 1,828
 5.57% 111,932
 1,502
 5.34%147,518
 2,183
 5.87% 130,275
 1,828
 5.57%
Total commercial4,467,874
 48,053
 4.27% 4,057,346
 42,269
 4.14%4,624,202
 55,739
 4.78% 4,467,874
 48,053
 4.27%
Residential real estate749,813
 7,656
 4.05% 631,582
 6,334
 3.99%792,154
 7,959
 3.99% 749,813
 7,656
 4.05%
Home equity1,046,894
 10,081
 3.82% 958,317
 8,243
 3.42%1,071,511
 11,457
 4.24% 1,046,894
 10,081
 3.82%
Total consumer real estate1,796,707
 17,737
 3.92% 1,589,899
 14,577
 3.65%1,863,665
 19,416
 4.13% 1,796,707
 17,737
 3.92%
Other consumer10,619
 241
 9.00% 13,026
 291
 8.89%13,040
 244
 7.42% 10,619
 241
 9.00%
Total loans6,275,200
 66,031
 4.17% 5,660,271
 57,137
 4.02%$6,500,907
 $75,399
 4.60% $6,275,200
 $66,031
 4.17%
Total interest-earning assets$7,325,969
 $72,152
 3.91% $6,798,727
 $62,682
 3.67%$7,699,436
 $83,058
 4.28% $7,325,969
 $72,152
 3.91%
Cash and due from banks100,228
     94,547
    106,273
     100,228
    
Federal Home Loan Bank stock12,734
     11,304
    13,107
     12,734
    
Other assets567,297
     552,247
    547,296
     567,297
    
Total assets$8,006,228
     $7,456,825
    $8,366,112
     $8,006,228
    
Interest-bearing liabilities                      
Deposits                      
Savings and interest checking accounts$2,562,557
 $992
 0.15% $2,408,498
 $756
 0.12%$2,654,157
 $1,433
 0.21% $2,562,557
 $992
 0.15%
Money market1,309,457
 1,171
 0.35% 1,197,382
 758
 0.25%1,373,594
 2,056
 0.59% 1,309,457
 1,171
 0.35%
Time deposits611,080
 1,168
 0.76% 635,635
 1,219
 0.76%652,638
 1,762
 1.07% 611,080
 1,168
 0.76%
Total interest-bearing deposits$4,483,094
 $3,331
 0.29% $4,241,515
 $2,733
 0.26%$4,680,389
 $5,251
 0.45% $4,483,094
 $3,331
 0.29%
Borrowings                      
Federal Home Loan Bank borrowings$53,926
 $302
 2.22% $51,100
 $391
 3.04%$50,770
 $248
 1.94% $53,926
 $302
 2.22%
Customer repurchase agreements172,387
 67
 0.15% 151,982
 52
 0.14%148,575
 75
 0.20% 172,387
 67
 0.15%
Junior subordinated debentures73,070
 578
 3.14% 73,184
 1,037
 5.64%73,077
 640
 3.47% 73,070
 578
 3.14%
Subordinated debentures34,664
 427
 4.89% 34,617
 427
 4.91%34,711
 427
 4.88% 34,664
 427
 4.89%
Total borrowings$334,047
 $1,374
 1.63% $310,883
 $1,907
 2.44%$307,133
 $1,390
 1.80% $334,047
 $1,374
 1.63%

Total interest-bearing liabilities$4,817,141
 $4,705
 0.39% $4,552,398
 $4,640
 0.41%$4,987,522
 $6,641
 0.53% $4,817,141
 $4,705
 0.39%
Demand deposits2,174,600
     1,976,177
    2,300,943
     2,174,600
    
Other liabilities84,782
     112,018
    84,442
     84,782
    
Total liabilities$7,076,523
     $6,640,593
    $7,372,907
     $7,076,523
    
Stockholders' equity929,705
     816,232
    993,205
     929,705
    
Total liabilities and stockholders' equity$8,006,228
     $7,456,825
    $8,366,112
     $8,006,228
    
Net interest income (1)  $67,447
     $58,042
    $76,417
     $67,447
  
Interest rate spread (3)    3.52%     3.26%    3.75%     3.52%
Net interest margin (4)    3.65%     3.40%    3.94%     3.65%
Supplemental information                      
Total deposits, including demand deposits$6,657,694
 $3,331
   $6,217,692
 $2,733
  $6,981,332
 $5,251
   $6,657,694
 $3,331
  
Cost of total deposits    0.20%     0.17%    0.30%     0.20%
Total funding liabilities, including demand deposits$6,991,741
 $4,705
   $6,528,575
 $4,640
  $7,288,465
 $6,641
   $6,991,741
 $4,705
  
Cost of total funding liabilities    0.27%     0.28%    0.36%     0.27%


(1)The total amount of adjustment to present interest income and yield on a FTE basis is $183,000 and $374,000 for both the three months ended September 30, 2018 and 2017, and 2016.respectively. The FTE adjustment relates to nontaxable investment securities with average balances of $2.8$2.0 million and $4.4$2.8 million and nontaxable industrial development bonds recorded within commercial real estate with average balances of $69.3$57.4 million and $67.8$69.3 million, for the three months ended September 30, 20172018 and 2016,2017, 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 1614 - Average Balance, Interest Earned/Paid & Average Yields Year-to-Date

 Nine Months Ended September 30
 2018 2017
 
Average
Balance
 
Interest
Earned/
Paid
 
Yield/
Rate
 
Average
Balance
 
Interest
Earned/
Paid
 
Yield/
Rate
 (Dollars in thousands)
Interest-earning assets           
Interest-earning deposits with banks, federal funds sold, and short-term investments$128,646
 $1,768
 1.84% $103,437
 $814
 1.05%
Securities           
Securities - trading1,547
 —
 —% 1,198
 —
 —%
Securities - equity           
Securities - taxable investments988,885
 19,381
 2.62% 894,809
 16,618
 2.48%
Securities - nontaxable investments (1)2,152
 58
 3.60% 3,462
 109
 4.21%
Total securities$992,584
 $19,439
 2.62% $899,469
 $16,727
 2.49%
Loans held for sale5,291
 110
 2.78% 4,086
 68
 2.23%
Loans (2)           
Commercial and industrial933,163
 32,667
 4.68% 881,387
 26,913
 4.08%
Commercial real estate (1)3,115,076
 105,511
 4.53% 3,054,336
 94,057
 4.12%
Commercial construction390,061
 14,499
 4.97% 353,134
 11,859
 4.49%
Small business139,523
 6,053
 5.80% 127,938
 5,284
 5.52%
Total commercial4,577,823
 158,730
 4.64% 4,416,795
 138,113
 4.18%
Residential real estate772,663
 23,121
 4.00% 699,793
 20,779
 3.97%
Home equity1,061,280
 32,492
 4.09% 1,024,164
 28,233
 3.69%
Total consumer real estate1,833,943
 55,613
 4.05% 1,723,957
 49,012
 3.80%
Other consumer11,340
 669
 7.89% 10,828
 722
 8.91%
Total loans$6,423,106
 $215,012
 4.48% $6,151,580
 $187,847
 4.08%
Total interest-earning assets$7,549,627
 $236,329
 4.19% $7,158,572
 $205,456
 3.84%
Cash and due from banks101,642
     97,457
    
Federal Home Loan Bank stock13,174
     13,180
    
Other assets546,276
     553,129
    
Total assets$8,210,719
     $7,822,338
    
Interest-bearing liabilities           
Deposits           
Savings and interest checking accounts$2,632,311
 $3,819
 0.19% $2,536,954
 $2,604
 0.14%
Money market1,357,488
 5,087
 0.50% 1,285,492
 2,963
 0.31%
Time deposits646,055
 4,867
 1.01% 618,518
 3,443
 0.74%
Total interest-bearing deposits$4,635,854
 $13,773
 0.40% $4,440,964
 $9,010
 0.27%
Borrowings           
Federal Home Loan Bank borrowings$62,055
 803
 1.73% $61,206
 $1,123
 2.45%
Customer repurchase agreements149,174
 205
 0.18% 161,850
 178
 0.15%
Junior subordinated debentures73,076
 1,855
 3.39% 73,074
 1,697
 3.10%
Subordinated debentures34,699
 1,282
 4.94% 34,652
 1,282
 4.95%
Total borrowings$319,004
 $4,145
 1.74% $330,782
 $4,280
 1.73%
Total interest-bearing liabilities$4,954,858
 $17,918
 0.48% $4,771,746
 $13,290
 0.37%
Demand deposits2,202,305
     2,063,668
    

Other liabilities80,964
     84,063
    
Total liabilities$7,238,127
     $6,919,477
    
Stockholders' equity972,592
     902,861
    
Total liabilities and stockholders' equity$8,210,719
     $7,822,338
    
Net interest income (1)  $218,411
     $192,166
  
Interest rate spread (3)    3.71%     3.47%
Net interest margin (4)    3.87%     3.59%
Supplemental information           
Total deposit, including demand deposits$6,838,159
 $13,773
   $6,504,632
 $9,010
  
Cost of total deposits    0.27%     0.19%
Total funding liabilities, including demand deposits$7,157,163
 $17,918
   $6,835,414
 $13,290
  
Cost of total funding liabilities    0.33%     0.26%
 Nine Months Ended September 30
 2017 2016
 
Average
Balance
 
Interest
Earned/
Paid
 
Yield/
Rate
 
Average
Balance
 
Interest
Earned/
Paid
 
Yield/
Rate
 (Dollars in thousands)
Interest-earning assets           
Interest-earning deposits with banks, federal funds sold, and short-term investments$103,437
 $814
 1.05% $202,397
 $767
 0.51%
Securities           
Securities - trading1,198
 —
 —% 667
 —
 —%
Securities - taxable investments894,809
 16,618
 2.48% 824,449
 15,500
 2.51%
Securities - nontaxable investments (1)3,462
 109
 4.21% 4,557
 137
 4.02%
Total securities899,469
 16,727
 2.49% 829,673
 15,637
 2.52%
Loans held for sale4,086
 68
 2.23% 8,005
 170
 2.84%
Loans (2)      —
    
Commercial and industrial881,387
 26,913
 4.08% 845,565
 24,759
 3.91%
Commercial real estate (1)3,054,336
 94,057
 4.12% 2,703,300
 83,082
 4.11%
Commercial construction353,134
 11,859
 4.49% 369,403
 11,376
 4.11%
Small business127,938
 5,284
 5.52% 105,761
 4,266
 5.39%
Total commercial4,416,795
 138,113
 4.18% 4,024,029
 123,483
 4.10%
Residential real estate699,793
 20,779
 3.97% 631,343
 18,939
 4.01%
Home equity1,024,164
 28,233
 3.69% 943,857
 24,452
 3.46%
Total consumer real estate1,723,957
 49,012
 3.80% 1,575,200
 43,391
 3.68%
Other consumer10,828
 722
 8.91% 13,743
 924
 8.98%
Total loans6,151,580
 187,847
 4.08% 5,612,972
 167,798
 3.99%
Total interest-earning assets$7,158,572
 $205,456
 3.84% $6,653,047
 $184,372
 3.70%
Cash and due from banks97,457
     90,527
    
Federal Home Loan Bank stock13,180
     12,940
    
Other assets553,129
     542,271
    
Total assets$7,822,338
     $7,298,785
    
Interest-bearing liabilities           
Deposits           
Savings and interest checking accounts$2,536,954
 $2,604
 0.14% $2,386,520
 $2,416
 0.14%
Money market1,285,492
 2,963
 0.31% 1,157,731
 2,171
 0.25%
Time deposits618,518
 3,443
 0.74% 651,044
 3,752
 0.77%
Total interest-bearing deposits$4,440,964
 $9,010
 0.27% $4,195,295
 $8,339
 0.27%
Borrowings           
Federal Home Loan Bank borrowings$61,206
 1,123
 2.45% $63,869
 $1,275
 2.67%
Customer repurchase agreements161,850
 178
 0.15% 144,393
 149
 0.14%
Junior subordinated debentures73,074
 1,697
 3.10% 73,233
 3,072
 5.60%
Subordinated debentures34,652
 1,282
 4.95% 34,606
 1,282
 4.95%
Total borrowings$330,782
 $4,280
 1.73% $316,101
 $5,778
 2.44%
Total interest-bearing liabilities$4,771,746
 $13,290
 0.37% $4,511,396
 $14,117
 0.42%
Demand deposits2,063,668
     1,878,558
    
Other liabilities84,063
     107,983
    

Total liabilities$6,919,477
     $6,497,937
    
Stockholders' equity902,861
     800,848
    
Total liabilities and stockholders' equity$7,822,338
     $7,298,785
    
Net interest income (1)  $192,166
     $170,255
  
Interest rate spread (3)    3.47%     3.28%
Net interest margin (4)    3.59%     3.42%
Supplemental information           
Total deposit, including demand deposits$6,504,632
 $9,010
   $6,073,853
 $8,339
  
Cost of total deposits    0.19%     0.18%
Total funding liabilities, including demand deposits$6,835,414
 $13,290
   $6,389,954
 $14,117
  
Cost of total funding liabilities    0.26%     0.30%
(1)The total amount of adjustment to present interest income and yield on a FTE basis is $1.1 million$538,000 and $1.2$1.1 million for the nine months ended September 30, 20172018 and 2016,2017, respectively. The FTE adjustment relates to nontaxable investment securities with average balances of $3.5$2.2 million and 4.6$3.5 million and nontaxable industrial development bonds recorded within commercial real estate with average balances of $71.1$54.8 million and $69.8$71.1 million for the nine months ended September 30, 20172018 and 2016,2017, 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 oldprior 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 1715 - Volume Rate Analysis
Three Months Ended September 30 Nine Months Ended September 30Three Months Ended September 30 Nine Months Ended September 30
2017 Compared To 2016 2017 Compared To 20162018 Compared To 2017 2018 Compared To 2017
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$249
 $(219) $30
 $422
 $(375) $47
$346
 $153
 $499
 $756
 $198
 $954
Securities                      
Securities - taxable investments36
 572
 608
 (205) 1,323
 1,118
418
 604
 1,022
 1,016
 1,747
 2,763
Securities - nontaxable investments (1)1
 (15) (14) 5
 (33) (28)(3) (8) (11) (10) (41) (51)
Total securities    594
     1,090
    1,011
     2,712
Loans held for sale(7) (41) (48) (19) (83) (102)13
 15
 28
 22
 20
 42
Loans                      
Commercial and industrial586
 167
 753
 1,105
 1,049
 2,154
1,626
 1,137
 2,763
 4,173
 1,581
 5,754
Commercial real estate (1)435
 3,974
 4,409
 186
 10,789
 10,975
3,744
 429
 4,173
 9,584
 1,870
 11,454
Commercial construction348
 (52) 296
 984
 (501) 483
499
 (104) 395
 1,400
 1,240
 2,640
Small business80
 246
 326
 123
 895
 1,018
113
 242
 355
 291
 478
 769
Total commercial    5,784
     14,630
    7,686
     20,617
Residential real estate136
 1,186
 1,322
 (213) 2,053
 1,840
(129) 432
 303
 178
 2,164
 2,342
Home equity1,076
 762
 1,838
 1,701
 2,080
 3,781
1,139
 237
 1,376
 3,236
 1,023
 4,259
Total consumer real estate    3,160
   4,098
 5,621
    1,679
     6,601
Other consumer4
 (54) (50) (6) (196) (202)(52) 55
 3
 (87) 34
 (53)
Total loans (1)(2)    8,894
     20,049
    9,368
     27,165
Total income of interest-earning assets    $9,470
     $21,084
    $10,906
     $30,873
Expense of interest-bearing liabilities                      
Deposits                      
Savings and interest checking accounts$188
 $48
 $236
 $36
 $152
 $188
$406
 $35
 $441
 $1,117
 $98
 $1,215
Money market342
 71
 413
 552
 240
 792
828
 57
 885
 1,958
 166
 2,124
Time certificates of deposits(4) (47) (51) (122) (187) (309)515
 79
 594
 1,271
 153
 1,424
Total interest bearing deposits    598
     671
    1,920
     4,763
Borrowings                      
Federal Home Loan Bank borrowings(111) 22
 (89) (99) (53) (152)(36) (18) (54) (336) 16
 (320)
Customer repurchase agreements and other short-term borrowings8
 7
 15
 11
 18
 29
17
 (9) 8
 41
 (14) 27
Junior subordinated debentures(457) (2) (459) (1,368) (7) (1,375)62
 —
 62
 158
 —
 158
Subordinated debentures(1) 1
 —
 (2) 2
 —
(1) 1
 —
 (2) 2
 —
Total borrowings    (533)     (1,498)    16
     (135)
Total expense of interest-bearing liabilities    65
     (827)    1,936
     4,628
Change in net interest income    $9,405
     $21,911
    $8,970
     $26,245


(1)The table above reflects income determined on a FTE basis. See footnote (1) to tables 15table 13 and 1614 above 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. The provision for loan losses was zero$1.1 million and $1.7$3.6 million, for the three and nine months ended September 30, 2017,2018, respectively, as compared to $950,000zero and $2.1$1.7 million for the comparable year-ago periods.

The Company’s allowance for loan losses, as a percentage of total loans, was 0.95%0.97% at September 30, 2017, 1.03%2018, and 0.95% at both December 31, 2016,2017 and 1.01% at September 30, 2016. The decrease is attributable to a significant charge-off recorded for a previously recognized specific reserve, combined with the impact of loans acquired in connection with the Island Bancorp acquisition. These acquired loans are recorded at fair value, including a reduction for estimated credit losses, and without carryover of the respective portfolio's historical allowance for loan losses.2017. The Company recorded net charge-offs of $397,000 and $983,000 for the three and nine months ended September 30, 2018, as compared to net recoveries of $231,000 and net charge-offs of $3.5 million for the three and nine months ended September 30, 2017, respectively, as compared to net charge-offs of $472,000 and net recoveries of $305,000 for the three and nine months ended September 30, 2016, respectively.
Overall economic conditions remained healthy and stable within New England.  Hiring activity was mixed with unemployment levels remaining quite low. Shortages in labor supply were noted during the summer months, notably in regions where tourism drives seasonal hiring decisions like Cape Cod and the Berkshires, however, there was relatively little upward pressure on wages.  In general, prices on retail items and consumer goods remained stable, and seasonal businesses impacted by tourism reported healthy revenues. Commercial real estate trends have remained generally consistent through 2017. Valuations remain at or near record levels for most property types and vacancy levels have remained relatively low, although office leasing activity has exhibited some mixed activity in certain Boston sub-markets due to limited supply.   Residential real estate metrics also remain strong with median sales prices continuing their upward momentum throughout New England. Overall volume of closed sales through July was down slightly from a year prior due to continued tightening of supply. Continued strength in most economic fundamentals is generally expected throughout the remainder of 2017 with most industries and sectors maintaining a positive to stable outlook.
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. Substantial

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.
In general, the national and local economies expanded at a moderate pace through much of the third quarter of 2018. A tight labor market persists in the New England market with higher-skilled workers in short supply; wage increases appear mixed in the region. Retailers reported generally favorable sales trends year-over-year, however some trepidation over looming tariffs and their effects on prices and sales remains in the marketplace. Median sales prices on residential real estate have continued to increase through the busy spring and summer seasons, owing to strong demand and a tight supply of housing. Commercial real estate markets remained relatively strong, although rising construction costs due to labor shortages and material price increases have begun to place some pressure on certain projects. Leasing activity for office space remained strong in the New England region with rents remaining stable or increasing slightly. The overall outlook for the near term remains positive for the New England region.


Noninterest Income The following table sets forth information regarding noninterest income for the periods shown:
Table 1816 - Noninterest Income
Three Months EndedThree Months Ended
September 30 ChangeSeptember 30 Change
2017 2016 Amount %2018 2017 Amount %
(Dollars in thousands)  (Dollars in thousands)  
Deposit account fees$4,401
 $4,766
 $(365) (7.66)%$4,658
 $4,401
 $257
 5.84 %
Interchange and ATM fees4,525
 4,190
 335
 8.00 %4,947
 4,525
 422
 9.33 %
Investment management5,967
 5,446
 521
 9.57 %6,564
 5,967
 597
 10.01 %
Mortgage banking income1,338
 1,963
 (625) (31.84)%1,222
 1,338
 (116) (8.67)%
Gain on life insurance benefits1,463
 —
 1,463
 100.00%
Gain on sale of equity securities4
 12
 (8) (66.67)%
Increase in cash surrender value of life insurance policies1,019
 984
 35
 3.56 %984
 1,019
 (35) (3.43)%
Gain on sale of equity securities12
 —
 12
 nm
Loan level derivative income784
 810
 (26) (3.21)%392
 784
 (392) (50.00)%
Other noninterest income2,724
 2,257
 467
 20.69 %3,030
 2,724
 306
 11.23 %
Total$20,770
 $20,416
 $354
 1.73 %$23,264
 $20,770
 $2,494
 12.01 %
              
Nine Months EndedNine Months Ended
September 30 ChangeSeptember 30 Change
2017 2016 Amount %2018 2017 Amount %
(Dollars in thousands)  (Dollars in thousands)  
Deposit account fees$13,337
 $13,979
 $(642) (4.59)%$13,640
 $13,337
 $303
 2.27 %
Interchange and ATM fees12,881
 12,050
 831
 6.90 %13,889
 12,881
 1,008
 7.83 %
Investment management17,576
 16,183
 1,393
 8.61 %19,528
 17,576
 1,952
 11.11 %
Mortgage banking income3,609
 4,458
 (849) (19.04)%3,130
 3,609
 (479) (13.27)%
Gain on life insurance benefits1,463
 —
 1,463
 100.00%
Increase in cash surrender value of life insurance policies3,000
 2,980
 (15) 0.67 %2,929
 3,000
 (71) (2.37)%
Gain on sale of equity securities19
 5
 14
 280.00 %6
 19
 (13) (68.42)%
Loan level derivative income2,727
 4,627
 (1,900) (41.06)%1,547
 2,727
 (1,180) (43.27)%
Other noninterest income7,931
 6,384
 1,547
 24.23 %8,882
 7,931
 951
 11.99 %
Total$61,080
 $60,666
 $414
 0.68 %$65,014
 $61,080
 $3,934
 6.44 %
nm - the percentage is not meaningful.


The primary reasons for the significant variances in the noninterest income category shown in the preceding tables are noted below:include:
•Deposit account fees decreasedincreased due primarily to reduced overdraft fees.overall increased household accounts.
Interchange and ATM fees have increased, as compared to the prior year periods as a result of new accountsdriven mainly by increased account activity and increased volume, partly due to the 2017 second quarter Island Bancorp acquisition and 2016 fourth quarter NEB acquisition.customer base.
Investment management income growth iswas driven primarily from growth in overall assets under administration, which were $3.3$3.6 billion as of September 30, 2017,2018, an increase of $393.1$373.4 million, or 13.6%11.4%, compared to September 30, 2016.2017.
Mortgage banking income decreases are primarilydecreased in the current year periods due to lower volume, driven in part by overall solda greater percentage of originations being retained within the Company's loan volume forportfolio.
The Company received proceeds on life insurance policies during the time periods presented.third quarter, resulting in a gain of $1.5 million.
Loan level derivative income decreased due toas a result of lower customer demand.
Other noninterest income increased in the current periods mainly due to increases inhigher rental income related to a new equipment leasing, initiative entered into during 2017. Themerchant processing income and an increase compared to the year ago period was further impacted by gains recognized on the sale of loans and fixed assets in the first quarter of 2017, and increased foreign currency exchange fees.equity securities unrealized gains.

Noninterest Expense The following table sets forth information regarding non-interest expense for the periods shown:
Table 1917 - Noninterest Expense
Three Months EndedThree Months Ended
September 30 ChangeSeptember 30 Change
2017 2016 Amount %2018 2017 Amount %
(Dollars in thousands)  (Dollars in thousands)  
Salaries and employee benefits$29,289
 $27,395
 $1,894
 6.91 %$31,095
 $29,289
 $1,806
 6.17 %
Occupancy and equipment expenses6,085
 5,433
 652
 12.00 %6,310
 6,085
 225
 3.70 %
Data processing & facilities management1,272
 1,400
 (128) (9.14)%1,287
 1,272
 15
 1.18 %
FDIC assessment673
 725
 (52) (7.17)%725
 673
 52
 7.73 %
Advertising expense1,359
 1,654
 (295) (17.84)%1,395
 1,359
 36
 2.65 %
Consulting expense937
 770
 167
 21.69 %1,128
 937
 191
 20.38 %
Debit card expense992
 730
 262
 35.89 %755
 992
 (237) (23.89)%
Legal fees1,423
 321
 1,102
 343.30 %752
 1,423
 (671) (47.15)%
Loss on sale of equity securities1
 —
 1
 nm
—
 1
 (1) (100.00)%
Merger and acquisition expenses—
 151
 (151) nm
2,688
 —
 2,688
 100.00%
Mortgage operations expense723
 820
 (97) (11.83)%
Software maintenance888
 765
 123
 16.08 %1,079
 888
 191
 21.51 %
Other noninterest expenses7,668
 6,693
 975
 14.57 %8,225
 8,391
 (166) (1.98)%
Total$51,310
 $46,857
 $4,453
 9.50 %$55,439
 $51,310
 $4,129
 8.05 %
              
Nine Months EndedNine Months Ended
September 30 ChangeSeptember 30 Change
2017 2016 Amount %2018 2017 Amount %
(Dollars in thousands)  (Dollars in thousands)  
Salaries and employee benefits$86,267
 $81,561
 $4,706
 5.77 %$92,483
 $86,267
 $6,216
 7.21 %
Occupancy and equipment expenses18,302
 16,927
 1,375
 8.12 %20,215
 18,302
 1,913
 10.45 %
Data processing & facilities management3,732
 3,831
 (99) (2.58)%3,837
 3,732
 105
 2.81 %
FDIC assessment2,234
 2,655
 (421) (15.86)%2,214
 2,234
 (20) (0.90)%
Advertising expense4,018
 4,134
 (116) (2.81)%3,684
 4,018
 (334) (8.31)%
Consulting expense2,753
 2,235
 518
 23.18 %2,973
 2,753
 220
 7.99 %
Debit card expense2,616
 2,162
 454
 21.00 %2,405
 2,616
 (211) (8.07)%
Legal fees2,074
 1,132
 942
 83.22 %2,084
 2,074
 10
 0.48 %
Loss on extinguishment of debt—
 437
 (437) nm
Loss on sale of equity securities6
 32
 (26) (81.25)%—
 6
 (6) (100.00)%
Merger and acquisition expenses3,393
 691
 2,702
 391.03 %3,122
 3,393
 (271) (7.99)%
Mortgage operations expense1,896
 1,880
 16
 0.85 %
Software maintenance2,714
 2,254
 460
 20.41 %3,048
 2,714
 334
 12.31 %
Other noninterest expenses22,887
 20,554
 2,333
 11.35 %25,513
 24,783
 730
 2.95 %
Total$152,892
 $140,485
 $12,407
 8.83 %$161,578
 $152,892
 $8,686
 5.68 %
nm - the percentage is not meaningful.
The primary reasons for the significant variances in the noninterest expense category shown in the preceding tables are noted below:

include:
The increase in salaries and employee benefits reflects overall increases in the employee base due to new hires, as well as the 2017 second quarter Island Bancorp acquisition and 2016 fourth quarter NEB acquisition, along with an increaseincreases in expenses associated with merit and incentive programs, payroll taxes, medical insurance expenses and payroll taxes.post-retirement benefit costs.
Occupancy and equipment expense increases were attributable to rental expense depreciation on equipment associated with the Company's newequipment leasing initiative, as well as increases in equipment maintenance and repairs.snow removal for the nine month periods.
The FDIC assessment decreased due to a reduction in assessment rates effective July 1, 2016, combined with strong financial results driving further reductions in the rate.
•Advertising expenses decreasedfluctuate due to timing of various campaigns.
Consulting expense has increased due primarily to process improvementcampaigns and strategic initiatives, as well as increased loan work out related costs.initiatives.
•Debit card expense has increased driven mainly by increased volume/usage by customers.decreased due to reduced network processing costs.
Legal fees increased primarilydecreased for the three month period due to increased loan work out costs associated with the bankruptcy of a large commercial customer.customer in September of 2017.
The Company recognized a $437,000 lossMerger and acquisition expense in conjunction2018 consists primarily of investment banker, legal, and professional fees associated with its payoffthe pending acquisitions of approximately $49.0 millionMNB, which is anticipated to close in Federal Home Loan Bank borrowingsthe fourth quarter of 2018, and BHB, which is anticipated to close in the first quarterhalf of 2016. No such losses have been recorded in 2017.
2019. Merger and acquisition expense in 2017 is primarily related to compensation and severance agreements, as well as contract termination costs related to the Island Bancorp acquisition, which closed in the second quarter of 2017. The majority of the expenses related to compensation and severance agreements, as well as contract termination costs, associated with the Island Bancorp acquisition. Additionally, a portion of the 2017 merger and acquisition expense is attributable to the 2016 NEB acquisition.
Software maintenance increases reflect additional investments in technology to support the Company’s growth.
Other noninterest expenses increased in the current periods due primarily to increases in provision for unfunded commitments, amortization of intangibles, OREO valuation write-downs, and directors' fees.

Income TaxesThe 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 2018 - Tax Provision and Applicable Tax Rates
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30 September 30September 30 September 30
2017 2016 2017 20162018 2017 2018 2017
(Dollars in thousands)(Dollars in thousands)
Combined federal and state income tax provision$12,681
 $9,793
 $32,426
 $27,729
$9,969
 $12,681
 $26,046
 $32,426
Effective income tax rate34.71% 32.34% 33.23% 31.80%23.19% 34.71% 22.12% 33.23%
Blended statutory tax rate28.22% 40.86% 28.22% 40.86%

The Company's blended statutory and effective tax rates in 2018 are lower as compared to the year ago period due primarily to the impact of the Tax Cuts and Jobs Act ("Tax Act"), which decreased the maximum Federal corporate tax rate was 40.86% for each offrom 35% to 21%. Additionally, the three and nine month periods ended September 30, 2017 and September 30, 2016. The effective income tax rates noted in the table above are lower than the blended statutory tax raterates 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. TheLastly, the effective tax rate when compared toincludes the year ago period was impacted by a reduction in the benefits recognized from the New Markets Tax Credit program, partially offset by discrete benefits recognized as a result of the Company’s adoption of ASU 2016-09 effective January 1, 2017, which required that recognitionimpact of excess tax benefits on certainassociated with stock compensation transactions be recorded through earnings as aand other discrete item within the Company’s effective tax rate during the period of the transaction.items which can fluctuate year over year.


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 following table details the remaining tax credit recognition by year associated with this program:
Table 2119 - New Markets Tax Credit Recognition Schedule
Year and Amount of InvestmentYear and Amount of Investment 2017 2018 2019 
Total Remaining
Credits
Year and Amount of Investment 2018 2019 
Total Remaining
Credits
      
2012$21,400
 $1,285
 $1,285
 $—
 $2,570
$21,400
 $1,285
 $—
 $1,285
201344,600
 2,675
 2,675
 2,675
 8,025
44,600
 2,675
 2,675
 5,350
Total$66,000
 $3,960
 $3,960
 $2,675
 $10,595
$66,000
 $3,960
 $2,675
 $6,635
    
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 2032, which represents the period that the tax credits and other tax benefits will be utilized. The total committed investment in these partnerships is $47.6 $47.5

million, of which $39.9$45.5 million has been funded.funded as of September 30, 2018. It is expected that the limited partnership investments will generate a net tax benefit of approximately $1.7$1.1 million for the full calendar year of 20172018 and a total of $12.4$6.7 million over the remaining life of the investments from the combination of the tax credits and operating losses.
Risk Management
The Company’s Board of Directors and Executive Management have identified significant risk categories which affect the Company. The risk categories include: credit risk, operations risk, compliance risk, strategic and reputation risk, market risk and liquidity risk. The Board of Directors has approved an Enterprise Risk Management Policy that addresses each category of risk. The Senior Portfolio Risk Officer, Chief Financial Officer, Chief Information Officer, Director of Residential Lending, Compliance Officer, Executive Vice President of Commercial Lending and other members of management provide regular reports to the Board of Directors, identifying key risk issues and plans to address these issues.mitigate key risks. The Board of Directors seeks to ensure the level of risk is maintained within limits established by both the Risk Management Policy and other previously approved policies.

Credit Risk   Credit risk represents the possibility that the Company's borrowing customers or other counterparties may not repay loans or other contractual obligations according to their terms due to changes in the financial capacity, ability and willingness of such borrowing customers or counterparties to meet their obligations. In some cases, the collateral securing the payment of the loans may be sufficient to assure repayment, but in other cases the Company may experience significant credit losses which could have an adverse effect on its operating results. The Company makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of the real estate and other assets serving as collateral for the repayment of loans. For further discussion regarding the credit risk and the credit quality of the Company’s loan portfolio, see Note 5,4, “Loans, Allowance for Loan Losses, and Credit Quality” within Condensed Notes to Consolidated Financial Statements included in Item 1 hereof.
Operations Risk    Operations risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, natural disasters and security risks. The potential for operational risk exposure exists throughout the organization. Integral to the Company's performance is the continued efficiencyeffectiveness of the Company's technical systems, operational infrastructure, relationships with third parties and the associates and key executives in day-to-day and ongoing operations. Failure by any or all of these resources subjects the Company to risks that may vary in size, scale and scope. These 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. The Bank has an Operations Risk Management Committee that meets monthly and reports to the Board quarterly, or more frequently if warranted.  The Committee is chaired by the Director of Risk Management and members of the Committee include representatives from Audit, Finance, Technology, Operations, Information Security, Compliance and periodic attendance from business units throughout the organization.  An operations risk management dashboardreport is updated quarterly and reviewed with the Board.
Compliance Risk    Compliance risk represents the risk of regulatory sanctions or financial loss resulting from the Company’s failure to comply with rules and regulations issued by the various banking agencies, the U.S. Securities and Exchange Commission, the NASDAQ Stock Market, and standards of good banking practice. Activities which may expose the Company to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, adherence to all applicable laws and regulations, community reinvestment initiatives and employment and tax matters. Compliance risk is mitigated through the use of written policies and procedures, training of staff, and monitoring of activities for adherence to those procedures. The Bank has a Compliance Committee that meets quarterly and updates the Board and Managementmanagement quarterly or more frequently if warranted.  The Committee is chaired by the Director of Compliance, and members of the Committee include representatives from each of the principal business lines as well as Enterprise Risk Management, Audit, Finance, Technology and Information Security.
Strategic and Reputation Risk  Strategic and reputation risk representrepresents 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 mitigatesseeks to mitigate strategic and reputational risk through robust annual strategic planning, frequent executive strategic reviews, ongoing competitive and technological observation, rigorous assessment processes of new product, new branch, and new business initiatives, adherence to ethical standards, a philosophy of customer advocacy, a structured process of customer complaint resolution, and ongoing reputational monitoring, crisis management plan,planning, and management tools.
Market Risk     Market risk is the sensitivity of income to changes in interest rates, foreign exchange rates, commodity prices and other market-driven rates or prices. Interest rate sensitivity is the most significant market risk to which the Company is exposed.
Interest rate risk is the sensitivity of income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, the Company’s primary source of revenue. Interest

rate risk arises directly from the Company’s core banking activities. In addition to directly impacting net interest income, changes in the level of interest rates can also affect the amount of loans originated, the timing of cash flows on loans and securities, and the fair value of securities and derivatives, as well as other effects.
The primary goal of interest rate risk management is to control this risk within limits approved by the Board of Directors. These limits reflect the Company’s tolerance for interest rate risk over both short-term and long-term horizons. The Company attempts to controlmanage interest rate risk by identifying, quantifying, and where appropriate, hedging its exposure. If assets and liabilities do not re-price simultaneously and in equal volume, the potential for interest rate exposure exists. It is management’sthe 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, limits, through the use of off-balance sheet hedging instruments such as interest rate swaps, floors and caps.

The Company quantifies its interest rate exposures using net interest income simulation models, as well as simpler gap analysis, and Economic Value of Equity analysis. Key assumptions in these simulation analyses relate to behavior of interest rates and behavior of the Company’s deposit and loan customers. The most material assumptions relate to the prepayment of mortgage assets (including mortgage loans and mortgage-backed securities) and the life and sensitivity of nonmaturity deposits (e.g. DDA, NOW, savings and money market). In the case of prepayment of mortgage assets, assumptions are derived from published dealer median prepayment estimates for comparable mortgage loans. The risk of prepayment tends to increase when interest rates fall. Since future prepayment behavior of loan customers is uncertain, the resultant interest rate sensitivity of loans cannot be determined exactly.exactly and actual behavior may differ from assumptions.
The Company’s policy on interest-rate risk simulation specifies that for all "core" interest rate scenarios, estimatedBased upon the net interest income forsimulation models, the subsequent one-year period should not decline by morecompany currently forecasts that the Bank’s assets re-price faster than 10%.the liabilities. As a result, the net interest income of the Bank will benefit as market rates increase. Conversely, if rates were to fall, the net interest margin of the Bank is expected to contract. The Company's coreCompany runs several scenarios for September 30, 2017 included fiveto quantify and effectively assist in managing this position. These scenarios include instantaneous parallel shifts (“shocks”) toin market interest rates and fouras well as gradual (12 to 24(12-24 months) shifts in interest. The Company also regularly analyzes other "noncore" scenarios as it deems appropriate.market rates.



The results of all scenarios and the impact to net interest income are outlined in the table below:
Table 2220 - Interest Rate Sensitivity
September 30September 30
2017 20162018 2017
Year 1 Year 2 Year 1 Year 2Year 1 Year 2 Year 1 Year 2
Parallel rate shocks (basis points)              
-100(9.5)% (12.4)% (3.4)% (7.3)%(6.5)% (7.0)% (9.5)% (12.4)%
+1005.7 % 9.1 % 7.1 % 9.8 %4.3 % 9.4 % 5.7 % 9.1 %
+20011.1 % 16.9 % 14.0 % 19.6 %8.0 % 15.0 % 11.1 % 16.9 %
+30016.4 % 24.7 % 20.7 % 29.2 %11.8 % 21.0 % 16.4 % 24.7 %
+40021.8 % 32.3 % 27.3 % 38.6 %15.6 % 26.7 % 21.8 % 32.3 %
              
Gradual rate shifts (basis points)              
-100 over 12 months(4.9)% (11.2)% (1.6)% (5.9)%(2.7)% (5.7)% (4.9)% (11.2)%
+200 over 12 months5.3 % 14.9 % 6.6 % 17.1 %3.9 % 13.7 % 5.3 % 14.9 %
+400 over 24 months5.3 % 20.0 % 6.6 % 23.8 %3.9 % 17.3 % 5.3 % 20.0 %
Flat +500 over 12 months6.8 % 24.8 % 8.3 % 29.3 %
              
Alternative scenarios              
Flat up 200 basis points scenario5.6 % 14.9 % 6.6 % 16.2 %3.9 % 12.9 % 5.6 % 14.9 %
    
In addition,As previously noted, the Company's policy on interest rate risk simulation specifies that estimated net interest income forresults in the second year of all “core scenarios” should not decline by more than 15.0%. The Company was within policy limits at September 30, 2017 and 2016. It should be emphasized, however, that the resultstable above are dependent on material assumptions such as those discussed above.assumptions. For instance, asymmetrical rate behavior can have a material impact on the simulation results. If competition for deposits forcedprompts 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 maywould be negatively impacted. Alternatively, if the Company is able to lag increases in deposit rates as loans re-price upward, net interest income would be positively impacted.


The most significant factors affecting market risk exposure of the Company’s net interest income during the nine months ended September 30, 20172018 were the shape of the U.S. Government securities and interest rate swap yield curve, the level of U.S. prime interest rate and LIBOR rates, and the level of interest rates being offered on long-term fixed rate loans.
The Company manages the interest rate risk inherent in both its loan and borrowing portfolios by utilizing interest rate swap agreements and interest rate caps and floors. An interest rate swap is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount for a predetermined period of time from a second party. Interest rate caps and floors are agreements whereby one party agrees to pay a floating rate of interest on a notional principal amount for a predetermined period of time to a second party if certain market interest rate thresholds are realized. The amounts relating to the notional principal amount are not actually exchanged. Additionally, the Company may manage the interest rate risk inherent in its mortgage banking operations by entering

into forward sales contracts. 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, forward delivery sales commitments are executed, under which the Company agrees to deliver whole mortgage loans to various investors. See Note 10,8, “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 4,3, “Securities” within Condensed Notes to Consolidated Financial Statements included in Item 1 hereof.
Liquidity Risk    Liquidity risk is the risk that the Company will not have the ability to generate adequate amounts of cash in the most economical way for the institution to meet its ongoing obligations to pay deposit withdrawals, service borrowings, and to fund loan commitments. The Company’s primary sources of funds are deposits, borrowings, and the amortization, prepayment and maturities of loans and securities. The Bank utilizes its extensive branch network to access retail customers who

provide a stable base of in-market core deposits. These funds are principally comprised of demand deposits, interest checking accounts, savings accounts, and money market accounts. Deposit levels are greatly influenced by interest rates, economic conditions, and competitive factors.
The Company actively manages its liquidity position under the direction of the Asset-Liability Committee of the Bank ("ALCO"). The Company’s primary measure of short-term liquidity is the Total Basic Surplus/Deficit as a percentage of assets. This ratio, which is an analysis of the relationship between liquid assets plus available funding at the FHLB less short-term liabilities relative to total assets, was within policy limits at September 30, 2017.2018. 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 is carefulseeks to increase deposits without adversely impacting the weighted average cost of those funds. As part of a prudent liquidity risk management practice, the Company maintains various liquidity sources, some of which are only accessed on a contingency basis. Accordingly, management has implemented funding strategies that include FHLB advances, Federal Reserve Bank borrowing capacity and repurchase agreement lines. These nondeposit funds are also viewed as a contingent source of liquidity and, when profitable lending and investment opportunities exist, access to such funds provides a means to grow the balance sheet.
Borrowing capacity at the FHLB and the Federal Reserve is impacted by the amount and type of assets available to be pledged. For example, a prime, one-to-four family, residential loan, may provide 75 cents of borrowing capacity for every $1.00 pledged, whereas, a commercial loan may provide a lower amount. As a result, the Company’s strategic lending decisions can also affect its liquidity position.
The Company can raise additional liquidityfunds through the issuance of equity or unsecured debt privately or publicly.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. As such, the Company is careful to monitor the various factors that could impact its ability to raise liquidity through these channels.

The table below shows current and unused liquidity capacity from various sources as of the dates indicated:
Table 2321 - Sources of Liquidity
September 30, 2017  December 31, 2016 September 30, 2018  December 31, 2017 
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$53,272
 $942,706
(3) $50,819
 $793,118
(3)$50,767
 $985,424
(1) $53,264
 $954,789
(1)
Federal Reserve Bank of Boston—
 724,411
(4) —
 696,085
(4)—
 701,211
(2) —
 720,005
(2)
Unpledged Securities—
 393,694
   —
 368,585
  —
 463,980
   —
 375,155
  
Customer repurchase agreements179,670
 —
(5) 176,913
 —
(5)141,176
 —
(3) 162,679
 —
(3)
Junior subordinated debentures (1)73,071
 —
(5) 73,107
 —
(5)73,078
 —
(3) 73,073
 —
(3)
Subordinated debt34,670
 —
(5) 34,635
 —
(5)34,717
 —
(3) 34,682
 —
(3)
Brokered deposits (2)44,916
 —
(5) 14,724
 —
(5)
Reciprocal deposits51,738
 —
(3) —
 —
 
Brokered deposits6,000
 —
(3) 54,541
(4)—
(3)
$385,599
 $2,060,811
   $350,198
 $1,857,788
  $357,476
 $2,150,615
   $378,239
 $2,049,949
  


(1)Amounts shown are inclusive of fair value marks associated with previous acquisitions.
(2)
Inclusive of $38.9 millionand $13.7 million of brokered deposits acquired through participation in the Promontory Interfinancial Network as of September 30, 2017 and December 31, 2016, respectively.
(3)Loans with a carrying value of $1.5 billion and $1.4 billion at both September 30, 20172018 and December 31, 20162017 have been pledged to the Federal Home Loan Bank of Boston resulting in this additional unused borrowing capacity.
(4)(2)Loans with a carrying value of $1.2 billion at both September 30, 20172018 and December 31, 20162017 have been pledged to the Federal Reserve Bank of Boston resulting in this additional unused borrowing capacity.
(5)(3)The additional borrowing capacity has not been assessed for these categories.
(4)Inclusive of $48.5 million of reciprocal deposits acquired through participation in the Promontory Interfinancial Network as of and December 31, 2017. The Economic Growth, Regulatory Relief, and Consumer Protection Act, which was promulgated during the second quarter of 2018, states that most reciprocal deposits are no longer treated as brokered deposits. As such, the Company is prospectively reporting deposits from the Promontory Interfinancial Network as nonbrokered.

In addition to policies used for managing operational liquidity, the Board of Directors and the ALCO recognize the need to establish reasonable guidelines for managing through an environment of heightened liquidity risk. Catalysts for elevated liquidity risk can be Bank-specific issues and/or systemic industry-wide events. It is therefore the responsibility of the Board and the ALCO to institute systems and controls to provide advanced detection of potentially significant funding shortages, establish methods for assessing and monitoring risk levels, and institute prompt responses that may alleviate/circumvent a potential liquidity crisis. As such, the Board of Directors and the ALCO have put a Liquidity Contingency Plan in place. The overall goal of this plan is to provide a framework for the Bank to help detect liquidity problems promptly and appropriately address potential liquidity problems in a timely manner. In a period of perceived heightened liquidity risk, the Liquidity Contingency Plan provides for the establishment of a Liquidity Crisis Task Force. The Liquidity Crisis Task Force is responsible for monitoring the potential for a liquidity crisis and for establishing and executing an appropriate response.
Off-Balance Sheet Arrangements There have beenwere no material changes in off-balance sheet financial instruments during the three months ended September 30, 2017. 2018, with the exception of the merger agreement entered into on September 20, 2018 for the BHB acquisition.
See Note 10,8, "Derivative and Hedging Activities" and Note 14,13, "Commitments and Contingencies" within Condensed Notes to Consolidated Financial Statements included in Item 1 hereof for more information relating to the Company's other off-balance sheet financial instruments.
Contractual Obligations, Commitments, and Contingencies There have beenwere no material changes in contractual obligations, commitments, or contingencies during the three months ended September 30, 2017.2018. Please refer to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20162017 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 ourthe Company's internal controlcontrols over financial reporting that occurred during the third quarter of 20172018 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 September 30, 2017,2018, 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
The Company intends to incur debt to fund cash payments required in connection with the BHB merger.
The Company will be required to pay cash consideration in connection with the closing of the datemerger. Although the merger agreement does not include a financing contingency, the Company does not currently believe that it will have sufficient cash at closing at the holding company level to pay the cash portion of this report, therethe merger consideration and other transaction costs and expenses required to complete the merger. Accordingly, the Company intends to issue debt in order to raise cash to complete the merger. If the Company is unable to issue debt on terms that are acceptable or at all, the Bank may have been no material changes with regardto pay a special dividend to the Risk Factors disclosedCompany to supply the Company with the cash needed to complete the merger. However, any special dividend is subject to regulatory approval and the cash reserves and regulatory capital of the Bank may be materially adversely affected by the special cash dividend. The Company has not entered into any definitive agreement for debt financing, and its ability to obtain debt financing is subject to various factors, including market conditions, the Company’s operating performance and financial condition and third party credit ratings. The Company cannot assure you that we will be able to secure debt financing in Item 1Aa sufficient amount, on acceptable terms, in a timely manner or at all, and we further cannot assure you that in the event we is unable to secure debt financing, the Bank will receive regulatory approval to pay a special dividend to the Company.
The Company and the Bank will have over $10 billion in total consolidated assets as a result of our Annual Reportthe BHB merger, which will lead to increased regulation.
Upon consummation of the merger, and as of September 30, 2018 on Form 10-Ka pro forma basis giving effect to the merger, the Company and the Bank will each have over $11 billion in total consolidated assets. Accordingly, the Company and the Bank will become subject to certain regulations that apply only to depository institution holding companies or depository institutions with total consolidated assets of $10 billion or more.
Debit card interchange fee restrictions set forth in Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is known as the Durbin Amendment, as implemented by regulations of the Federal Reserve Board, cap the maximum debit interchange fee that a debit card issuer may receive per transaction at the sum of $0.21 plus five basis points. A debit card issuer that adopts certain fraud prevention procedures may charge an additional $0.01 per transaction. Debit card issuers with total consolidated assets of less than $10 billion, which currently includes the Bank and Blue Hills Bank, are exempt from these interchange fee restrictions. The exemption for small issuers ceases to apply as of July 1st of the fiscal year ended December 31, 2016,following the calendar year in which the debit card issuer has total consolidated assets of $10 billion or more at calendar year-end. As a result, if the bank merger is consummated in 2019, the Bank will become subject to the interchange restrictions of the Durbin Amendment beginning July 1, 2020. the Company and the Bank are incorporated herein by reference.currently evaluating the financial impact of the Bank becoming subject to the Durbin Amendment.

In addition, an insured depository institution with total assets of $10 billion or more is subject to supervision, examination, and enforcement with respect to consumer protection laws by the Consumer Financial Protection Bureau, which we refer to as the CFPB. Under its current policies, the CFPB will assert jurisdiction in the first quarter after the call reports of merging insured depository institutions, on a combined basis, show total consolidated assets of $10 billion or more for four consecutive quarters, including quarters ended prior to the merger. As a result, the Company expects the Bank to become subject to CFPB supervision, examination and enforcement at the beginning of the quarter following consummation of the bank merger.
There are other regulatory requirements that apply to insured depository institution holding companies and insured depository institutions with total consolidated assets of $10 billion or more. These include, but are not limited to, (i) the establishment by publicly traded depository institution holding companies with $10 billion or more in assets of a risk committee responsible for oversight of enterprise-wide risk management practices that are commensurate with the entity’s structure, risk profile, complexity, activities and size and (ii) an institution with total consolidated assets of $10 billion or more no longer being entitled to benefit from the FDIC’s offset of the effect of the increase in the statutory minimum Deposit Insurance Fund reserve ratio to 1.35% from the former statutory minimum of 1.15% that is required for institutions with assets of less than $10 billion by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In addition, Congress and/or regulatory agencies may impose new requirements or surcharges on these institutions in the future. The Economic Growth, Regulatory Reform, and Consumer Protection Act, which was enacted on May 24, 2018, includes provisions that, as they are implemented, relieve banking organizations with total consolidated assets of less than $10 billion (and that satisfy certain other conditions) from risk-based capital requirements, restrictions on proprietary trading and investment and sponsorship in hedge funds and private equity funds known as the Volcker Rule, and certain other regulatory requirements. Once the Company and the Bank have total consolidated assets of $10 billion or more, the Company and the Bank will no longer qualify for any of the foregoing relief.

There can be no assurance that the benefits of the merger will outweigh the regulatory costs resulting from the Company and the Bank having total consolidated assets of $10 billion or more.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended September 30, 2017:2018:
 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, 2017—
 $—
 —
 —
August 1 to August 31, 2017295
 $68.80
 —
 —
September 1 to September 30, 2017242
 $72.11
 —
 —
Total537
   —
 —
 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, 2018—
 $—
 —
 —
August 1 to August 31, 2018—
 $—
 —
 —
September 1 to September 30, 20182,604
 $87.09
 —
 —
Total2,604
   —
 —


(1)Shares repurchased relate to the surrendering of mature shares forin connection with the exercise and/or vesting of stockequity compensation grants andto satisfy related tax withholding.withholding obligations.
(2)The Company does not currently have a stock repurchase program or plan in place.


Item  3. Defaults Upon Senior Securities—None


Item 4. Mine Safety Disclosures - Not Applicable


Item 5. Other Information—None



Item 6. Exhibits


Exhibit Index
 
No.Exhibit
3.12.1
AmendedAgreement and Restated By-lawsPlan of theMerger dated September 20, 2018 by and among Independent Bank Corp., Rockland Trust Company, adopted on October 19, 2017, Blue Hills Bancorp, Inc., and Blue Hills Bank is incorporated by reference to Exhibit 3.12.1 to Formform 8-K filed on October 23, 2017.
4.1
Independent Bank Corp. 2014 Dividend Reinvestment and Stock Purchase PlanSeptember 24, 2018. incorporated by reference to Form S-3 filed on October 31, 2017.
31.1
Section 302 Certification of Sarbanes-Oxley Act of 2002 is attached hereto.hereto.*
31.2
Section 302 Certification of Sarbanes-Oxley Act of 2002 is attached hereto.hereto.*
32.1
Section 906 Certification of Sarbanes-Oxley Act of 2002 is attached hereto.hereto.+
32.2
Section 906 Certification of Sarbanes-Oxley Act of 2002 is attached hereto.hereto.+
101Interactive Data File *The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document


*Filed herewith
+Furnished herewith



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)
 
November 2, 20171, 2018 /s/ Christopher Oddleifson
  
Christopher Oddleifson
President and
Chief Executive Officer
(Principal Executive Officer)
 
November 2, 20171, 2018 /s/ Robert D. Cozzone
  
Robert D. Cozzone
Chief Financial Officer and Treasurer
(Principal Financial Officer)




9597