INDEPENDENT BANK CORP /MI/ - Quarter Report: 2017 March (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 March 31, 2017

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, smaller reporting company or an emerging growth company.

Large accelerated filer ☐

Accelerated filer  ☒

Non-accelerated filer  ☐

Smaller reporting company ☐

Emerging growth company  ☐

 

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

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

YES ☐       NO☒      

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common stock, no par value		21,333,152
Class		Outstanding at May 2, 2017

 

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INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

 

		Number(s)
PART I -	Financial Information
Item 1.	Condensed Consolidated Statements of Financial Condition March 31, 2017 and December 31, 2016	3
	Condensed Consolidated Statements of Operations Three-month periods ended March 31, 2017 and 2016	4
	Condensed Consolidated Statements of Comprehensive Income Three-month periods ended March 31, 2017 and 2016	5
	Condensed Consolidated Statements of Cash Flows Three-month periods ended March 31, 2017 and 2016	6
	Condensed Consolidated Statements of Shareholders' Equity Three-month periods ended March 31, 2017 and 2016	7
	Notes to Interim Condensed Consolidated Financial Statements	8-55
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	56-77
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	78
Item 4.	Controls and Procedures	78
PART II -	Other Information
Item 1A	Risk Factors	79
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79
Item 6.	Exhibits	80

 

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, 2016, 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

 

		March 31, 2017				December 31, 2016
		(unaudited)
		(In thousands, except share amounts)
Assets
Cash and due from banks		$	29,866			$	35,238
Interest bearing deposits			39,957				47,956
Cash and Cash Equivalents			69,823				83,194
Interest bearing deposits - time			5,340				5,591
Trading securities			331				410
Securities available for sale			608,964				610,616
Federal Home Loan Bank and Federal Reserve Bank stock, at cost			15,543				15,543
Loans held for sale, carried at fair value			37,613				35,946
Payment plan receivables and other assets held for sale			34,798				33,360
Loans
Commercial			815,484				804,017
Mortgage			581,030				538,615
Installment			274,233				265,616
Total Loans			1,670,747				1,608,248
Allowance for loan losses			(20,038	)			(20,234	)
Net Loans			1,650,709				1,588,014
Other real estate and repossessed assets			5,257				5,004
Property and equipment, net			39,509				40,175
Bank-owned life insurance			53,763				54,033
Deferred tax assets, net			28,954				32,818
Capitalized mortgage loan servicing rights			14,727				13,671
Vehicle service contract counterparty receivables, net			2,176				2,271
Other intangibles			1,845				1,932
Accrued income and other assets			27,130				26,372
Total Assets		$	2,596,482			$	2,548,950
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing		$	710,644			$	717,472
Savings and interest-bearing checking			1,062,582				1,015,724
Reciprocal			41,383				38,657
Time			448,450				453,866
Total Deposits			2,263,059				2,225,719
Other borrowings			9,433				9,433
Subordinated debentures			35,569				35,569
Other liabilities held for sale			1,435				718
Accrued expenses and other liabilities			31,511				28,531
Total Liabilities			2,341,007				2,299,970
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: 21,327,796 shares at March 31, 2017 and 21,258,092 shares at December 31, 2016			323,775				323,745
Accumulated deficit			(61,764	)			(65,657	)
Accumulated other comprehensive loss			(6,536	)			(9,108	)
Total Shareholders’ Equity			255,475				248,980
Total Liabilities and Shareholders’ Equity		$	2,596,482			$	2,548,950

See notes to interim condensed consolidated financial statements (unaudited)

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Three months ended March 31,
		2017				2016
		(unaudited)
		(In thousands, except per share amounts)
Interest Income
Interest and fees on loans		$	19,858			$	18,556
Interest on securities
Taxable			2,754				2,244
Tax-exempt			455				248
Other investments			312				306
Total Interest Income			23,379				21,354
Interest Expense
Deposits			1,443				1,114
Other borrowings and subordinated debentures			470				477
Total Interest Expense			1,913				1,591
Net Interest Income			21,466				19,763
Provision for loan losses			(359	)			(530	)
Net Interest Income After Provision for Loan Losses			21,825				20,293
Non-interest Income
Service charges on deposit accounts			3,009				2,845
Interchange income			1,922				1,878
Net gains on assets
Mortgage loans			2,571				1,642
Securities			27				162
Mortgage loan servicing, net			825				(978	)
Title insurance fees			264				288
Other			1,721				1,972
Total Non-interest Income			10,339				7,809
Non-interest Expense
Compensation and employee benefits			14,147				11,881
Occupancy, net			2,142				2,207
Data processing			1,937				2,101
Furniture, fixtures and equipment			977				984
Communications			683				888
Loan and collection			413				825
Advertising			506				477
Legal and professional			437				413
FDIC deposit insurance			198				334
Interchange expense			283				266
Credit card and bank service fees			191				187
Other			1,655				1,482
Total Non-interest Expense			23,569				22,045
Income Before Income Tax			8,595				6,057
Income tax expense			2,621				1,957
Net Income		$	5,974			$	4,100
Net Income Per Common Share
Basic		$	0.28			$	0.19
Diluted		$	0.28			$	0.19
Dividends Per Common Share
Declared		$	0.10			$	0.08
Paid		$	0.10			$	0.08

See notes to interim condensed consolidated financial statements (unaudited)

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Three months ended March 31,
		2017				2016
		(unaudited)
		(In thousands)
Net income		$	5,974			$	4,100
Other comprehensive income, before tax
Securities available for sale
Unrealized gains arising during period			3,623				2,114
Change in unrealized gains for which a portion of other than temporary impairment has been recognized in earnings			(22	)			(36	)
Reclassification adjustments for gains included in earnings			(106	)			(174	)
Unrealized gains recognized in other comprehensive income on securities available for sale			3,495				1,904
Income tax expense			1,223				667
Unrealized gains recognized in other comprehensive income on available for sale securities, net of tax			2,272				1,237
Other comprehensive income			2,272				1,237
Comprehensive income		$	8,246			$	5,337

See notes to interim condensed consolidated financial statements (unaudited)

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Three months ended March 31,
		2017				2016
		(unaudited - In thousands)
Net Income		$	5,974			$	4,100
Adjustments to Reconcile Net Income to Net Cash From Operating Activities
Proceeds from sales of loans held for sale			81,681				57,181
Disbursements for loans held for sale			(80,777	)			(55,689	)
Net increase in other liabilities held for sale			717				-
Provision for loan losses			(359	)			(530	)
Deferred income tax expense			3,836				2,468
Deferred loan fees			(931	)			(216	)
Net depreciation, amortization of intangible assets and premiums and accretion of discounts on securities, loans and interest bearing deposits - time			1,279				1,306
Net gains on mortgage loans			(2,571	)			(1,642	)
Net gains on securities			(27	)			(162	)
Share based compensation			432				410
Increase in accrued income and other assets			(2,848	)			(1,130	)
Decrease in accrued expenses and other liabilities			(3,218	)			(613	)
Total Adjustments			(2,786	)			1,383
Net Cash From Operating Activities			3,188				5,483
Cash Flow From (Used in) Investing Activities
Proceeds from the sale of securities available for sale			6,152				42,391
Proceeds from the maturity of securities available for sale			4,770				13,385
Principal payments received on securities available for sale			45,305				37,246
Purchases of securities available for sale			(45,673	)			(74,259	)
Proceeds from the maturity of interest bearing deposits - time			251				1,678
Purchase of Federal Reserve Bank stock			-				(129	)
Net increase in portfolio loans (loans originated, net of principal payments)			(61,003	)			(23,280	)
Net increase in payment plan receivables and other assets held for sale			(1,438	)			-
Proceeds from bank-owned life insurance			523				-
Proceeds from the collection of vehicle service contract counterparty receivables			191				4,217
Proceeds from the sale of other real estate and repossessed assets			238				1,357
Capital expenditures			(680	)			(611	)
Net Cash From (Used in) Investing Activities			(51,364	)			1,995
Cash Flow From Financing Activities
Net increase in total deposits			37,340				68,743
Net decrease in other borrowings			-				(1	)
Dividends paid			(2,133	)			(1,750	)
Proceeds from issuance of common stock			25				32
Repurchase of common stock			-				(15,510	)
Share based compensation withholding obligation			(427	)			(66	)
Net Cash From Financing Activities			34,805				51,448
Net Increase (Decrease) in Cash and Cash Equivalents			(13,371	)			58,926
Cash and Cash Equivalents at Beginning of Period			83,194				85,783
Cash and Cash Equivalents at End of Period		$	69,823			$	144,709
Cash paid during the period for
Interest		$	1,622			$	1,495
Income taxes			140				120
Transfers to other real estate and repossessed assets			502				873
Transfer of payment plan receivables to vehicle service contract counterparty receivables			-				191
Purchase of securities available for sale not yet settled			6,046				21,329

See notes to interim condensed consolidated financial statements (unaudited)

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Three months ended March 31,
		2017				2016
		(unaudited)
		(In thousands)
Balance at beginning of period		$	248,980			$	251,092
Cumulative effect of change in accounting			352				-
Balance at beginning of period, as adjusted			249,332				251,092
Net income			5,974				4,100
Cash dividends declared			(2,133	)			(1,750	)
Issuance of common stock			25				32
Share based compensation			432				410
Share based compensation withholding obligation			(427	)			(66	)
Repurchase of common stock			-				(15,510	)
Net change in accumulated other comprehensive loss, net of related tax effect			2,272				1,237
Balance at end of period		$	255,475			$	239,545

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, 2016 included in our Annual Report on Form 10-K.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary to present fairly our consolidated financial condition as of March 31, 2017 and December 31, 2016, and the results of operations for the three month periods ended March 31, 2017 and 2016.  The results of operations for the three month period ended March 31, 2017, is 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 valuation of originated mortgage loan servicing rights and the valuation of deferred tax assets.  Refer to our 2016 Annual Report on Form 10-K for a disclosure of our accounting policies.

2.	New Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.  Financial instruments for the most part and related contractual rights and obligations which are the sources of the majority of our operating revenue are excluded from the scope of this amended guidance.  In addition, for those operating revenue streams that are included in the scope of this amended guidance, based upon our review of these sources of income we do not believe they will be materially impacted by this amended guidance.

 

(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.  We have reviewed the types of financial instruments impacted by this amended guidance, including certain equity investments and liabilities measured under the fair value election, and have determined that we do not currently own any such instruments.  The balance of this amended guidance is expected to impact certain disclosure items but is not expected to have any 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.  Based on a review of 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.  While the primary impact will be the recognition of certain operating leases on our Condensed Consolidated Statements of Financial Condition this impact is not expected to be material.

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 securities available for sale, 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 began evaluating this ASU in 2016 and have formed a committee that includes personnel from various areas of the Bank that meets regularly to discuss the implementation of the ASU.  We are in the process of gathering data and reviewing loss methodologies as well as reviewing certain software applications that would assist us in the implementation of this ASU.  While we have not yet determined what the impact will be on our consolidated operating results or financial condition by the nature of the implementation of an expected loss model compared to an incurred loss approach, we would expect our AFLL to increase under this ASU.

 

(unaudited)

In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”).  This ASU shortens the amortization period for certain callable debt securities held at a premium.  Specifically, the amendments require the premium to be amortized to the earliest call date.  The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.   This amended guidance is effective for us on January 1, 2019, with early adoption permitted.  We adopted this amended guidance during the first quarter of 2017 using a modified retrospective approach.  The impact of this adoption was to adjust our January 1, 2017 Condensed Consolidated Statement of Financial Position to reflect cumulative effect adjustments as summarized in the table below. The adjustments below reflect the recording of $0.46 million ($0.30 million, net of tax) of additional premium amortization on securities available for sale and a $0.30 million decrease in accumulated other comprehensive loss to reflect the decrease in after tax unrealized losses on securities available for sale as of January 1, 2017 as a result of adopting this amended guidance. After January 1, 2017, premium amortization on certain callable debt securities is now amortized to the first call date.  During the first quarter of 2017 the impact on the Condensed Consolidated Statements of Operations was an increase to premium amortization of $0.03 million.

During the first quarter of 2017, we adopted the fair value method of accounting for our capitalized mortgage loan servicing rights pursuant to FASB Accounting Standards Codification topic 860 – “Transfers and Servicing”.  Prior to January 1, 2017, we were accounting for our capitalized mortgage loan servicing rights under the amortization method.  We adopted the fair value method using a modified retrospective adjustment to beginning accumulated deficit.  The impact of the adoption of the fair value method is summarized in the table below.  The adjustments below reflect the recording of a $0.54 million increase in the fair value of our capitalized mortgage loan servicing rights with a $0.19 million reduction in deferred tax assets, net for a net impact on accumulated deficit and total equity of $0.35 million.

		January 1, 2017 Originally Presented				Cumulative Retrospective Adjustments						January 1, 2017 Adjusted
		(Dollars in thousands)
Deferred tax assets, net		$	32,818			$	(190	)	(1)			$	32,628
Capitalized mortgage loan servicing rights		$	13,671			$	542		(1)			$	14,213
Total assets		$	2,548,950			$	352					$	2,549,302
Accumulated deficit		$	(65,657	)		$	352		(1)
						$	(300	)	(2)			$	(65,605	)
Accumulated other comprehensive loss		$	(9,108	)		$	300		(2)			$	(8,808	)
Total Shareholders’ Equity		$	248,980			$	352					$	249,332
Total Liabilities and Shareholders’ Equity		$	2,548,950			$	352					$	2,549,302

(1)	Represents adjustment to capitalized mortgage loan servicing rights, deferred tax assets, net, and accumulated deficit to reflect the adoption of the fair value method of accounting for our capitalized mortgage loan servicing rights.

(2)	Represents  adjustment to accumulated deficit and accumulated other comprehensive loss to reflect the adoption of ASU 2017-08.

 

(unaudited)

3.	Securities

Securities available for sale consist of the following:

		Amortized Cost				Unrealized								Fair Value
						Gains				Losses
		(In thousands)
March 31, 2017
U.S. agency		$	28,636			$	211			$	63			$	28,784
U.S. agency residential mortgage-backed			147,432				1,165				723				147,874
U.S. agency commercial mortgage-backed			12,298				52				155				12,195
Private label mortgage-backed			29,018				218				396				28,840
Other asset backed			145,659				346				210				145,795
Obligations of states and political subdivisions			181,727				716				2,193				180,250
Corporate			60,790				380				203				60,967
Trust preferred			2,924				-				271				2,653
Foreign government			1,616				-				10				1,606
Total		$	610,100			$	3,088			$	4,224			$	608,964

December 31, 2016
U.S. agency		$	28,909			$	159			$	80			$	28,988
U.S. agency residential mortgage-backed			156,053				1,173				937				156,289
U.S. agency commercial mortgage-backed			12,799				28				195				12,632
Private label mortgage-backed			35,035				216				524				34,727
Other asset backed			146,829				271				391				146,709
Obligations of states and political subdivisions			175,180				478				4,759				170,899
Corporate			56,356				223				399				56,180
Trust preferred			2,922				-				343				2,579
Foreign government			1,626				-				13				1,613
Total		$	615,709			$	2,548			$	7,641			$	610,616

We adopted ASU 2017-08 during the first quarter of 2017 using a modified retrospective approach.  As a result, the amortized cost of securities as of January 1, 2017 was adjusted lower by $0.46 million (see note #2).

 

(unaudited)

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

		Less Than Twelve Months								Twelve Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(In thousands)
March 31, 2017
U.S. agency		$	3,721			$	24			$	7,707			$	39			$	11,428			$	63
U.S. agency residential mortgage-backed			46,206				537				20,682				186				66,888				723
U.S. agency commercial mortgage-backed			6,672				154				140				1				6,812				155
Private label mortgage-backed			17,038				173				1,321				223				18,359				396
Other asset backed			39,168				95				11,949				115				51,117				210
Obligations of states and political subdivisions			103,301				2,030				10,090				163				113,391				2,193
Corporate			15,461				155				1,955				48				17,416				203
Trust preferred			-				-				2,653				271				2,653				271
Foreign government			1,606				10				-				-				1,606				10
Total		$	233,173			$	3,178			$	56,497			$	1,046			$	289,670			$	4,224

December 31, 2016
U.S. agency		$	4,179			$	41			$	8,217			$	39			$	12,396			$	80
U.S. agency residential mortgage-backed			62,524				732				20,857				205				83,381				937
U.S. agency commercial mortgage-backed			6,079				194				143				1				6,222				195
Private label mortgage-backed			20,545				281				1,413				243				21,958				524
Other asset backed			52,958				172				17,763				219				70,721				391
Obligations of states and political subdivisions			113,078				4,014				14,623				745				127,701				4,759
Corporate			25,546				292				2,810				107				28,356				399
Trust preferred			-				-				2,579				343				2,579				343
Foreign government			1,613				13				-				-				1,613				13
Total		$	286,522			$	5,739			$	68,405			$	1,902			$	354,927			$	7,641

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 March 31, 2017, we had 23 U.S. agency, 118 U.S. agency residential mortgage-backed and 13 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 March 31, 2017, we had 30 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 all four 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 periodically 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 March 31, 2017, we had 97 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 March 31, 2017, we had 308 municipal securities whose fair value is less than amortized cost. The unrealized losses are primarily due to increases in interest rates since acquisition. Twenty-eight of these securities have an impairment in excess of 10%. 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.

 

(unaudited)

Corporate — at March 31, 2017, we had 19 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.

Trust preferred securities — at March 31, 2017, 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 $0.8 million as of March 31, 2017, continues to have satisfactory credit metrics and make interest payments.

The following table breaks out our trust preferred securities in further detail as of March 31, 2017 and December 31, 2016:

		March 31, 2017								December 31, 2016
		Fair Value				Net Unrealized Loss				Fair Value				Net Unrealized Loss
		(In thousands)
Trust preferred securities
Rated issues		$	1,812			$	(112	)		$	1,800			$	(123	)
Unrated issues			841				(159	)			779				(220	)

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.

Foreign government — at March 31, 2017, 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 month periods ended March 31, 2017 and 2016, respectively.

 

(unaudited)

At March 31, 2017, 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 March 31, 2017
Fair value		$	1,127			$	1,013			$	72			$	2,212
Amortized cost			1,092				958				-				2,050
Non-credit unrealized loss			-				-				-				-
Unrealized gain			35				55				72				162
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 March 31,
2017		$	-			$	-			$	-			$	-
2016			-				-				-				-

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 March 31, 2017.  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 month periods ending March 31, follows:

		Three months ended March 31,
		2017				2016
		(In thousands)
Balance at beginning of period		$	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

 

(unaudited)

The amortized cost and fair value of securities available for sale at March 31, 2017, by contractual maturity, follow:

		Amortized Cost				Fair Value
		(In thousands)
Maturing within one year		$	20,583			$	20,596
Maturing after one year but within five years			107,748				107,791
Maturing after five years but within ten years			85,047				84,667
Maturing after ten years			62,315				61,206
			275,693				274,260
U.S. agency residential mortgage-backed			147,432				147,874
U.S. agency commercial mortgage-backed			12,298				12,195
Private label residential mortgage-backed			29,018				28,840
Other asset backed			145,659				145,795
Total		$	610,100			$	608,964

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

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

		Proceeds				Realized
						Gains				Losses
		(In thousands)
2017		$	6,152			$	106			$	-
2016			42,391				226				52

During 2017 and 2016, our trading securities consisted of various preferred stocks.  During the first three months of 2017 and 2016, we recognized losses on trading securities of $0.079 million and $0.012 million, respectively, that are included in net gains on securities in the Condensed Consolidated Statements of Operations.  Both of these amounts relate to losses recognized on trading securities still held at each respective period end.

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.

 

(unaudited)

An analysis of the allowance for loan losses by portfolio segment for the three months ended March 31, follows:

		Commercial				Mortgage				Installment				Payment Plan Receivables(1)				Subjective Allocation				Total
		(In thousands)
2017
Balance at beginning of period		$	4,880			$	8,681			$	1,011			$	-			$	5,662			$	20,234
Additions (deductions)
Provision for loan losses			(61	)			(699	)			133				-				268				(359	)
Recoveries credited to allowance			404				486				239				-				-				1,129
Loans charged against the allowance			(135	)			(359	)			(472	)			-				-				(966	)
Balance at end of period		$	5,088			$	8,109			$	911			$	-			$	5,930			$	20,038
2016
Balance at beginning of period		$	5,670			$	10,391			$	1,181			$	56			$	5,272			$	22,570
Additions (deductions)
Provision for loan losses			(404	)			(279	)			65				(3	)			91				(530	)
Recoveries credited to allowance			356				382				221				-				-				959
Loans charged against the allowance			-				(198	)			(306	)			-				-				(504	)
Balance at end of period		$	5,622			$	10,296			$	1,161			$	53			$	5,363			$	22,495

(1) Payment plan receivables were reclassified to held for sale at December 31, 2016.  See note #15.

 

(unaudited)

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

		Commercial				Mortgage				Installment				Subjective Allocation				Total
		(In thousands)
March 31, 2017
Allowance for loan losses
Individually evaluated for impairment		$	1,162			$	6,147			$	325			$	-			$	7,634
Collectively evaluated for impairment			3,926				1,962				586				5,930				12,404
Total ending allowance balance		$	5,088			$	8,109			$	911			$	5,930			$	20,038
Loans
Individually evaluated for impairment		$	11,573			$	57,216			$	4,675							$	73,464
Collectively evaluated for impairment			805,883				526,178				270,329								1,602,390
Total loans recorded investment			817,456				583,394				275,004								1,675,854
Accrued interest included in recorded investment			1,972				2,364				771								5,107
Total loans		$	815,484			$	581,030			$	274,233							$	1,670,747
December 31, 2016
Allowance for loan losses
Individually evaluated for impairment		$	2,244			$	6,579			$	329			$	-			$	9,152
Collectively evaluated for impairment			2,636				2,102				682				5,662				11,082
Total ending allowance balance		$	4,880			$	8,681			$	1,011			$	5,662			$	20,234
Loans
Individually evaluated for impairment		$	15,767			$	59,151			$	4,913							$	79,831
Collectively evaluated for impairment			790,228				481,828				261,474								1,533,530
Total loans recorded investment			805,995				540,979				266,387								1,613,361
Accrued interest included in recorded investment			1,978				2,364				771								5,113
Total loans		$	804,017			$	538,615			$	265,616							$	1,608,248

 

(unaudited)

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

		90+ and Still Accruing				Non- Accrual				Total Non- Performing Loans
		(In thousands)
March 31, 2017
Commercial
Income producing - real estate		$	-			$	579			$	579
Land, land development and construction - real estate			-				4				4
Commercial and industrial			-				742				742
Mortgage
1-4 family			-				4,950				4,950
Resort lending			-				1,414				1,414
Home equity - 1st lien			-				208				208
Home equity - 2nd lien			-				290				290
Purchased loans			-				-				-
Installment
Home equity - 1st lien			-				184				184
Home equity - 2nd lien			-				350				350
Boat lending			-				129				129
Recreational vehicle lending			-				26				26
Other			-				140				140
Total recorded investment		$	-			$	9,016			$	9,016
Accrued interest included in recorded investment		$	-			$	2			$	2
December 31, 2016
Commercial
Income producing - real estate		$	-			$	628			$	628
Land, land development and construction - real estate			-				105				105
Commercial and industrial			-				4,430				4,430
Mortgage
1-4 family			-				5,248				5,248
Resort lending			-				1,507				1,507
Home equity - 1st lien			-				222				222
Home equity - 2nd lien			-				317				317
Purchased loans			-				-				-
Installment
Home equity - 1st lien			-				266				266
Home equity - 2nd lien			-				289				289
Boat lending			-				219				219
Recreational vehicle lending			-				21				21
Other			-				112				112
Total recorded investment		$	-			$	13,364			$	13,364
Accrued interest included in recorded investment		$	-			$	-			$	-

 

(unaudited)

An aging analysis of loans by class follows:

		Loans Past Due																Loans not Past Due				Total Loans
		30-59 days				60-89 days				90+ days				Total
		(In thousands)
March 31, 2017
Commercial
Income producing - real estate		$	-			$	30			$	418			$	448			$	281,597			$	282,045
Land, land development and construction - real estate			-				-				-				-				53,649				53,649
Commercial and industrial			366				114				69				549				481,213				481,762
Mortgage
1-4 family			2,169				586				4,950				7,705				357,881				365,586
Resort lending			137				21				1,414				1,572				98,371				99,943
Home equity - 1st lien			133				-				208				341				30,596				30,937
Home equity - 2nd lien			385				32				290				707				48,280				48,987
Purchased loans			3				1				-				4				37,937				37,941
Installment
Home equity - 1st lien			91				24				184				299				11,569				11,868
Home equity - 2nd lien			100				78				350				528				12,115				12,643
Boat lending			85				3				129				217				107,826				108,043
Recreational vehicle lending			42				2				26				70				78,698				78,768
Other			140				37				140				317				63,365				63,682
Total recorded investment		$	3,651			$	928			$	8,178			$	12,757			$	1,663,097			$	1,675,854
Accrued interest included in recorded investment		$	46			$	10			$	2			$	58			$	5,049			$	5,107
December 31, 2016
Commercial
Income producing - real estate		$	-			$	-			$	383			$	383			$	287,255			$	287,638
Land, land development and construction - real estate			74				-				31				105				51,670				51,775
Commercial and industrial			100				1,385				66				1,551				465,031				466,582
Mortgage
1-4 family			2,361				869				5,248				8,478				306,063				314,541
Resort lending			-				-				1,507				1,507				101,541				103,048
Home equity - 1st lien			149				-				222				371				28,645				29,016
Home equity - 2nd lien			470				218				317				1,005				54,232				55,237
Purchased loans			13				2				-				15				39,122				39,137
Installment
Home equity - 1st lien			311				48				266				625				12,025				12,650
Home equity - 2nd lien			238				41				289				568				13,390				13,958
Boat lending			184				33				219				436				102,489				102,925
Recreational vehicle lending			68				33				21				122				74,413				74,535
Other			289				30				112				431				61,888				62,319
Total recorded investment		$	4,257			$	2,659			$	8,681			$	15,597			$	1,597,764			$	1,613,361
Accrued interest included in recorded investment		$	45			$	19			$	-			$	64			$	5,049			$	5,113