Independent Bank Earnings 2019-09-30

IBCP 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

Comparables ($MM TTM)
Ticker	M Cap	Assets	Liab	Rev	G Profit	Net Inc	EBITDA	EV	G Margin	EV/EBITDA	ROA
QCRH	548	5,195	4,691	262	0	49	121	460	0%	3.8	1%
MBWM	530	3,576	3,176	0	0	45	84	530		6.3	1%
HTBK	528	3,108	2,720	5	0	49	84	252	0%	3.0	2%
FLIC	527	4,202	3,811	2	0	42	92	818	0%	8.9	1%
FCBC	516	2,212	1,878	0	0	38	54	359		6.6	2%
IBCP	509	3,438	3,107	27	0	42	73	454	0%	6.2	1%
MOFG	495	4,662	4,174	0	0	32	79	748		9.4	1%
THFF	492	3,064	2,586	0	0	45	67	431		6.4	1%
MBIN	485	5,287	4,772	0	0	59	153	86		0.6	1%
AROW	479	3,006	2,721	0	0	36	68	416		6.1	1%

10-Q 1 form10q.htm 10-Q

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, 2019

Commission file number 0-7818

INDEPENDENT BANK CORPORATION

(Exact name of registrant as specified in its charter)

Michigan		38-2032782
(State or jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

4200 East Beltline, Grand Rapids, Michigan 49525

(Address of principal executive offices)

(616) 527-5820

(Registrant’s telephone number, including area code)

NONE

Former name, address and fiscal year, if changed since last report.

Securities registered pursuant to Section 12(b) of the Act:

Title of each Class		Trading Symbol		Name of each exchange which registered
Common stock, no par value		IBCP		The Nasdaq Stock Market, LLC

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, 22,481,485 as of October 31, 2019.

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

INDEX

		Number(s)
PART I -	Financial Information
Item 1.	Condensed Consolidated Statements of Financial Condition September 30, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Operations Three- and Nine-month periods ended September 30, 2019 and 2018	4
	Condensed Consolidated Statements of Comprehensive Income Three- and Nine-month periods ended September 30, 2019 and 2018	5
	Condensed Consolidated Statements of Cash Flows Nine-month periods ended September 30, 2019 and 2018	6
	Condensed Consolidated Statements of Shareholders’ Equity Three- and Nine-month periods ended September 30, 2019 and 2018	7
	Notes to Interim Condensed Consolidated Financial Statements	8-68
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	69-91
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	92
Item 4.	Controls and Procedures	92

PART II	Other Information
Item 1A	Risk Factors	93
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	93
Item 6.	Exhibits	94

Index

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:

•

economic, market, operational, liquidity, credit, and interest rate risks associated with our business;

•

economic conditions generally and in the financial services industry, particularly economic conditions within Michigan and the regional and local real estate markets in which our bank operates;

•

the failure of assumptions underlying the establishment of, and provisions made to, our allowance for loan losses;

•

increased competition in the financial services industry, either nationally or regionally;

•

our ability to achieve loan and deposit growth;

•

volatility and direction of market interest rates;

•

the continued services of our management team; and

•

implementation of new legislation, which may have significant effects on us and the financial services industry.

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, 2018, 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 all 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.

Index

Part I - Item1.

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

	September 30, 2019			December 31, 2018
	(unaudited)
	(In thousands, except share amounts)
Assets
Cash and due from banks	$	38,662		$	23,350
Interest bearing deposits		43,755			46,894
Cash and Cash Equivalents		82,417			70,244
Interest bearing deposits - time		499			595
Equity securities at fair value		-			393
Securities available for sale		439,592			427,926
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		18,359			18,359
Loans held for sale, carried at fair value		87,358			44,753
Loans held for sale, carried at lower of cost or fair value		36,622			41,471
Loans
Commercial		1,189,017			1,144,481
Mortgage		1,070,035			1,042,890
Installment		463,394			395,149
Total Loans		2,722,446			2,582,520
Allowance for loan losses		(26,148	)		(24,888	)
Net Loans		2,696,298			2,557,632
Other real estate and repossessed assets, net		1,789			1,299
Property and equipment, net		37,424			38,777
Bank-owned life insurance		55,412			55,068
Deferred tax assets, net		2,773			5,779
Capitalized mortgage loan servicing rights, carried at fair value		16,906			21,400
Other intangibles		5,598			6,415
Goodwill		28,300			28,300
Accrued income and other assets		41,490			34,870
Total Assets	$	3,550,837		$	3,353,281

Liabilities and Shareholders’ Equity
Deposits
Non-interest bearing	$	883,138		$	879,549
Savings and interest-bearing checking		1,178,695			1,194,865
Reciprocal		416,200			182,072
Time		374,579			385,981
Brokered time		199,700			270,961
Total Deposits		3,052,312			2,913,428
Other borrowings		63,974			25,700
Subordinated debentures		39,439			39,388
Accrued expenses and other liabilities		54,867			35,771
Total Liabilities		3,210,592			3,014,287
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: 22,480,748 shares at September 30, 2019 and 23,579,725 shares at December 31, 2018		351,839			377,372
Accumulated deficit		(8,221	)		(28,270	)
Accumulated other comprehensive loss		(3,373	)		(10,108	)
Total Shareholders’ Equity		340,245			338,994
Total Liabilities and Shareholders’ Equity	$	3,550,837		$	3,353,281

See notes to interim condensed consolidated financial statements (unaudited)

Index

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
	(unaudited)						(unaudited)
	(In thousands, except per share amounts)

Interest Income
Interest and fees on loans	$	34,226		$	31,000		$	100,743		$	84,027
Interest on securities
Taxable		2,771			2,737			8,811			8,092
Tax-exempt		319			412			1,017			1,335
Other investments		495			303			1,449			898
Total Interest Income		37,811			34,452			112,020			94,352
Interest Expense
Deposits		6,236			3,976			17,938			9,472
Other borrowings and subordinated debentures		703			779			2,211			2,267
Total Interest Expense		6,939			4,755			20,149			11,739
Net Interest Income		30,872			29,697			91,871			82,613
Provision for loan losses		(271	)		(53	)		1,045			912
Net Interest Income After Provision for Loan Losses		31,143			29,750			90,826			81,701
Non-interest Income
Service charges on deposit accounts		2,883			3,166			8,323			9,166
Interchange income		2,785			2,486			7,744			7,236
Net gains (losses) on assets
Mortgage loans		5,677			2,745			13,590			8,571
Securities		-			93			304			(71	)
Mortgage loan servicing, net		(1,562	)		1,212			(4,684	)		4,668
Other		2,492			2,134			6,862			6,294
Total Non-interest Income		12,275			11,836			32,139			35,864
Non-interest Expense
Compensation and employee benefits		16,673			16,169			48,955			46,506
Occupancy, net		2,161			2,233			6,797			6,667
Data processing		2,282			2,051			6,597			6,180
Furniture, fixtures and equipment		1,023			1,043			3,058			3,029
Communications		733			727			2,219			2,111
Interchange expense		891			715			2,332			1,974
Loan and collection		714			531			1,976			1,900
Advertising		636			594			1,935			1,578
Legal and professional		541			477			1,281			1,311
FDIC deposit insurance		13			270			723			750
Merger related expenses		-			98			-			3,354
Other		2,181			1,832			6,557			5,276
Total Non-interest Expense		27,848			26,740			82,430			80,636
Income Before Income Tax		15,570			14,846			40,535			36,929
Income tax expense		3,125			2,921			7,979			7,026
Net Income	$	12,445		$	11,925		$	32,556		$	29,903
Net Income Per Common Share
Basic	$	0.55		$	0.49		$	1.41		$	1.29
Diluted	$	0.55		$	0.49		$	1.40		$	1.27

See notes to interim condensed consolidated financial statements (unaudited)

Index

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
	(unaudited - In thousands)

Net income	$	12,445		$	11,925		$	32,556		$	29,903
Other comprehensive income (loss)
Securities available for sale
Unrealized gains (losses) arising during period		1,567			(1,157	)		10,851			(6,220	)
Change in unrealized losses for which a portion of other than temporary impairment has been recognized in earnings		(53	)		(14	)		(55	)		(17	)
Reclassification adjustments for (gains) losses included in earnings		-			-			(137	)		45
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale		1,514			(1,171	)		10,659			(6,192	)
Income tax expense (benefit)		318			(246	)		2,238			(1,300	)
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale, net of tax		1,196			(925	)		8,421			(4,892	)
Derivative instruments
Unrealized gain (loss) arising during period		(72	)		389			(1,740	)		1,400
Reclassification adjustment for income recognized in earnings		(102	)		(73	)		(393	)		(132	)
Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments		(174	)		316			(2,133	)		1,268
Income tax expense (benefit)		(36	)		66			(447	)		266
Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments, net of tax		(138	)		250			(1,686	)		1,002
Other comprehensive income (loss)		1,058			(675	)		6,735			(3,890	)
Comprehensive income	$	13,503		$	11,250		$	39,291		$	26,013

See notes to interim condensed consolidated financial statements (unaudited)

Index

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

	Nine months ended September 30,
	2019			2018
	(unaudited - In thousands)
Net Income	$	32,556		$	29,903
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		422,557			351,486
Disbursements for loans held for sale		(451,572	)		(343,462	)
Provision for loan losses		1,045			912
Deferred income tax expense		1,216			6,972
Deferred loan fees and costs		(3,122	)		(3,681	)
Net depreciation, amortization of intangible assets and premiums and accretion of discounts on securities, loans and interest bearing deposits - time		4,427			4,560
Net gains on mortgage loans		(13,590	)		(8,571	)
Net (gains) losses on securities		(304	)		71
Share based compensation		1,348			1,293
Increase in accrued income and other assets		(2,149	)		(16,925	)
Increase (decrease) in accrued expenses and other liabilities		13,088			(1,930	)
Total Adjustments		(26,496	)		(9,275	)
Net Cash From Operating Activities		6,060			20,628
Cash Flow Used in Investing Activities
Proceeds from the sale of securities available for sale		44,305			31,445
Proceeds from maturities, prepayments and calls of securities available for sale		110,517			125,275
Purchases of securities available for sale		(123,238	)		(71,067	)
Proceeds from the sale of interest bearing deposits - time		-			2,474
Proceeds from the maturity of interest bearing deposits - time		100			3,728
Purchase of Federal Reserve Bank Stock		-			(2,034	)
Net increase in portfolio loans (loans originated, net of principal payments)		(213,116	)		(272,084	)
Proceeds from the sale of portfolio loans		50,516			27,577
Acquisition of TCSB Bancorp Inc., less cash received		-			23,516
Proceeds from bank-owned life insurance		470			474
Proceeds from the sale of other real estate and repossessed assets		1,438			1,777
Capital expenditures		(2,587	)		(2,812	)
Net Cash Used in Investing Activities		(131,595	)		(131,731	)
Cash Flow From Financing Activities
Net increase in total deposits		138,884			110,400
Net increase in other borrowings		18,355			18,903
Proceeds from Federal Home Loan Bank Advances		57,000			1,202,000
Payments of Federal Home Loan Bank Advances		(37,143	)		(1,210,197	)
Dividends paid		(12,507	)		(10,446	)
Proceeds from issuance of common stock		282			202
Repurchase of common stock		(26,284	)		-
Share based compensation withholding obligation		(879	)		(1,327	)
Net Cash From Financing Activities		137,708			109,535
Net Increase (Decrease) in Cash and Cash Equivalents		12,173			(1,568	)
Cash and Cash Equivalents at Beginning of Period		70,244			54,738
Cash and Cash Equivalents at End of Period	$	82,417		$	53,170
Cash paid during the period for
Interest	$	20,185		$	11,168
Income taxes		5,934			120
Operating leases		1,692			-
Transfers to other real estate and repossessed assets		1,901			960
Purchase of securities available for sale not yet settled		3,075			1,000
Securitization of portfolio loans		29,790			-
Right of use assets obtained in exchange for lease obligations		7,767			-
Transfer of loans to held for sale		36,622			27,577

See notes to interim condensed consolidated financial statements (unaudited)

Index

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity

	Common Stock			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
	(Dollars in thousands, except per share amounts)
Balances at July 1, 2019	$	351,894		$	(16,617	)	$	(4,431	)	$	330,846
Net income, three months ended September 30, 2019		-			12,445			-			12,445
Cash dividends declared, $.18 per share		-			(4,049	)		-			(4,049	)
Repurchase of 25,000 shares of common stock		(502	)		-			-			(502	)
Issuance of 1,900 shares of common stock		-			-			-			-
Share based compensation (issuance of 5,991 shares of common stock)		460			-			-			460
Share based compensation withholding obligation (withholding of 919 shares of common stock)		(13	)		-			-			(13	)
Other comprehensive income		-			-			1,058			1,058
Balances at September 30, 2019	$	351,839		$	(8,221	)	$	(3,373	)	$	340,245
Balances at July 1, 2018	$	389,196		$	(42,899	)	$	(9,214	)	$	337,083
Net income, three months ended September 30, 2018		-			11,925			-			11,925
Cash dividends declared, $.15 per share		-			(3,623	)		-			(3,623	)
Issuance of 8,340 shares of common stock		55			-			-			55
Share based compensation (issuance of zero shares of common stock)		445			-			-			445
Share based compensation withholding obligation (withholding of 382 shares of common stock)		(6	)		-			-			(6	)
Other comprehensive loss		-			-			(675	)		(675	)
Balances at September 30, 2018	$	389,690		$	(34,597	)	$	(9,889	)	$	345,204
Balances at January 1, 2019	$	377,372		$	(28,270	)	$	(10,108	)	$	338,994
Net income, nine months ended September 30, 2019		-			32,556			-			32,556
Cash dividends declared, $.54 per share		-			(12,507	)		-			(12,507	)
Repurchase of 1,204,688 shares of common stock		(26,284	)		-			-			(26,284	)
Issuance of 70,299 shares of common stock		282			-			-			282
Share based compensation (issuance of 92,617 shares of common stock)		1,348			-			-			1,348
Share based compensation withholding obligation (withholding of 57,205 shares of common stock)		(879	)		-			-			(879	)
Other comprehensive income		-			-			6,735			6,735
Balances at September 30, 2019	$	351,839		$	(8,221	)	$	(3,373	)	$	340,245
Balances at January 1, 2018	$	324,986		$	(54,054	)	$	(5,999	)	$	264,933
Net income, nine months ended September 30, 2018		-			29,903			-			29,903
Cash dividends declared, $.45 per share		-			(10,446	)		-			(10,446	)
Acquisition of TCSB Bancorp, Inc.		64,536			-			-			64,536
Issuance of 113,548 shares of common stock		202			-			-			202
Share based compensation (issuance of 81,919 shares of common stock)		1,293			-			-			1,293
Share based compensation withholding obligation (withholding of 87,767 shares of common stock)		(1,327	)		-			-			(1,327	)
Other comprehensive loss		-			-			(3,890	)		(3,890	)
Balances at September 30, 2018	$	389,690		$	(34,597	)	$	(9,889	)	$	345,204

See notes to interim condensed consolidated financial statements (unaudited)

Index

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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, 2018 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 September 30, 2019 and December 31, 2018, and the results of operations for the three and nine-month periods ended September 30, 2019 and 2018. The results of operations for the three and nine-month periods ended September 30, 2019, 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 2018 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:

•

Replaces the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost, which will reflect our estimate of credit losses over the full remaining expected life of the financial assets and will consider expected future changes in macroeconomic conditions.

•

Eliminates existing guidance for purchase credit impaired (“PCI”) loans, and requires recognition of the nonaccretable difference as an increase to the allowance for expected credit losses on financial assets purchased with more than insignificant credit deterioration since origination, which will be offset by an increase in the recorded investment of the related loans.

•	Requires inclusion of expected recoveries, limited to the cumulative amount of prior write-offs, when estimating the allowance for credit losses for in scope financial assets (including collateral dependent assets).

•

Amends existing impairment guidance for securities available for sale to incorporate an allowance, which will allow for reversals of credit impairments in the event that the credit of an issuer improves. Credit losses on securities available for sale are limited to the amount of the decline in fair value regardless of what the credit loss model would show for impairment.

•	Generally requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.

•	Is effective for us on January 1, 2020.

Index

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

We began evaluating this ASU in 2016 and established a company-wide, cross-discipline governance structure, which provides implementation oversight. We continue to test and refine our current expected credit loss models that satisfy the requirements of this ASU. Oversight and testing, as well as efforts to meet expanded disclosure requirements, will extend through the remainder of 2019. We expect that the allowance related to our loans will increase as it will cover credit losses over the full remaining expected life of the portfolio. We currently intend to estimate losses over approximately a two year forecast period using the Federal Open Market Committee median economic projections (which are typically published in March of each year) 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 currently expect the increase in the allowance for loan losses to be in the range of $9.0 million to $11.0 million, primarily driven by the longer contractual maturities of our mortgage and consumer installment loan segments. This estimated range is based on our September 30, 2019 loan portfolio and currently available economic forecasts. The mid-point of the range utilizes a two year forecast period and a two year reversion period. This estimated range also includes a qualitative adjustment to the allowance for loan losses. In addition, we currently expect this ASU to increase the allowance for losses related to unfunded loan commitments between $0.5 million and $1.5 million. These estimates are subject to further refinement based on continuing reviews, testing, enhancements and approvals of models, methodologies and judgments. The ultimate impact will depend upon the nature and characteristics of our loan portfolio at the adoption date, the macroeconomic conditions and forecasts at that date, further regulatory or accounting guidance and other management judgments. We currently do not expect to record any allowance for loss on available for sale securities. The ultimate impact will depend upon the nature and characteristics of our securities available for sale (including issuer specific matters) at the adoption date, the macroeconomic conditions and forecasts at that date, and other management judgments.

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 is effective for us on January 1, 2020, and is not expected to have a material impact on our consolidated operating results or financial condition.

Index

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. This ASU amends existing guidance related to the accounting for leases. These amendments, among other things, require lessees to account for most leases on the balance sheet while recognizing expense on the income statement in a manner similar to existing guidance. For lessors the guidance modifies the classification criteria and the accounting for sales-type and direct finance leases. This amended guidance was effective for us on January 1, 2019 and did not have a material impact on our consolidated operating results or financial condition. Based on our operating leases that we currently have in place we do not expect a material change in the recognition, measurement and presentation of lease expense or impact on cash flow. The primary impact was the recognition of certain operating leases on our Condensed Consolidated Statements of Financial Condition which resulted in the recording of right of use (“ROU”) assets and offsetting lease liabilities each totaling approximately $7.7 million at January 1, 2019. See note #16.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities”. This new ASU amends the hedge accounting model in Topic 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. This amended guidance was effective for us on January 1, 2019, and did not have a material impact on our consolidated operating results or financial condition.

Index

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

3.	Securities

Securities available for sale consist of the following:

	Amortized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
September 30, 2019
U.S. agency	$	15,145	$	153	$	15	$	15,283
U.S. agency residential mortgage-backed		146,128		1,806		214		147,720
U.S. agency commercial mortgage-backed		11,182		155		18		11,319
Private label mortgage-backed		31,195		686		55		31,826
Other asset backed		94,799		185		199		94,785
Obligations of states and political subdivisions		99,352		1,880		93		101,139
Corporate		32,444		1,237		3		33,678
Trust preferred		1,966		-		146		1,820
Foreign government		2,020		4		2		2,022
Total	$	434,231	$	6,106	$	745	$	439,592

December 31, 2018
U.S. agency	$	20,198	$	9	$	193	$	20,014
U.S. agency residential mortgage-backed		124,777		817		1,843		123,751
U.S. agency commercial mortgage-backed		5,909		1		184		5,726
Private label mortgage-backed		29,735		321		637		29,419
Other asset backed		83,481		86		248		83,319
Obligations of states and political subdivisions		130,244		257		2,946		127,555
Corporate		34,866		29		586		34,309
Trust preferred		1,964		-		145		1,819
Foreign government		2,050		-		36		2,014
Total	$	433,224	$	1,520	$	6,818	$	427,926

Index

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(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)

September 30, 2019
U.S. agency	$	2,189	$	4	$	2,888	$	11	$	5,077	$	15
U.S. agency residential mortgage-backed		26,084		33		16,902		181		42,986		214
U.S. agency commercial mortgage-backed		1,987		12		882		6		2,869		18
Private label mortgage- backed		5,636		6		612		49		6,248		55
Other asset backed		23,926		100		11,487		99		35,413		199
Obligations of states and political subdivisions		14,457		37		4,362		56		18,819		93
Corporate		285		2		999		1		1,284		3
Trust preferred		900		100		920		46		1,820		146
Foreign government		-		-		1,519		2		1,519		2
Total	$	75,464	$	294	$	40,571	$	451	$	116,035	$	745

December 31, 2018
U.S. agency	$	7,150	$	46	$	11,945	$	147	$	19,095	$	193
U.S. agency residential mortgage-backed		18,374		180		48,184		1,663		66,558		1,843
U.S. agency commercial mortgage-backed		566		3		5,094		181		5,660		184
Private label mortgage-backed		8,273		57		16,145		580		24,418		637
Other asset backed		53,043		160		10,235		88		63,278		248
Obligations of states and political subdivisions		25,423		262		80,701		2,684		106,124		2,946
Corporate		17,758		343		9,222		243		26,980		586
Trust preferred		939		61		880		84		1,819		145
Foreign government		-		-		2,014		36		2,014		36
Total	$	131,526	$	1,112	$	184,420	$	5,706	$	315,946	$	6,818

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).

Index

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

U.S. agency, U.S. agency residential mortgage-backed securities and U.S. agency commercial mortgage backed securities — at September 30, 2019, we had 26 U.S. agency, 98 U.S. agency residential mortgage-backed and eight U.S. agency commercial mortgage-backed securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to increases in interest rates since acquisition and widening spreads to Treasury bonds. As management does not intend to liquidate these securities 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 are deemed to be other than temporary.

Private label mortgage backed securities — at September 30, 2019, we had 12 of this type of security whose fair value is less than amortized cost. Unrealized losses are primarily due to credit spread widening and increases in interest rates since their 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. See further discussion below.

As management does not intend to liquidate these securities 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 other declines discussed above are deemed to be other than temporary.

Other asset backed — at September 30, 2019, we had 40 other asset backed securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening and increases in interest rates since acquisition. As management does not intend to liquidate these securities 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 are deemed to be other than temporary.

Obligations of states and political subdivisions — at September 30, 2019, we had 59 municipal securities whose fair value is less than amortized cost. The unrealized losses are primarily due to wider benchmark pricing spreads and increases in interest rates since acquisition. As management does not intend to liquidate these securities 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 are deemed to be other than temporary.

Corporate — at September 30, 2019, we had two corporate securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening and increases in interest rates since acquisition. As management does not intend to liquidate these securities 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 are deemed to be other than temporary.

Index

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Trust preferred securities — at September 30, 2019, 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 $0.90 million as of September 30, 2019, continues to have satisfactory credit metrics and make interest payments. As management does not intend to liquidate this security and it is more likely than not that we will not be required to sell this security prior to recovery of the unrealized loss, this decline is not deemed to be other than temporary.

Foreign government — at September 30, 2019, we had one foreign government security whose fair value is less than amortized cost. The unrealized loss is primarily due to increases in interest rates since acquisition. As management does not intend to liquidate this security and it is more likely than not that we will not be required to sell this security prior to recovery of this unrealized loss, this decline is not 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 and nine month periods ended September 30, 2019 and 2018, respectively.

At September 30, 2019, 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	$	645	$	647	$	1,292
Amortized cost		552		479		1,031
Non-credit unrealized loss		-		-		-
Unrealized gain		93		168		261
Cumulative credit related OTTI		757		457		1,214

Both of these securities are receiving principal and interest payments similar to principal reductions in the underlying collateral and have unrealized gains at September 30, 2019. 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 these securities is now less than previously recorded credit related OTTI amounts.

Index

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

	Three months ended September 30,					Nine months ended September 30,
	2019			2018		2019			2018
	(In thousands)					(In thousands)
Balance at beginning of period	$	1,594		$	1,594	$	1,594		$	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		-			-		-			-
Reduction(1)		(380	)		-		(380	)		-
Balance at end of period	$	1,214		$	1,594	$	1,214		$	1,594

⁽¹⁾During the third quarter of 2019 one security with previously recorded OTTI was settled and balance is now zero.

The amortized cost and fair value of securities available for sale at September 30, 2019, by contractual maturity, follow:

	Amortized Cost		Fair Value
	(In thousands)
Maturing within one year	$	13,331	$	13,347
Maturing after one year but within five years		53,809		54,524
Maturing after five years but within ten years		47,726		49,239
Maturing after ten years		36,061		36,832
		150,927		153,942
U.S. agency residential mortgage-backed		146,128		147,720
U.S. agency commercial mortgage-backed		11,182		11,319
Private label mortgage-backed		31,195		31,826
Other asset backed		94,799		94,785
Total	$	434,231	$	439,592

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 nine month periods ending September 30, follows:

			Realized
	Proceeds		Gains (1)		Losses
	(In thousands)
2019	$	44,305	$	169	$	32
2018	$	31,445	$	81	$	126

(1)	2018 excludes a $0.144 million gain on the sale of 1,000 VISA class B shares.

Index

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(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 nine months ended September 30, 2019 and 2018 we recognized gains (losses) on these preferred stocks of $0.167 million and $(0.170) million, respectively, that are included in net gains (losses) on securities in the Condensed Consolidated Statements of Operations. Zero and $(0.170) million of these gains (losses) during the nine months ended September 30, 2019 and 2018, respectively relate to preferred stock still held at each respective period end.

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.

An analysis of the allowance for loan losses by portfolio segment for the three months ended September 30, follows:

	Commercial			Mortgage			Installment			Subjective Allocation		Total
	(In thousands)
2019
Balance at beginning of period	$	8,121		$	8,062		$	1,293		$	8,427	$	25,903
Additions (deductions)
Provision for loan losses		(810	)		83			289			167		(271	)
Recoveries credited to the allowance		1,215			235			202			-		1,652
Loans charged against the allowance		(303	)		(397	)		(436	)		-		(1,136	)
Balance at end of period	$	8,223		$	7,983		$	1,348		$	8,594	$	26,148

2018
Balance at beginning of period	$	6,073		$	8,296		$	848		$	8,287	$	23,504
Additions (deductions)
Provision for loan losses		(907	)		415			(25	)		464		(53	)
Recoveries credited to the allowance		1,418			192			298			-		1,908
Loans charged against the allowance		(225	)		(448	)		(285	)		-		(958	)
Balance at end of period	$	6,359		$	8,455		$	836		$	8,751	$	24,401

Index

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

An analysis of the allowance for loan losses by portfolio segment for the nine months ended September 30, follows:

	Commercial			Mortgage			Installment			Subjective Allocation			Total
	(In thousands)
2019
Balance at beginning of period	$	7,090		$	7,978		$	895		$	8,925		$	24,888
Additions (deductions)
Provision for loan losses		85			270			1,021			(331	)		1,045
Recoveries credited to the allowance		1,720			786			603			-			3,109
Loans charged against the allowance		(672	)		(1,051	)		(1,171	)		-			(2,894	)
Balance at end of period	$	8,223		$	7,983		$	1,348		$	8,594		$	26,148

2018
Balance at beginning of period	$	5,595		$	8,733		$	864		$	7,395		$	22,587
Additions (deductions)
Provision for loan losses		(1,404	)		778			182			1,356			912
Recoveries credited to the allowance		2,458			549			761			-			3,768
Loans charged against the allowance		(290	)		(1,605	)		(971	)		-			(2,866	)
Balance at end of period	$	6,359		$	8,455		$	836		$	8,751		$	24,401

Index

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Allowance for loan losses and recorded investment in loans by portfolio segment follows:

	Commercial		Mortgage		Installment		Subjective Allocation		Total
	(In thousands)
September 30, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	871	$	4,610	$	297	$	-	$	5,778
Collectively evaluated for impairment		7,352		3,373		1,051		8,594		20,370
Loans acquired with deteriorated credit quality		-		-		-		-		-
Total ending allowance for loan losses balance	$	8,223	$	7,983	$	1,348	$	8,594	$	26,148

Loans
Individually evaluated for impairment	$	7,776	$	42,590	$	3,223			$	53,589
Collectively evaluated for impairment		1,182,825		1,031,163		460,973				2,674,961
Loans acquired with deteriorated credit quality		1,421		582		329				2,332
Total loans recorded investment		1,192,022		1,074,335		464,525				2,730,882
Accrued interest included in recorded investment		3,005		4,300		1,131				8,436
Total loans	$	1,189,017	$	1,070,035	$	463,394			$	2,722,446

December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment	$	1,305	$	4,799	$	206	$	-	$	6,310
Collectively evaluated for impairment		5,785		3,179		689		8,925		18,578
Loans acquired with deteriorated credit quality		-		-		-		-		-
Total ending allowance for loan losses balance	$	7,090	$	7,978	$	895	$	8,925	$

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$0.00	23	$509

10-Q	2019-11-01	Quarter: 2019-09-30
10-Q	2019-08-02	Quarter: 2019-06-30
10-Q	2019-05-03	Quarter: 2019-03-31
10-K	2019-03-07	Annual: 2018-12-31
10-Q	2018-11-02	Quarter: 2018-09-30
10-Q	2018-08-03	Quarter: 2018-06-30
10-Q	2018-05-04	Quarter: 2018-03-31
10-K	2018-03-07	Annual: 2017-12-31
10-Q	2017-11-03	Quarter: 2017-09-30
10-Q	2017-08-04	Quarter: 2017-06-30
10-Q	2017-05-03	Quarter: 2017-03-31
10-K	2017-03-07	Annual: 2016-12-31
10-Q	2016-11-03	Quarter: 2016-09-30
10-Q	2016-08-04	Quarter: 2016-06-30
10-Q	2016-05-04	Quarter: 2016-03-31
10-K	2016-03-07	Annual: 2015-12-31
10-Q	2015-11-04	Quarter: 2015-09-30
10-Q	2015-08-05	Quarter: 2015-06-30
10-Q	2015-05-06	Quarter: 2015-03-31
10-K	2015-03-06	Annual: 2014-12-31
10-Q	2014-11-06	Quarter: 2014-09-30
10-Q	2014-08-05	Quarter: 2014-06-30
10-Q	2014-05-05	Quarter: 2014-03-31
10-K	2014-03-07	Annual: 2013-12-31
10-Q	2013-11-07	Quarter: 2013-09-30
10-Q	2013-08-08	Quarter: 2013-06-30
10-Q	2013-05-08	Quarter: 2013-03-31
10-K	2013-03-13	Annual: 2012-12-31
10-Q	2012-11-09	Quarter: 2012-09-30
10-Q	2012-08-09	Quarter: 2012-06-30
10-Q	2012-05-09	Quarter: 2012-03-31
10-K	2012-03-13	Annual: 2011-12-31
10-Q	2011-11-09	Quarter: 2011-09-30
10-Q	2011-08-09	Quarter: 2011-06-30
10-Q	2011-05-09	Quarter: 2011-03-31
10-K	2011-03-10	Annual: 2010-12-31
10-Q	2010-11-04	Quarter: 2010-09-30
10-Q	2010-08-06	Quarter: 2010-06-30
10-Q	2010-05-11	Quarter: 2010-03-31
10-K	2010-02-26	Annual: 2009-12-31

8-K	2020-01-23	Earnings, Exhibits
8-K	2019-10-31	Other Events, Exhibits
8-K	2019-10-24	Earnings, Exhibits
8-K	2019-10-22	Exhibits
8-K	2019-08-26	Other Events, Exhibits
8-K	2019-07-25	Earnings, Exhibits
8-K	2019-06-27	Officers, Exhibits
8-K	2019-06-19	Other Events, Exhibits
8-K	2019-05-22	Other Events, Exhibits
8-K	2019-04-23	Shareholder Vote
8-K	2019-04-23	Regulation FD, Exhibits
8-K	2019-04-22	Earnings, Exhibits
8-K	2019-01-29	Earnings, Exhibits
8-K	2018-12-18	Other Events, Exhibits
8-K	2018-10-25	Earnings, Exhibits
8-K	2018-07-26	Earnings, Exhibits
8-K	2018-04-24	Regulation FD, Exhibits
8-K	2018-04-24	Exhibits
8-K	2018-04-24	Exhibits
8-K	2018-04-23	Earnings, Exhibits
8-K	2018-02-15	Other Events, Exhibits
8-K	2018-01-30	Earnings, Exhibits
8-K	2018-01-01

EX-31.1	ex31_1.htm
EX-31.2	ex31_2.htm
EX-32.1	ex32_1.htm
EX-32.2	ex32_2.htm