Independent Bank Earnings 2020-03-31

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 March 31, 2020

Commission file number   0-7818

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 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  ☒  NO ☐

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  ☒  NO ☐ 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, smaller reporting company or an emerging growth company.

Large accelerated filer  ☐  Accelerated filer  ☒  Non-accelerated filer  ☐  Smaller reporting company  ☐  Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.  Yes  ☐  No  ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐  NO  ☒  

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: common stock, no par value, 21,892,836 as of May 4, 2020.

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INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Number(s)
PART I -	Financial Information
Item 1.	Condensed Consolidated Statements of Financial Condition March 31, 2020 and December 31, 2019	3
	Condensed Consolidated Statements of Operations Three-month periods ended March 31, 2020 and 2019	4
	Condensed Consolidated Statements of Comprehensive Income Three-month periods ended March 31, 2020 and 2019	5
	Condensed Consolidated Statements of Cash Flows Three-month periods ended March 31, 2020 and 2019	6
	Condensed Consolidated Statements of Shareholders' Equity Three-month periods ended March 31, 2020 and 2019	7
	Notes to Interim Condensed Consolidated Financial Statements	8-57
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	58-80
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	81
Item 4.	Controls and Procedures	81
PART II -	Other Information
Item 1A	Risk Factors	82
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	85
Item 6.	Exhibits	86

FORWARD-LOOKING STATEMENTS

Statements in this report that are not statements of historical fact, including statements that include terms such as ‘‘will,’’ ‘‘may,’’ ‘‘should,’’ ‘‘believe,’’ ‘‘expect,’’ ‘‘forecast,’’ ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘project,’’ ‘‘intend,’’ ‘‘likely,’’ ‘‘optimistic’’ and ‘‘plan’’ and statements about future or projected financial and operating results, plans, projections, objectives, expectations, and intentions, are forward-looking statements. Forward-looking statements include, but are not limited to, descriptions of plans and objectives for future operations, products or services; projections of our future revenue, earnings or other measures of economic performance; forecasts of credit losses and other asset quality trends; statements about our business and growth strategies; and expectations about economic and market conditions and trends. These forward-looking statements express our current expectations, forecasts of future events, or long-term goals. They are based on assumptions, estimates, and forecasts that, although believed to be reasonable, may turn out to be incorrect. Actual results could differ materially from those discussed in the forward-looking statements for a variety of reasons, including:

This list provides examples of factors that could affect the results described by forward-looking statements contained in this report, but the list is not intended to be all-inclusive.  The risk factors disclosed in Part I – Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, as updated by any new or modified risk factors disclosed in Part II – Item 1A of any subsequently filed Quarterly Report on Form 10-Q, include the known risks our management believes could materially affect the results described by forward-looking statements in this report. However, those risks may not be the only risks we face. Our results of operations, cash flows, financial position, and prospects could also be materially and adversely affected by additional factors that are not presently known to us that we currently consider to be immaterial, or that develop after the date of this report. We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this report are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.

Part I - Item 1.

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		March 31, 2020				December 31, 2019
		(unaudited)
		(In thousands, except share amounts)
Assets
Cash and due from banks		$	48,753			$	53,295
Interest bearing deposits			21,538				12,009
Cash and Cash Equivalents			70,291				65,304
Interest bearing deposits - time			-				350
Securities available for sale			594,284				518,400
Federal Home Loan Bank and Federal Reserve Bank stock, at cost			18,359				18,359
Loans held for sale, carried at fair value			64,549				69,800
Loans
Commercial			1,181,599				1,166,695
Mortgage			1,069,967				1,098,911
Installment			466,549				459,417
Total Loans			2,718,115				2,725,023
Allowance for loan losses			(32,495	)			(26,148	)
Net Loans			2,685,620				2,698,875
Other real estate and repossessed assets, net			1,494				1,865
Property and equipment, net			37,776				38,411
Bank-owned life insurance			55,035				55,710
Deferred tax assets, net			4,280				2,072
Capitalized mortgage loan servicing rights, carried at fair value			14,829				19,171
Other intangibles			5,071				5,326
Goodwill			28,300				28,300
Accrued income and other assets			52,499				42,751
Total Assets		$	3,632,387			$	3,564,694
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing		$	874,935			$	852,076
Savings and interest-bearing checking			1,229,999				1,186,745
Reciprocal			464,574				431,027
Time			359,050				376,877
Brokered time			155,006				190,002
Total Deposits			3,083,564				3,036,727
Other borrowings			101,954				88,646
Subordinated debentures			39,473				39,456
Accrued expenses and other liabilities			71,778				49,696
Total Liabilities			3,296,769				3,214,525
Commitments and contingent liabilities
Shareholders’ Equity
Preferred stock, no par value, 200,000 shares authorized;  none issued or outstanding			-				-
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding: 21,892,001 shares at March 31, 2020 and 22,481,643 shares at December 31, 2019			338,528				352,344
Retained earnings			1,944				1,611
Accumulated other comprehensive loss			(4,854	)			(3,786	)
Total Shareholders’ Equity			335,618				350,169
Total Liabilities and Shareholders’ Equity		$	3,632,387			$	3,564,694

See notes to interim condensed consolidated financial statements (unaudited)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Three months ended March 31,
		2020				2019
		(unaudited)
		(In thousands, except per share amounts)
Interest Income
Interest and fees on loans		$	31,764			$	32,681
Interest on securities
Taxable			3,059				3,006
Tax-exempt			390				374
Other investments			366				575
Total Interest Income			35,579				36,636
Interest Expense
Deposits			4,700				5,681
Other borrowings and subordinated debentures			688				712
Total Interest Expense			5,388				6,393
Net Interest Income			30,191				30,243
Provision for loan losses			6,721				664
Net Interest Income After Provision for Loan Losses			23,470				29,579
Non-interest Income
Service charges on deposit accounts			2,591				2,640
Interchange income			2,457				2,355
Net gains on assets
Mortgage loans			8,840				3,611
Securities			253				304
Mortgage loan servicing, net			(5,300	)			(1,215	)
Other			2,163				2,264
Total Non-interest Income			11,004				9,959
Non-interest Expense
Compensation and employee benefits			16,509				16,351
Occupancy, net			2,460				2,505
Data processing			2,355				2,144
Furniture, fixtures and equipment			1,036				1,029
Communications			803				769
Interchange expense			859				688
Loan and collection			805				634
Advertising			683				672
Legal and professional			393				369
FDIC deposit insurance			370				368
Other			2,446				2,461
Total Non-interest Expense			28,719				27,990
Income Before Income Tax			5,755				11,548
Income tax expense			945				2,167
Net Income		$	4,810			$	9,381
Net Income Per Common Share
Basic		$	0.22			$	0.40
Diluted		$	0.21			$	0.39

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Three months ended March 31,
		2020				2019
		(unaudited - In thousands)
Net income		$	4,810			$	9,381
Other comprehensive income (loss)
Securities available for sale
Unrealized gains (losses) arising during period			(598	)			5,364
Change in unrealized losses for which a portion of other than temporary impairment has been recognized in earnings			(169	)			(2	)
Reclassification adjustments for gains included in earnings			(253	)			(137	)
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale			(1,020	)			5,225
Income tax expense (benefit)			(214	)			1,097
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale, net of tax			(806	)			4,128
Derivative instruments
Unrealized gain (loss) arising during period			(406	)			(912	)
Reclassification adjustment for income recognized in earnings			75				(149	)
Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments			(331	)			(1,061	)
Income tax expense (benefit)			(69	)			(224	)
Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments, net of tax			(262	)			(837	)
Other comprehensive income (loss)			(1,068	)			3,291
Comprehensive income		$	3,742			$	12,672

See notes to interim condensed consolidated financial statements (unaudited)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Three months ended March 31,
		2020				2019
		(unaudited - In thousands)
Net Income		$	4,810			$	9,381
Adjustments to Reconcile Net Income to Net Cash From Operating Activities
Proceeds from the sale of equity securities at fair value			-				560
Proceeds from sales of loans held for sale			241,856				87,496
Disbursements for loans held for sale			(227,765	)			(82,230	)
Provision for loan losses			6,721				664
Deferred income tax expense (benefit)			(1,925	)			2,039
Deferred loan fees and costs			(358	)			(111	)
Net depreciation, amortization of intangible assets and premiums and accretion of discounts on securities, loans and interest bearing deposits - time			1,795				1,479
Net gains on mortgage loans			(8,840	)			(3,611	)
Net gains on securities			(253	)			(304	)
Share based compensation			547				420
(Increase) decrease in accrued income and other assets			5,095				(8,107	)
Increase in accrued expenses and other liabilities			599				2,455
Total Adjustments			17,472				750
Net Cash From Operating Activities			22,282				10,131
Cash Flow Used in Investing Activities
Proceeds from the sale of securities available for sale			21,743				42,236
Proceeds from maturities, prepayments and calls of securities available for sale			42,744				32,533
Purchases of securities available for sale			(103,901	)			(71,693	)
Proceeds from the maturity of interest bearing deposits - time			350				100
Net increase in portfolio loans (loans originated, net of principal payments)			(22,432	)			(65,653	)
Proceeds from the sale of portfolio loans			2,395				40,630
Proceeds from bank-owned life insurance			945				-
Proceeds from the sale of other real estate and repossessed assets			328				167
Capital expenditures			(760	)			(511	)
Net Cash Used in Investing Activities			(58,588	)			(22,191	)
Cash Flow From Financing Activities
Net increase in total deposits			46,837				20,797
Net increase in other borrowings			6,296				2
Proceeds from Federal Home Loan Bank Advances			160,000				-
Payments of Federal Home Loan Bank Advances			(153,000	)			-
Dividends paid			(4,477	)			(4,246	)
Proceeds from issuance of common stock			11				282
Repurchase of common stock			(13,784	)			(2,530	)
Share based compensation withholding obligation			(590	)			(866	)
Net Cash From Financing Activities			41,293				13,439
Net Increase in Cash and Cash Equivalents			4,987				1,379
Cash and Cash Equivalents at Beginning of Period			65,304				70,244
Cash and Cash Equivalents at End of Period		$	70,291			$	71,623
Cash paid during the period for
Interest		$	5,489			$	6,253
Income taxes			-				-
Operating leases			476				563
Transfers to other real estate and repossessed assets			66				325
Purchase of securities available for sale not yet settled			10,497				1,500
Securitization of portfolio loans			26,325				29,790
Right of use assets obtained in exchange for lease obligations			116				7,703

See notes to interim condensed consolidated financial statements (unaudited)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Common Stock				Retained Earnings (Accumulated Deficit)				Accumulated Other Comprehensive Loss				Total Shareholders’ Equity
		(Dollars in thousands, except per share amounts)
Balances at January 1, 2020		$	352,344			$	1,611			$	(3,786	)		$	350,169
Net income, three months ended March 31, 2020			-				4,810				-				4,810
Cash dividends declared, $.20 per share			-				(4,477	)			-				(4,477	)
Repurchase of 678,929 shares of common stock			(13,784	)			-				-				(13,784	)
Issuance of 11,567 shares of common stock			11				-				-				11
Share based compensation (issuance of 105,894 shares of common stock)			547				-				-				547
Share based compensation withholding obligation (withholding of 28,174 shares of common stock)			(590	)			-				-				(590	)
Other comprehensive income			-				-				(1,068	)			(1,068	)
Balances at March 31, 2020		$	338,528			$	1,944			$	(4,854	)		$	335,618
Balances at January 1, 2019		$	377,372			$	(28,270	)		$	(10,108	)		$	338,994
Net income, three months ended March 31, 2019			-				9,381				-				9,381
Cash dividends declared, $.18 per share			-				(4,246	)			-				(4,246	)
Repurchase of 115,787 shares of common stock			(2,530	)			-				-				(2,530	)
Issuance of 68,399 shares of common stock			282				-				-				282
Share based compensation (issuance of 84,128 shares of common stock)			420				-				-				420
Share based compensation withholding obligation (withholding of 56,286 shares of common stock)			(866	)			-				-				(866	)
Other comprehensive income			-				-				3,291				3,291
Balances at March 31, 2019		$	374,678			$	(23,135	)		$	(6,817	)		$	344,726

See notes to interim condensed consolidated financial statements (unaudited)

(unaudited)

1.	Preparation of Financial Statements

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2019 included in our Annual Report on Form 10-K.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary to present fairly our consolidated financial condition as of March 31, 2020 and December 31, 2019, and the results of operations for the three month periods ended March 31, 2020 and 2019.  The results of operations for the three month period ended March 31, 2020, are not necessarily indicative of the results to be expected for the full year.  Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation.  Our critical accounting policies include the determination of the allowance for loan losses and the valuation of capitalized mortgage loan servicing rights.  Refer to our 2019 Annual Report on Form 10-K for a disclosure of our accounting policies.

2.	New Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, ‘‘Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments’’. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

This ASU:

(unaudited)

We began evaluating this ASU in 2016 and established a company-wide, cross-discipline governance structure, which provides implementation oversight. We continued to test and refine our current expected credit loss models that satisfied the requirements of this ASU. Oversight and testing, as well as efforts to meet expanded disclosure requirements, extended through the end of 2019.  We currently estimate losses over approximately a two year forecast period using the Federal Open Market Committee median economic projections as well as considering other economic forecast sources, and then revert to longer term historical loss experience to estimate losses over more extended periods.  We were originally required to adopt this ASU on January 1, 2020 but section 4014 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act allows for temporary relief from applying this ASU.  Under the CARES Act we may delay the adoption of this ASU until the earlier of the termination of the national emergency that President Trump declared on March 13, 2020, or December 31, 2020.  As such, we have chosen to delay the adoption of this ASU and continue to utilize the existing incurred loss impairment methodology to calculate our allowance for loan losses and our provision for loan losses as required under Accounting Standards Codification 310 (Receivables). When we adopt this ASU as required under the CARES act we will do so retrospectively to January 1, 2020.

We expect to recognize a one-time cumulative effect adjustment at January 1, 2020 increasing the allowance for loan losses.  We are estimating an increase to the allowance for loan losses at that time to be in the range of $8.0 million to $10.0 million primarily driven by the longer contractual maturities of our mortgage and consumer installment loan segments. In addition, we currently expect this ASU to increase the allowance for losses related to unfunded loan commitments between $1.0 million and $2.0 million. The ultimate impact of adopting this ASU, and at each subsequent reporting period, is highly dependent on credit quality, economic forecasts and conditions, composition of our loan portfolios and securities available for sale, along with other management judgements. The transition adjustment to record the allowance for credit losses may fall outside of our estimated increase based on the finalization of assumptions including qualitative adjustments and the economic forecast used in calculating the allowance for credit losses upon the adoption of CECL.

 

We do not expect a material allowance for credit losses to be recorded on securities available for sale upon adoption of this ASU.

In August 2018, the FASB issued ASU 2018-13, ‘‘Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement’’. This new ASU amends disclosure requirements in Topic 820 to eliminate, add and modify certain disclosure requirements for fair value measurements as part of its disclosure framework project. The amended guidance eliminates the requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the entity’s policy for the timing of transfers between levels of the fair value hierarchy and the entity’s valuation processes for Level 3 fair value measurements. The amended guidance adds the requirements to disclose the changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements of instruments held at the end of the reporting period and for recurring and nonrecurring Level 3 fair value measurements, the range and weighted average used to develop significant unobservable inputs and how the weighted average was calculated, with certain exceptions. This amended guidance was effective for us on January 1, 2020, and did not have a material impact on our consolidated operating results or financial condition.

(unaudited)

In March 2020, the FASB issued ASU 2020-04, ‘‘Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting’’. This new ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. Entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. Entities that make such elections would not have to remeasure contracts at the modification date or reassess a previous accounting determination.  Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met.  This amended guidance and our ability to elect its temporary optional expedients and exceptions are effective for us as of March 12, 2020 through December 31, 2022.

3.	Securities

Securities available for sale consist of the following:

		Amortized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
March 31, 2020
U.S. agency		$	12,648			$	207			$	27			$	12,828
U.S. agency residential mortgage-backed			216,436				5,746				353				221,829
U.S. agency commercial mortgage-backed			9,665				252				1				9,916
Private label mortgage-backed			38,188				341				1,458				37,071
Other asset backed			105,971				79				2,169				103,881
Obligations of states and political subdivisions			162,805				2,477				1,341				163,941
Corporate			42,392				932				513				42,811
Trust preferred			1,968				-				477				1,491
Foreign government			499				17				-				516
Total		$	590,572			$	10,051			$	6,339			$	594,284
December 31, 2019
U.S. agency		$	14,591			$	89			$	19			$	14,661
U.S. agency residential mortgage-backed			226,130				1,910				278				227,762
U.S. agency commercial mortgage-backed			10,671				113				28				10,756
Private label mortgage-backed			39,248				544				99				39,693
Other asset backed			94,158				103				375				93,886
Obligations of states and political subdivisions			94,499				1,724				121				96,102
Corporate			31,904				1,296				5				33,195
Trust preferred			1,968				-				125				1,843
Foreign government			499				3				-				502
Total		$	513,668			$	5,782			$	1,050			$	518,400

(unaudited)

Our investments’ gross unrealized losses and fair values aggregated by investment type and length of time that individual securities have been at a continuous unrealized loss position follows:

		Less Than Twelve Months								Twelve Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(In thousands)
March 31, 2020
U.S. agency		$	1,042			$	1			$	2,473			$	26			$	3,515			$	27
U.S. agency residential mortgage-backed			37,673				289				5,166				64				42,839				353
U.S. agency commercial mortgage-backed			-				-				372				1				372				1
Private label mortgage-backed			22,232				1,388				358				70				22,590				1,458
Other asset backed			67,012				1,442				18,910				727				85,922				2,169
Obligations of states and political subdivisions			50,643				1,321				2,213				20				52,856				1,341
Corporate			14,556				513				-				-				14,556				513
Trust preferred			-				-				1,491				477				1,491				477
Total		$	193,158			$	4,954			$	30,983			$	1,385			$	224,141			$	6,339
December 31, 2019
U.S. agency		$	2,782			$	8			$	2,712			$	11			$	5,494			$	19
U.S. agency residential mortgage-backed			56,377				126				13,551				152				69,928				278
U.S. agency commercial mortgage-backed			3,284				24				659				4				3,943				28
Private label mortgage-backed			16,387				55				343				44				16,730				99
Other asset backed			34,027				233				13,839				142				47,866				375
Obligations of states and political subdivisions			15,666				84				5,396				37				21,062				121
Corporate			2,125				5				-				-				2,125				5
Trust preferred			-				-				1,843				125				1,843				125
Total		$	130,648			$	535			$	38,343			$	515			$	168,991			$	1,050

Our portfolio of securities available for sale is reviewed quarterly for impairment in value. In performing this review management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. For securities that do not meet the aforementioned recovery criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income (loss).

(unaudited)

U.S. agency, U.S. agency residential mortgage-backed securities and U.S. agency commercial mortgage backed securities — at March 31, 2020, we had 24 U.S. agency, 52 U.S. agency residential mortgage-backed and six U.S. agency commercial mortgage-backed securities whose fair value is less than amortized cost. The  unrealized losses are largely attributed to widening spreads to Treasury bonds since acquisition.

 

Private label mortgage backed, other asset backed and corporate securities — at March 31, 2020, we had 35 private label mortgage backed, 122 other asset backed and 18 corporate securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening since acquisition.

 

Two private label mortgage-backed securities (discussed further below) were reviewed for other than temporary impairment (‘‘OTTI’’) utilizing a cash flow projection. The cash flow analysis forecasts cash flow from the underlying loans in each transaction and then applies these cash flows to the bonds in the securitization.

 

Obligations of states and political subdivisions — at March 31, 2020, we had 36 municipal securities whose fair value is less than amortized cost. The unrealized losses are primarily due to wider benchmark pricing spreads since acquisition.

 

Trust preferred securities — at March 31, 2020, we had two trust preferred securities whose fair value is less than amortized cost. Both of our trust preferred securities are single issue securities issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities has suffered from credit spread widening. One of the securities is rated by a major rating agency as investment grade while the other one is non-rated. The non-rated issue is a relatively small bank and was never rated. The issuer of this non-rated trust preferred security, which had a total amortized cost of $1.0 million and total fair value of $0.65 million as of March 31, 2020, continues to have satisfactory credit metrics and make interest payments.

 

As management does not intend to liquidate any of the securities discussed above and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines discussed above (other than certain declines related to the two private label mortgage-backed securities currently being reviewed for OTTI) are deemed to be other than temporary.

 

We recorded no credit related OTTI charges in our Condensed Consolidated Statements of Operations related to securities available for sale during the three month periods ended March 31, 2020 and 2019, respectively.

At March 31, 2020, two private label mortgage-backed securities had credit related OTTI and are summarized as follows:

		Senior Security				Super Senior Security				Total
		(In thousands)
Fair value		$	469			$	513			$	982
Amortized cost			490				410				900
Non-credit unrealized loss			21				-				21
Unrealized gain			-				103				103
Cumulative credit related OTTI			757				457				1,214

(unaudited)

Both of these securities are receiving principal and interest payments similar to principal reductions in the underlying collateral and have unrealized gains at March 31, 2020. The original amortized cost (current amortized cost excluding cumulative credit related OTTI) for each of these securities has been permanently adjusted downward for previously recorded credit related OTTI. The unrealized loss (based on original amortized cost) for one of these securities is now less than previously recorded credit related OTTI amounts.

A roll forward of credit losses recognized in earnings on securities available for sale follows:

		Three months ended March 31,
		2020				2019
		(In thousands)
Balance at beginning of period		$	1,214			$	1,594
Additions to credit losses on securities for which no previous OTTI was recognized			-				-
Increases to credit losses on securities for which OTTI was previously recognized			-				-
Balance at end of period		$	1,214			$	1,594

The amortized cost and fair value of securities available for sale at March 31, 2020, by contractual maturity, follow:

		Amortized Cost				Fair Value
		(In thousands)
Maturing within one year		$	13,075			$	13,132
Maturing after one year but within five years			61,789				62,393
Maturing after five years but within ten years			47,654				48,967
Maturing after ten years			97,794				97,095
			220,312				221,587
U.S. agency residential mortgage-backed			216,436				221,829
U.S. agency commercial mortgage-backed			9,665				9,916
Private label mortgage-backed			38,188				37,071
Other asset backed			105,971				103,881
Total		$	590,572			$	594,284

The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Gains and losses realized on the sale of securities available for sale are determined using the specific identification method and are recognized on a trade-date basis.  A summary of proceeds from the sale of securities available for sale and gains and losses for the three month periods ending March 31, follows:

						Realized
		Proceeds				Gains				Losses
		(In thousands)
2020		$	21,743			$	253			$	-
2019			42,236				169				32

(unaudited)

Certain preferred stocks which were all sold during the first quarter of 2019 had been classified as equity securities at fair value in our Condensed Consolidated Statement of Financial Condition.  During the three months ended March 31, 2019 we recognized gains on these preferred stocks of $0.167 million that are included in net gains (losses) on securities in the Condensed Consolidated Statements of Operations.

4.

Loans

Our assessment of the allowance for loan losses is based on an evaluation of the loan portfolio, recent and historical loss experience, current economic conditions and other pertinent factors.

		Commercial				Mortgage				Installment				Subjective Allocation				Total
		(In thousands)
2020
Balance at beginning of period		$	7,922			$	8,216			$	1,283			$	8,727			$	26,148
Additions (deductions)
Provision for loan losses			2,218				(508	)			129				4,882				6,721
Recoveries credited to the allowance			108				117				174				-				399
Loans charged against the allowance			(36	)			(409	)			(328	)			-				(773	)
Balance at end of period		$	10,212			$	7,416			$	1,258			$	13,609			$	32,495
2019
Balance at beginning of period		$	7,090			$	7,978			$	895			$	8,925			$	24,888
Additions (deductions)
Provision for loan losses			420				573				523				(852	)			664
Recoveries credited to the allowance			127				224				217				-				568
Loans charged against the allowance			(119	)			(363	)			(384	)			-				(866	)
Balance at end of period		$	7,518			$	8,412			$	1,251			$	8,073			$	25,254

(unaudited)

		Commercial				Mortgage				Installment				Subjective Allocation				Total
		(In thousands)
March 31, 2020
Allowance for loan losses:
Individually evaluated for impairment		$	3,467			$	4,391			$	280			$	-			$	8,138
Collectively evaluated for impairment			6,745				3,025				978				13,609				24,357
Loans acquired with deteriorated credit quality			-				-				-				-				-
Total ending allowance for loan losses balance		$	10,212			$	7,416			$	1,258			$	13,609			$	32,495
Loans
Individually evaluated for impairment		$	18,048			$	42,440			$	2,813							$	63,301
Collectively evaluated for impairment			1,164,903				1,030,996				464,633								2,660,532
Loans acquired with deteriorated credit quality			1,340				567				311								2,218
Total loans recorded investment			1,184,291				1,074,003				467,757								2,726,051
Accrued interest included in recorded investment			2,692				4,036				1,208								7,936
Total loans		$	1,181,599			$	1,069,967			$	466,549							$	2,718,115
December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment		$	1,031			$	4,863			$	261			$	-			$	6,155
Collectively evaluated for impairment			6,891				3,353				1,022				8,727				19,993
Loans acquired with deteriorated credit quality			-				-				-				-				-
Total ending allowance for loan losses balance		$	7,922			$	8,216			$	1,283			$	8,727			$	26,148
Loans
Individually evaluated for impairment		$	9,393			$	43,574			$	2,925							$	55,892
Collectively evaluated for impairment			1,158,906				1,058,917				457,370								2,675,193
Loans acquired with deteriorated credit quality			1,394				575				316								2,285
Total loans recorded investment			1,169,693				1,103,066				460,611								2,733,370
Accrued interest included in recorded investment			2,998				4,155				1,194								8,347
Total loans		$	1,166,695			$	1,098,911			$	459,417							$	2,725,023

(unaudited)

Loans on non-accrual status and past due more than 90 days (“Non-performing Loans”) follow⁽¹⁾:

		90+ and Still Accruing				Non- Accrual				Total Non- Performing Loans
		(In thousands)
March 31, 2020
Commercial
Commercial and industrial (2)		$	-			$	1,285			$	1,285
Commercial real estate			-				7,756				7,756
Mortgage
1-4 family owner occupied - jumbo			-				2,356				2,356
1-4 family owner occupied - non-jumbo (3)			-				1,804				1,804
1-4 family non-owner occupied			-				1,122				1,122
1-4 family - 2nd lien			-				1,326				1,326
Resort lending			-				438				438
Installment
Boat lending			-				150				150
Recreational vehicle lending			-				84				84
Other			-				457				457
Total recorded investment		$	-			$	16,778			$	16,778
Accrued interest included in recorded investment		$	-			$	-			$	-
December 31, 2019
Commercial
Commercial and industrial (2)		$	-			$	565			$	565
Commercial real estate			-				735				735
Mortgage
1-4 family owner occupied - jumbo			-				1,179				1,179
1-4 family owner occupied - non-jumbo (3)			-				3,540				3,540
1-4 family non-owner occupied			-				1,039				1,039
1-4 family - 2nd lien			-				979				979
Resort lending			-				690				690
Installment
Boat lending			-				332				332
Recreational vehicle lending			-				3				3
Other			-				470				470
Total recorded investment		$	-			$	9,532			$	9,532
Accrued interest included in recorded investment		$	-			$	-			$	-

(1)	Non-performing loans exclude purchase credit impaired loans.

(2)	Non-performing commercial and industrial loans exclude $0.053 million and $0.077 million of government guaranteed loans at March 31, 2020 and December 31, 2019, respectively.

(3)	Non-performing 1-4 family owner occupied – non jumbo loans exclude $0.623 million and $0.569 million of government guaranteed loans at March 31, 2020 and December 31, 2019, respectively.

(unaudited)

		Loans Past Due																Loans not				Total
		30-59 days				60-89 days				90+ days				Total				Past Due				Loans
		(In thousands)
March 31, 2020
Commercial
Commercial and industrial		$	339			$	-			$	70			$	409			$	581,613			$	582,022
Commercial real estate			175				-				-				175				602,094				602,269
Mortgage
1-4 family owner occupied - jumbo			911				947				1,436				3,294				434,866				438,160
1-4 family owner occupied - non-jumbo			2,296				628				584				3,508				284,956				288,464
1-4 family non-owner occupied			1,039				348				690				2,077				164,961				167,038
1-4 family - 2nd lien			980				455				862				2,297				111,877				114,174
Resort lending			226				-				402				628				65,539				66,167
Installment
Boat lending			548				75				75				698				205,019				205,717
Recreational vehicle lending			242				42				54				338				158,336				158,674