INDEPENDENT BANK CORP /MI/ - Quarter Report: 2016 September (Form 10-Q)

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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, 2016

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)

(Registrant's telephone number, including area code)

NONE

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

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 or smaller reporting company.

Large accelerated filer ☐

Accelerated filer  ☒

Non-accelerated filer  ☐

Smaller reporting company  ☐

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		21,245,536
Class		Outstanding at November 2, 2016

 

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INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

 

INDEX

		Number(s)
PART I -	Financial Information
Item 1.	Condensed Consolidated Statements of Financial Condition September 30, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Operations Three- and Nine-month periods ended September 30, 2016 and 2015	4
	Condensed Consolidated Statements of Comprehensive Income Three- and Nine-month periods ended September 30, 2016 and 2015	5
	Condensed Consolidated Statements of Cash Flows Nine-month periods ended September 30, 2016 and 2015	6
	Condensed Consolidated Statements of Shareholders' Equity Nine-month periods ended September 30, 2016 and 2015	7
	Notes to Interim Condensed Consolidated Financial Statements	8-59
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	60-86
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	87
Item 4.	Controls and Procedures	87
PART II -	Other Information
Item 1A	Risk Factors	88
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	88
Item 6.	Exhibits	89

 

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;

•

the failure of assumptions underlying our estimate of probable incurred losses from vehicle service contract payment plan counterparty contingencies, including our assumptions regarding future cancellations of vehicle service contracts, the value to us of collateral that may be available to recover funds due from our counterparties, and our ability to enforce the contractual obligations of our counterparties to pay amounts owing to us;

•

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, 2015, 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.

 

Part I - Item 1.

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Financial Condition

     

		September 30, 2016				December 31, 2015
		(unaudited)
		(In thousands, except share amounts)
Assets
Cash and due from banks		$	38,610			$	54,260
Interest bearing deposits			75,706				31,523
Cash and Cash Equivalents			114,316				85,783
Interest bearing deposits - time			7,233				11,866
Trading securities			152				148
Securities available for sale			603,112				585,484
Federal Home Loan Bank and Federal Reserve Bank stock, at cost			15,507				15,471
Loans held for sale, carried at fair value			38,008				27,866
Loans
Commercial			784,976				748,398
Mortgage			522,833				498,036
Installment			268,357				234,017
Payment plan receivables			31,188				34,599
Total Loans			1,607,354				1,515,050
Allowance for loan losses			(22,043	)			(22,570	)
Net Loans			1,585,311				1,492,480
Other real estate and repossessed assets			4,989				7,150
Property and equipment, net			40,375				43,103
Bank-owned life insurance			53,779				54,402
Deferred tax assets, net			32,156				39,635
Capitalized mortgage loan servicing rights			11,048				12,436
Vehicle service contract counterparty receivables, net			2,608				7,229
Other intangibles			2,019				2,280
Accrued income and other assets			27,706				23,733
Total Assets		$	2,538,319			$	2,409,066
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing		$	725,166			$	659,793
Savings and interest-bearing checking			1,009,354				988,174
Reciprocal			46,636				50,207
Time			425,804				387,789
Total Deposits			2,206,960				2,085,963
Other borrowings			11,527				11,954
Subordinated debentures			35,569				35,569
Vehicle service contract counterparty payables			538				797
Accrued expenses and other liabilities			32,823				23,691
Total Liabilities			2,287,417				2,157,974
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: 21,227,974 shares at September 30, 2016 and 22,251,373 shares at December 31, 2015			323,303				339,462
Accumulated deficit			(69,386	)			(82,334	)
Accumulated other comprehensive loss			(3,015	)			(6,036	)
Total Shareholders’ Equity			250,902				251,092
Total Liabilities and Shareholders’ Equity		$	2,538,319			$	2,409,066

See notes to interim condensed consolidated financial statements (unaudited)

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Three months ended September 30,								Nine months ended September 30,
		2016				2015				2016				2015
		(unaudited)								(unaudited)
		(In thousands, except per share amounts)
Interest Income
Interest and fees on loans		$	18,597			$	17,869			$	55,361			$	52,859
Interest on securities
Taxable			2,537				1,901				7,261				5,528
Tax-exempt			330				228				860				667
Other investments			281				295				884				922
Total Interest Income			21,745				20,293				64,366				59,976
Interest Expense
Deposits			1,254				987				3,520				2,961
Other borrowings			493				465				1,455				1,382
Total Interest Expense			1,747				1,452				4,975				4,343
Net Interest Income			19,998				18,841				59,391				55,633
Provision for loan losses			(175	)			(244	)			(1,439	)			(1,037	)
Net Interest Income After Provision for Loan Losses			20,173				19,085				60,830				56,670
Non-Interest Income
Service charges on deposit accounts			3,281				3,294				9,164				9,261
Interchange income			1,943				2,169				5,797				6,551
Net gains (losses) on assets
Mortgage loans			3,556				1,812				7,727				5,735
Securities			(45	)			45				302				97
Mortgage loan servicing, net			858				(556	)			(454	)			476
Title insurance fees			319				281				860				874
Net gain on branch sale			-				1,193				-				1,193
Other			1,796				1,881				5,701				5,881
Total Non-Interest Income			11,708				10,119				29,097				30,068
Non-Interest Expense
Compensation and employee benefits			13,031				12,029				36,912				35,605
Data processing			1,971				2,001				6,008				5,958
Occupancy, net			1,919				1,940				5,982				6,399
Furniture, fixtures and equipment			990				998				2,939				2,915
Communications			670				754				2,280				2,184
Loan and collection			568				816				1,964				2,938
Advertising			455				406				1,410				1,338
Legal and professional			420				519				1,178				1,352
FDIC deposit insurance			187				350				852				1,044
Interchange expense			276				279				809				859
Credit card and bank service fees			203				197				588				602
Net (gains) losses on other real estate and repossessed assets			263				5				98				(173	)
Provision for loss reimbursement on sold loans			45				(35	)			30				(59	)
Costs related to unfunded lending commitments			73				26				6				46
Vehicle service contract counterparty contingencies			(39	)			30				(10	)			89
Other			1,497				1,564				4,423				4,512
Total Non-Interest Expense			22,529				21,879				65,469				65,609
Income Before Income Tax			9,352				7,325				24,458				21,129
Income tax expense			2,979				2,278				7,547				6,682
Net Income		$	6,373			$	5,047			$	16,911			$	14,447
Net Income Per Common Share
Basic		$	0.30			$	0.22			$	0.79			$	0.63
Diluted		$	0.30			$	0.22			$	0.78			$	0.62
Dividends Per Common Share
Declared		$	0.08			$	0.06			$	0.24			$	0.18
Paid		$	0.08			$	0.06			$	0.24			$	0.18

See notes to interim condensed consolidated financial statements (unaudited)

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Three months ended September 30,								Nine months ended September 30,
		2016				2015				2016				2015
		(unaudited)								(unaudited)
		(In thousands)								(In thousands)
Net income		$	6,373			$	5,047			$	16,911			$	14,447
Other comprehensive income, before tax
Securities available for sale
Unrealized gains arising during period			451				1,366				4,899				1,830
Change in unrealized gains for which a portion of other than temporary impairment has been recognized in earnings			(24	)			10				47				-
Reclassification adjustments for gains included in earnings			(15	)			-				(298	)			(75	)
Unrealized gains recognized in other comprehensive income on securities available for sale			412				1,376				4,648				1,755
Income tax expense			144				482				1,627				615
Unrealized gains recognized in other comprehensive income on available for sale securities, net of tax			268				894				3,021				1,140
Other comprehensive income			268				894				3,021				1,140
Comprehensive income		$	6,641			$	5,941			$	19,932			$	15,587

See notes to interim condensed consolidated financial statements (unaudited)

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Nine months ended September 30,
		2016				2015
		(unaudited - In thousands)
Net Income		$	16,911			$	14,447
Adjustments to Reconcile Net Income to Net Cash From Operating Activities
Proceeds from sales of loans held for sale			222,610				227,381
Disbursements for loans held for sale			(225,025	)			(223,446	)
Provision for loan losses			(1,439	)			(1,037	)
Deferred federal income tax expense			8,726				7,210
Deferred loan fees			(1,634	)			(1,189	)
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities, loans and interest bearning deposits - time			3,831				3,345
Net gains on mortgage loans			(7,727	)			(5,735	)
Net gains on securities			(302	)			(97	)
Net (gains) losses on other real estate and repossessed assets			98				(173	)
Vehicle service contract counterparty contingencies			(10	)			89
Share based compensation			1,200				1,153
Gain on branch sale			-				(1,193	)
Net gain on sale of fixed assets			(2	)			(152	)
Increase in accrued income and other assets			(5,540	)			(359	)
Increase (decrease) in accrued expenses and other liabilities			1,409				(684	)
Total Adjustments			(3,805	)			5,113
Net Cash From Operating Activities			13,106				19,560
Cash Flow Used in Investing Activities
Proceeds from the sale of securities available for sale			56,451				11,786
Proceeds from the maturity of securities available for sale			32,590				25,458
Principal payments received on securities available for sale			117,513				94,333
Purchases of securities available for sale			(213,839	)			(195,623	)
Purchases of interest bearing deposits - time			-				(4,100	)
Proceeds from the maturity of interest bearing deposits - time			4,613				4,576
Purchase of Federal Reserve Bank stock			(407	)			(272	)
Redemption of Federal Reserve Bank stock			371				391
Redemption of Federal Home Loan Bank stock			-				4,514
Net increase in portfolio loans (loans originated, net of principal payments)			(73,673	)			(56,407	)
Purchase of portfolio loans			(15,000	)			-
Net cash paid in branch sale			-				(7,229	)
Proceeds from the collection of vehicle service contract counterparty receivables			4,671				255
Proceeds from the sale of other real estate and repossessed assets			3,854				5,619
Proceeds from life insurance			2,235				-
Proceeds from the sale of property and equipment			23				490
Capital expenditures			(1,717	)			(2,925	)
Net Cash Used in Investing Activities			(82,315	)			(119,134	)
Cash Flow From Financing Activities
Net increase in total deposits			120,997				145,313
Net increase (decrease) in other borrowings			5				(1	)
Payments of Federal Home Loan Bank Advances			(432	)			(399	)
Net decrease in vehicle service contract counterparty payables			(259	)			(27	)
Dividends paid			(5,149	)			(4,118	)
Proceeds from issuance of common stock			61				103
Repurchase of common stock			(16,854	)			(9,025	)
Share based compensation withholding obligation			(627	)			(1,091	)
Net Cash From Financing Activities			97,742				130,755
Net Increase in Cash and Cash Equivalents			28,533				31,181
Cash and Cash Equivalents at Beginning of Period			85,783				74,016
Cash and Cash Equivalents at End of Period		$	114,316			$	105,197
Cash paid during the period for
Interest		$	4,811			$	4,302
Income taxes			437				229
Transfers to other real estate and repossessed assets			1,791				2,843
Transfer of payment plan receivables to vehicle service contract counterparty receivables			40				431
Purchase of securities available for sale not yet settled			7,440				7,717

See notes to interim condensed consolidated financial statements (unaudited)

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Nine months ended September 30,
		2016				2015
		(unaudited)
		(In thousands)
Balance at beginning of period		$	251,092			$	250,371
Cumulative effect of change in accounting principle			1,247				-
Balance at beginning of period, as adjusted			252,339				250,371
Net income			16,911				14,447
Cash dividends declared			(5,149	)			(4,118	)
Issuance of common stock			61				103
Share based compensation			1,200				1,153
Share based compensation withholding obligation			(627	)			(1,091	)
Repurchase of common stock			(16,854	)			(9,025	)
Net change in accumulated other comprehensive loss, net of related tax effect			3,021				1,140
Balance at end of period		$	250,902			$	252,980

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, 2015 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, 2016 and December 31, 2015, and the results of operations for the three and nine-month periods ended September 30, 2016 and 2015.  The results of operations for the three and nine-month periods ended September 30, 2016, 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, the determination of vehicle service contract counterparty contingencies, the valuation of originated mortgage loan servicing rights and the valuation of deferred tax assets.  Refer to our 2015 Annual Report on Form 10-K for a disclosure of our accounting policies.

2.	New Accounting Standards

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-12, “Compensation – Stock Compensation (Topic 718) – Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period”.  This ASU amends existing guidance related to the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. These amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.  The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. This amended guidance became effective for us on January 1, 2016, and did not have a material impact on our consolidated operating results or financial condition.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this ASU specifies the accounting for some costs to obtain or fulfill a contract with a customer.  This amended guidance is effective for us on January 1, 2018, and is not expected to have a material impact on our consolidated operating results or financial condition.

 

(unaudited)

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities”.  This ASU amends existing guidance related to the accounting for certain financial assets and liabilities. These amendments, among other things, requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. This amended guidance is effective for us on January 1, 2018, and is not expected to have a material impact on our consolidated operating results or financial condition.

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, requires 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 is effective for us on January 1, 2019, and is not expected to have a material impact on our consolidated operating results or financial condition.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (718) Improvements to Employee Share-Based Payment Accounting”.  This ASU amends existing guidance in an effort to simplify certain aspects of accounting for share-based payments. The areas for simplification in this ASU include income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.  This amended guidance is effective for us on January 1, 2017, with early adoption permitted.  We adopted this amended guidance during the second quarter of 2016 using a modified retrospective approach.  The impact of this adoption was to adjust our January 1, 2016 Condensed Consolidated Statement of Financial Position to reflect cumulative effect adjustments as follows:

		January 1, 2016 Originally Presented				Cumulative Retrospective Adjustments				January 1, 2016 Adjusted
		(Dollars in thousands)
Deferred tax assets		$	39,635			$	1,247			$	40,882
Total assets		$	2,409,066			$	1,247			$	2,410,313
Common stock		$	339,462			$	62			$	339,524
Accumulated deficit		$	(82,334	)		$	1,185			$	(81,149	)
Total Shareholders’ Equity		$	251,092			$	1,247			$	252,339
Total Liabilities and Shareholders’ Equity		$	2,409,066			$	1,247			$	2,410,313

 

(unaudited)

The adjustments above reflect the recording of $1.23 million of unrealized excess benefits on share based compensation and $0.06 million (impact to equity of $0.02 million after consideration of deferred taxes)  for the impact of making an accounting policy election to account for forfeitures as they occur.  After January 1, 2016, excess tax benefits or deficiencies resulting from share-based payments will be recognized as tax benefit or expense when they occur.  Tax benefits of zero and $0.3 million were recorded during the three and nine month periods ended September 30, 2016, respectively as a result of share awards vesting during the periods.  In addition, we have elected to apply the  amendments related to the presentation of excess tax benefits in the statement of cash flows on a prospective basis.

In June 2016, the FASB issued 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 will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, allowances will be recorded rather than reducing the carrying amount as is done under the current other-than-temporary impairment model. This ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. This amended guidance is effective for us on January 1, 2020.  We have not yet determined what the impact will be on our consolidated operating results or financial condition.

3.	Securities

Securities available for sale consist of the following:

		Amortized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
September 30, 2016
U.S. agency		$	29,482			$	508			$	41			$	29,949
U.S. agency residential mortgage-backed			168,233				1,857				132				169,958
U.S. agency commercial mortgage-backed			13,694				214				16				13,892
Private label mortgage-backed			33,482				374				278				33,578
Other asset backed			142,058				435				305				142,188
Obligations of states and political subdivisions			156,539				2,115				665				157,989
Corporate			50,787				792				124				51,455
Trust preferred			2,921				-				471				2,450
Foreign government			1,635				18				0				1,653
Total		$	598,831			$	6,313			$	2,032			$	603,112
December 31, 2015
U.S. agency		$	47,283			$	309			$	80			$	47,512
U.S. agency residential mortgage-backed			195,055				1,584				583				196,056
U.S. agency commercial mortgage-backed			34,017				94				83				34,028
Private label mortgage-backed			5,061				161				319				4,903
Other asset backed			117,431				54				581				116,904
Obligations of states and political subdivisions			145,193				941				1,150				144,984
Corporate			38,895				9				290				38,614
Trust preferred			2,916				-				433				2,483
Total		$	585,851			$	3,152			$	3,519			$	585,484

 

(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, 2016
U.S. agency		$	1,604			$	3			$	8,147			$	38			$	9,751			$	41
U.S. agency residential mortgage-backed			22,982				48				19,099				84				42,081				132
U.S. agency commercial mortgage-backed			3,455				14				257				2				3,712				16
Private label mortgage- backed			12,202				18				1,429				260				13,631				278
Other asset backed			22,147				96				16,998				209				39,145				305
Obligations of states and political subdivisions			17,853				91				15,203				574				33,056				665
Corporate			3,776				14				2,892				110				6,668				124
Trust preferred			-				-				2,450				471				2,450				471
Total		$	84,019			$	284			$	66,475			$	1,748			$	150,494			$	2,032
December 31, 2015
U.S. agency		$	12,164			$	47			$	6,746			$	33			$	18,910			$	80
U.S. agency residential mortgage-backed			57,538				316				23,340				267				80,878				583
U.S. agency commercial mortgage-backed			16,747				60				2,247				23				18,994				83
Private label mortgage- backed			-				-				3,393				319				3,393				319
Other asset backed			102,660				434				5,189				147				107,849				581
Obligations of states and political subdivisions			52,493				597				12,240				553				64,733				1,150
Corporate			30,550				290				-				-				30,550				290
Trust preferred			-				-				2,483				433				2,483				433
Total		$	272,152			$	1,744			$	55,638			$	1,775			$	327,790			$	3,519

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.

 

(unaudited)

U.S. agency, U.S. agency residential mortgage-backed securities and U.S. agency commercial mortgage backed securities — at September 30, 2016, we had 21 U.S. agency, 59 U.S. agency residential mortgage-backed and seven 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, 2016, we had 24 of this type of security whose fair value is less than amortized cost.  The unrealized losses are primarily attributed to four securities purchased prior to 2016.  Two of these four securities have an impairment in excess of 10% and three of these holdings have been impaired for more than 12 months.  The unrealized losses are largely attributable to credit spread widening on these four securities since their acquisition.

These four securities are receiving principal and interest payments. Most of these transactions are pass-through structures, receiving pro rata principal and interest payments from a dedicated collateral pool. The nonreceipt of interest cash flows is not expected and thus not presently considered in our discounted cash flow methodology discussed below.

These four private label mortgage-backed securities are 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.  Our cash flow analysis forecasts complete recovery of our cost basis for all four of these securities whose fair value is less than amortized cost.

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, 2016, we had 70 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, 2016, we had 100 municipal securities whose fair value is less than amortized cost.  The unrealized losses are primarily due to increases in interest rates since acquisition.  One of these securities has an impairment in excess of 10%.  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, 2016, we had seven 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.

 

(unaudited)

Trust preferred securities — at September 30, 2016, we had three trust preferred securities whose fair value is less than amortized cost. All 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 three securities is rated by two major rating agencies as investment grade, while one (a Bank of America issuance) is rated below investment grade by two major rating agencies and 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 $0.7 million as of September 30, 2016, continues to have satisfactory credit metrics and make interest payments.

The following table breaks out our trust preferred securities in further detail as of September 30, 2016 and December 31, 2015:

		September 30, 2016								December 31, 2015
		Fair Value				Net Unrealized Loss				Fair Value				Net Unrealized Loss
		(In thousands)
Trust preferred securities
Rated issues		$	1,735			$	(186	)		$	1,690			$	(226	)
Unrated issues			715				(285	)			793				(207	)

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.

We recorded no credit related OTTI charges in our Condensed Consolidated Statements of Operations related to securities available for sale during the three or nine month periods ended September 30, 2016 and 2015, respectively.

At September 30, 2016, three private label mortgage-backed securities had credit related OTTI and are summarized as follows:

		Senior Security				Super Senior Security				Senior Support Security				Total
		(In thousands)
As of September 30, 2016
Fair value		$	1,346			$	1,135			$	75			$	2,556
Amortized cost			1,303				1,064				-				2,367
Non-credit unrealized loss			-				-				-				-
Unrealized gain			43				71				75				189
Cumulative credit related OTTI			757				457				380				1,594
Credit related OTTI recognized in our Condensed
Consolidated Statements of Operations
For the three months ended September 30,
2016		$	-			$	-			$	-			$	-
2015			-				-				-				-
For the nine months ended September 30,
2016			-				-				-				-
2015			-				-				-				-

 

(unaudited)

Each of these securities is receiving principal and interest payments similar to principal reductions in the underlying collateral.  All three of these securities have unrealized gains at September 30, 2016.  The original amortized cost 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.

A roll forward of credit losses recognized in earnings on securities available for sale for the three and nine month periods ending September 30, follows:

		Three months ended September 30,								Nine months ended September 30,
		2016				2015				2016				2015
		(In thousands)								(In thousands)
Balance at beginning of period		$	1,844			$	1,844			$	1,844			$	1,844
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		$	1,844			$	1,844			$	1,844			$	1,844

The amortized cost and fair value of securities available for sale at September 30, 2016, by contractual maturity, follow:

		Amortized Cost				Fair Value
		(In thousands)
Maturing within one year		$	23,706			$	23,753
Maturing after one year but within five years			86,673				87,599
Maturing after five years but within ten years			63,799				64,784
Maturing after ten years			67,186				67,360
			241,364				243,496
U.S. agency residential mortgage-backed			168,233				169,958
U.S. agency commercial mortgage-backed			13,694				13,892
Private label residential mortgage-backed			33,482				33,578
Other asset backed			142,058				142,188
Total		$	598,831			$	603,112

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:

		Proceeds				Realized Gains				Losses
		(In thousands)
2016		$	56,451			$	350			$	52
2015			11,786				75				-

During 2016 and 2015, our trading securities consisted of various preferred stocks.  During the first nine months of 2016 and 2015, we recognized gains on trading securities of $0.004 million and $0.022 million, respectively, that are included in net gains on securities in the Condensed Consolidated Statements of Operations.  Both of these amounts relate to gains recognized on trading securities still held at each respective period end.

 

(unaudited)

4.

Loans

Our assessment of the allowance for loan losses is based on an evaluation of the loan portfolio, recent 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				Payment Plan Receivables				Subjective Allocation				Total
		(In thousands)
2016
Balance at beginning of period		$	6,039			$	9,956			$	1,139			$	52			$	5,526			$	22,712
Additions (deductions)
Provision for loan losses			(153	)			(247	)			208				-				17				(175	)
Recoveries credited to allowance			474				195				236				-				-				905
Loans charged against the allowance			(365	)			(561	)			(473	)			-				-				(1,399	)
Balance at end of period		$	5,995			$	9,343			$	1,110			$	52			$	5,543			$	22,043
2015
Balance at beginning of period		$	6,707			$	11,465			$	1,461			$	65			$	4,888			$	24,586
Additions (deductions)
Provision for loan losses			(26	)			(47	)			(49	)			(5	)			(117	)			(244	)
Recoveries credited to allowance			637				286				250				-				-				1,173
Loans charged against the allowance			(190	)			(379	)			(342	)			-				-				(911	)
Balance at end of period		$	7,128			$	11,325			$	1,320			$	60			$	4,771			$	24,604

 

(unaudited)

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

		Commercial				Mortgage				Installment				Payment Plan Receivables				Subjective Allocation				Total
		(In thousands)
2016
Balance at beginning of period		$	5,670			$	10,391			$	1,181			$	56			$	5,272			$	22,570
Additions (deductions)
Provision for loan losses			(1,220	)			(885	)			399				(4	)			271				(1,439	)
Recoveries credited to allowance			1,944				871				808				-				-				3,623
Loans charged against the allowance			(399	)			(1,034	)			(1,278	)			-				-				(2,711	)
Balance at end of period		$	5,995			$	9,343			$	1,110			$	52			$	5,543			$	22,043
2015
Balance at beginning of period		$	5,445			$	13,444			$	1,814			$	64			$	5,223			$	25,990
Additions (deductions)
Provision for loan losses			479				(881	)			(179	)			(4	)			(452	)			(1,037	)
Recoveries credited to allowance			1,722				843				853				-				-				3,418
Loans charged against the allowance			(518	)			(2,081	)			(1,168	)			-				-				(3,767	)
Balance at end of period		$	7,128			$	11,325			$	1,320			$	60			$	4,771			$	24,604

 

(unaudited)

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

		Commercial				Mortgage				Installment				Payment Plan Receivables				Subjective Allocation				Total
		(In thousands)
September 30, 2016
Allowance for loan losses
Individually evaluated for impairment		$	3,325			$	6,717			$	333			$	-			$	-			$	10,375
Collectively evaluated for impairment			2,670				2,626				777				52				5,543				11,668
Total ending allowance balance		$	5,995			$	9,343			$	1,110			$	52			$	5,543			$	22,043
Loans
Individually evaluated for impairment		$	16,087			$	60,891			$	5,101			$	-							$	82,079
Collectively evaluated for impairment			770,642				464,234				263,973				31,188								1,530,037
Total loans recorded investment			786,729				525,125				269,074				31,188								1,612,116
Accrued interest included in recorded investment			1,753				2,292				717				-								4,762
Total loans		$	784,976			$	522,833			$	268,357			$	31,188							$	1,607,354
December 31, 2015
Allowance for loan losses
Individually evaluated for impairment		$	2,708			$	7,818			$	457			$	-			$	-			$	10,983
Collectively evaluated for impairment			2,962				2,573				724				56				5,272				11,587
Total ending allowance balance		$	5,670			$	10,391			$	1,181			$	56			$	5,272			$	22,570
Loans
Individually evaluated for impairment		$	16,868			$	66,375			$	5,888			$	-							$	89,131
Collectively evaluated for impairment			733,399				433,931				228,827				34,599								1,430,756
Total loans recorded investment			750,267				500,306				234,715				34,599								1,519,887
Accrued interest included in recorded investment			1,869				2,270				698				-								4,837
Total loans		$	748,398			$	498,036			$	234,017			$	34,599							$	1,515,050