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Independent Bank Corporation
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๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Independent Bank Corporation
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q2

Independent Bank Corporation - 10-Q quarterly report FY2019 Q2


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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 June 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, 22,499,498 as of August 1, 2019.

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

INDEX



Number(s)
PART I -
Financial Information

Item 1.
Condensed Consolidated Statements of Financial Condition June 30, 2019 and December 31, 2018
3

Condensed Consolidated Statements of Operations Three- and Six-month periods ended June 30, 2019 and 2018
4

Condensed Consolidated Statements of Comprehensive Income Three- and Six-month periods ended June 30, 2019 and 2018
5

Condensed Consolidated Statements of Cash Flows Six-month periods ended June 30, 2019 and 2018
6

Condensed Consolidated Statements of Shareholders’ Equity Three- and Six-month periods ended June 30, 2019 and 2018
7

Notes to Interim Condensed Consolidated Financial Statements
8-66
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
66-88
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
89
Item 4.
Controls and Procedures
89



PART II -
Other Information

Item 1A
Risk Factors
90
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
90
Item 6.
Exhibits
91

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.

Part I - Item 1.

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition

    
June 30,
2019
    
December 31,
2018
  
  
(unaudited)
 
    
(In thousands, except share
amounts)
  
Assets
 
Cash and due from banks
 
$
34,461
  
$
23,350
 
Interest bearing deposits
  
20,676
   
46,894
 
Cash and Cash Equivalents
  
55,137
   
70,244
 
Interest bearing deposits - time
  
498
   
595
 
Equity securities at fair value
  
-
   
393
 
Securities available for sale
  
430,305
   
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
  
62,883
   
44,753
 
Loans held for sale, carried at lower of cost or fair value
  
-
   
41,471
 
Loans
        
Commercial
  
1,175,970
   
1,144,481
 
Mortgage
  
1,086,309
   
1,042,890
 
Installment
  
444,247
   
395,149
 
Total Loans
  
2,706,526
   
2,582,520
 
Allowance for loan losses
  
(25,903
)
  
(24,888
)
Net Loans
  
2,680,623
   
2,557,632
 
Other real estate and repossessed assets, net
  
1,990
   
1,299
 
Property and equipment, net
  
37,703
   
38,777
 
Bank-owned life insurance
  
55,580
   
55,068
 
Deferred tax assets, net
  
2,746
   
5,779
 
Capitalized mortgage loan servicing rights, carried at fair value
  
17,894
   
21,400
 
Other intangibles
  
5,870
   
6,415
 
Goodwill
  
28,300
   
28,300
 
Accrued income and other assets
  
40,414
   
34,870
 
Total Assets
 
$
3,438,302
  
$
3,353,281
 
         
Liabilities and Shareholders’ Equity
 
Deposits
        
Non-interest bearing
 
$
864,481
  
$
879,549
 
Savings and interest-bearing checking
  
1,158,910
   
1,194,865
 
Reciprocal
  
326,326
   
182,072
 
Time
  
384,477
   
385,981
 
Brokered time
  
244,691
   
270,961
 
Total Deposits
  
2,978,885
   
2,913,428
 
Other borrowings
  
41,144
   
25,700
 
Subordinated debentures
  
39,422
   
39,388
 
Accrued expenses and other liabilities
  
48,005
   
35,771
 
Total Liabilities
  
3,107,456
   
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: 22,498,776 shares at June 30, 2019 and 23,579,725 shares at December 31, 2018
  
351,894
   
377,372
 
Accumulated deficit
  
(16,617
)
  
(28,270
)
Accumulated other comprehensive loss
  
(4,431
)
  
(10,108
)
Total Shareholders’ Equity
  
330,846
   
338,994
 
Total Liabilities and Shareholders’ Equity
 
$
3,438,302
  
$
3,353,281
 

See notes to interim condensed consolidated financial statements (unaudited)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations


    
Three months ended
June 30,
    
Six months ended
June 30,
  
  
2019
  
2018
  
2019
  
2018
 
  
(unaudited)
  
(unaudited)
 
  
(In thousands, except per share amounts)
 
          
Interest Income
            
Interest and fees on loans
 
$
33,836
  
$
29,674
  
$
66,517
  
$
53,027
 
Interest on securities
                
Taxable
  
3,034
   
2,720
   
6,040
   
5,355
 
Tax-exempt
  
324
   
444
   
698
   
923
 
Other investments
  
379
   
265
   
954
   
595
 
Total Interest Income
  
37,573
   
33,103
   
74,209
   
59,900
 
Interest Expense
                
Deposits
  
6,021
   
3,209
   
11,702
   
5,496
 
Other borrowings and subordinated debentures
  
796
   
914
   
1,508
   
1,488
 
Total Interest Expense
  
6,817
   
4,123
   
13,210
   
6,984
 
Net Interest Income
  
30,756
   
28,980
   
60,999
   
52,916
 
Provision for loan losses
  
652
   
650
   
1,316
   
965
 
Net Interest Income After Provision for Loan Losses
  
30,104
   
28,330
   
59,683
   
51,951
 
Non-interest Income
                
Service charges on deposit accounts
  
2,800
   
3,095
   
5,440
   
6,000
 
Interchange income
  
2,604
   
2,504
   
4,959
   
4,750
 
Net gains (losses) on assets
                
Mortgage loans
  
4,302
   
3,255
   
7,913
   
5,826
 
Securities
  
-
   
9
   
304
   
(164
)
Mortgage loan servicing, net
  
(1,907
)
  
1,235
   
(3,122
)
  
3,456
 
Other
  
2,106
   
2,217
   
4,370
   
4,160
 
Total Non-interest Income
  
9,905
   
12,315
   
19,864
   
24,028
 
Non-interest Expense
                
Compensation and employee benefits
  
15,931
   
15,869
   
32,282
   
30,337
 
Occupancy, net
  
2,131
   
2,170
   
4,636
   
4,434
 
Data processing
  
2,171
   
2,251
   
4,315
   
4,129
 
Furniture, fixtures and equipment
  
1,006
   
1,019
   
2,035
   
1,986
 
Communications
  
717
   
704
   
1,486
   
1,384
 
Interchange expense
  
753
   
661
   
1,441
   
1,259
 
Loan and collection
  
628
   
692
   
1,262
   
1,369
 
Advertising
  
627
   
543
   
1,299
   
984
 
Legal and professional
  
371
   
456
   
740
   
834
 
FDIC deposit insurance
  
342
   
250
   
710
   
480
 
Merger related expenses
  
-
   
3,082
   
-
   
3,256
 
Other
  
1,915
   
2,064
   
4,376
   
3,444
 
Total Non-interest Expense
  
26,592
   
29,761
   
54,582
   
53,896
 
Income Before Income Tax
  
13,417
   
10,884
   
24,965
   
22,083
 
Income tax expense
  
2,687
   
2,067
   
4,854
   
4,105
 
Net Income
 
$
10,730
  
$
8,817
  
$
20,111
  
$
17,978
 
Net Income Per Common Share
                
Basic
 
$
0.47
  
$
0.37
  
$
0.86
  
$
0.79
 
Diluted
 
$
0.46
  
$
0.36
  
$
0.85
  
$
0.78
 

See notes to interim condensed consolidated financial statements (unaudited)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income

    
Three months ended
June 30,
    
Six months ended
June 30,
  
  
2019
  
2018
  
2019
  
2018
 
  
(unaudited - In thousands)
 
       
Net income
 
$
10,730
  
$
8,817
  
$
20,111
  
$
17,978
 
Other comprehensive income (loss)
                
Securities available for sale
                
Unrealized gains (losses) arising during period
  
3,920
   
(1,198
)
  
9,284
   
(5,063
)
Change in unrealized losses for which a portion of other than temporary impairment has been recognized in earnings
  
-
   
(2
)
  
(2
)
  
(3
)
Reclassification adjustments for (gains) losses included in earnings
  
-
   
26
   
(137
)
  
45
 
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale
  
3,920
   
(1,174
)
  
9,145
   
(5,021
)
Income tax expense (benefit)
  
823
   
(246
)
  
1,920
   
(1,054
)
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale, net of tax
  
3,097
   
(928
)
  
7,225
   
(3,967
)
Derivative instruments
                
Unrealized gain (loss) arising during period
  
(756
)
  
327
   
(1,668
)
  
1,011
 
Reclassification adjustment for income recognized in earnings
  
(142
)
  
(53
)
  
(291
)
  
(59
)
Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments
  
(898
)
  
274
   
(1,959
)
  
952
 
Income tax expense (benefit)
  
(187
)
  
58
   
(411
)
  
200
 
Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments, net of tax
  
(711
)
  
216
   
(1,548
)
  
752
 
Other comprehensive income (loss)
  
2,386
   
(712
)
  
5,677
   
(3,215
)
Comprehensive income
 
$
13,116
  
$
8,105
  
$
25,788
  
$
14,763
 

See notes to interim condensed consolidated financial statements (unaudited)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows

  
Six months ended June 30,
 
  
2019
  
2018
 
  
(unaudited - In thousands)
 
Net Income
 
$
20,111
  
$
17,978
 
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
  
222,953
   
210,641
 
Disbursements for loans held for sale
  
(233,170
)
  
(214,952
)
Provision for loan losses
  
1,316
   
965
 
Deferred income tax expense
  
1,524
   
4,518
 
Deferred loan fees and costs
  
(1,947
)
  
(2,457
)
Net depreciation, amortization of intangible assets and premiums and accretion of discounts on securities, loans and interest bearing deposits - time
  
2,906
   
3,192
 
Net gains on mortgage loans
  
(7,913
)
  
(5,826
)
Net (gains) losses on securities
  
(304
)
  
164
 
Share based compensation
  
888
   
848
 
Increase in accrued income and other assets
  
(3,112
)
  
(3,377
)
Increase in accrued expenses and other liabilities
  
10,125
   
1,604
 
Total Adjustments
  
(6,174
)
  
(4,680
)
Net Cash From Operating Activities
  
13,937
   
13,298
 
Cash Flow Used in Investing Activities
        
Proceeds from the sale of securities available for sale
  
42,236
   
31,445
 
Proceeds from maturities, prepayments and calls of securities available for sale
  
76,579
   
88,131
 
Purchases of securities available for sale
  
(81,639
)
  
(47,054
)
Proceeds from the sale of interest bearing deposits - time
  
-
   
2,474
 
Proceeds from the maturity of interest bearing deposits - time
  
100
   
1,842
 
Net increase in portfolio loans (loans originated, net of principal payments)
  
(152,256
)
  
(181,365
)
Proceeds from the sale of portfolio loans
  
40,630
   
16,460
 
Acquisition of TCSB Bancorp Inc., less cash received
  
-
   
23,516
 
Proceeds from bank-owned life insurance
  
-
   
474
 
Proceeds from the sale of other real estate and repossessed assets
  
808
   
889
 
Capital expenditures
  
(1,542
)
  
(2,033
)
Net Cash Used in Investing Activities
  
(75,084
)
  
(65,221
)
Cash Flow From Financing Activities
        
Net increase in total deposits
  
65,457
   
92,273
 
Net increase (decrease) in other borrowings
  
550
   
(3,093
)
Proceeds from Federal Home Loan Bank Advances
  
27,000
   
1,044,000
 
Payments of Federal Home Loan Bank Advances
  
(12,143
)
  
(1,069,287
)
Dividends paid
  
(8,458
)
  
(6,823
)
Proceeds from issuance of common stock
  
282
   
147
 
Repurchase of common stock
  
(25,782
)
  
-
 
Share based compensation withholding obligation
  
(866
)
  
(1,321
)
Net Cash From Financing Activities
  
46,040
   
55,896
 
Net Increase (Decrease) in Cash and Cash Equivalents
  
(15,107
)
  
3,973
 
Cash and Cash Equivalents at Beginning of Period
  
70,244
   
54,738
 
Cash and Cash Equivalents at End of Period
 
$
55,137
  
$
58,711
 
Cash paid during the period for
        
Interest
 
$
13,188
  
$
6,545
 
Income taxes
  
2,457
   
120
 
Operating leases
  
1,127
   
-
 
Transfers to other real estate and repossessed assets
  
1,420
   
641
 
Purchase of securities available for sale not yet settled
  
645
   
-
 
Securitization of portfolio loans
  
29,790
   
-
 
Right of use assets obtained in exchange for lease obligations
  
7,703
   
-
 
Transfer of loans to held for sale
  
-
   
13,216
 

See notes to interim condensed consolidated financial statements (unaudited)

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 April 1, 2019
 
$
374,678
  
$
(23,135
)
 
$
(6,817
)
 
$
344,726
 
Net income, three months ended June 30, 2019
  
-
   
10,730
   
-
   
10,730
 
Cash dividends declared, $.18 per share
  
-
   
(4,212
)
  
-
   
(4,212
)
Repurchase of 1,063,901 shares of common stock
  
(23,252
)
  
-
   
-
   
(23,252
)
Share based compensation (issuance of 2,498 shares of common stock)
  
468
   
-
   
-
   
468
 
Other comprehensive income
  
-
   
-
   
2,386
   
2,386
 
Balances at June 30, 2019
 
$
351,894
  
$
(16,617
)
 
$
(4,431
)
 
$
330,846
 
                 
Balances at April 1, 2018
 
$
324,518
  
$
(48,099
)
 
$
(8,502
)
 
$
267,917
 
Net income, three months ended June 30, 2018
  
-
   
8,817
   
-
   
8,817
 
Cash dividends declared, $.15 per share
  
-
   
(3,617
)
  
-
   
(3,617
)
Acquisition of TCSB Bancorp, Inc.
  
64,536
   
-
   
-
   
64,536
 
Issuance of 101,408 shares of common stock
  
134
   
-
   
-
   
134
 
Share based compensation (issuance of 7,444 shares of common stock)
  
441
   
-
   
-
   
441
 
Share based compensation withholding obligation (withholding of 50,057 shares of common stock)
  
(433
)
  
-
   
-
   
(433
)
Other comprehensive loss
  
-
   
-
   
(712
)
  
(712
)
Balances at June 30, 2018
 
$
389,196
  
$
(42,899
)
 
$
(9,214
)
 
$
337,083
 
                 
Balances at January 1, 2019
 
$
377,372
  
$
(28,270
)
 
$
(10,108
)
 
$
338,994
 
Net income, six months ended June 30, 2019
  
-
   
20,111
   
-
   
20,111
 
Cash dividends declared, $.36 per share
  
-
   
(8,458
)
  
-
   
(8,458
)
Repurchase of 1,179,688 shares of common stock
  
(25,782
)
  
-
   
-
   
(25,782
)
Issuance of 68,399 shares of common stock
  
282
   
-
   
-
   
282
 
Share based compensation (issuance of 86,626 shares of common stock)
  
888
   
-
   
-
   
888
 
Share based compensation withholding obligation (withholding of 56,286 shares of common stock)
  
(866
)
  
-
   
-
   
(866
)
Other comprehensive income
  
-
   
-
   
5,677
   
5,677
 
Balances at June 30, 2019
 
$
351,894
  
$
(16,617
)
 
$
(4,431
)
 
$
330,846
 
                 
Balances at January 1, 2018
 
$
324,986
  
$
(54,054
)
 
$
(5,999
)
 
$
264,933
 
Net income, six months ended June 30, 2018
  
-
   
17,978
   
-
   
17,978
 
Cash dividends declared, $.30 per share
  
-
   
(6,823
)
  
-
   
(6,823
)
Acquisition of TCSB Bancorp, Inc.
  
64,536
   
-
   
-
   
64,536
 
Issuance of 105,208 shares of common stock
  
147
   
-
   
-
   
147
 
Share based compensation (issuance of 81,919 shares of common stock)
  
848
   
-
   
-
   
848
 
Share based compensation withholding obligation (withholding of 87,385 shares of common stock)
  
(1,321
)
  
-
   
-
   
(1,321
)
Other comprehensive loss
  
-
   
-
   
(3,215
)
  
(3,215
)
Balances at June 30, 2018
 
$
389,196
  
$
(42,899
)
 
$
(9,214
)
 
$
337,083
 

See notes to interim condensed consolidated financial statements (unaudited)

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 June 30, 2019 and December 31, 2018, and the results of operations for the three and six-month periods ended June 30, 2019 and 2018.  The results of operations for the three and six-month periods ended June 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.

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 $9.5 million to $11.5 million, primarily driven by the longer contractual maturities of our mortgage and consumer installment loan segments.  This estimated range is based on our June 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.

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.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

3.  Securities

Securities available for sale consist of the following:


  
Amortized
Cost
    
Unrealized
    
Fair Value
  
Gains
  
Losses

 
(In thousands)
 
June 30, 2019
            
U.S. agency
 
$
16,997
  
$
200
  
$
14
  
$
17,183
 
U.S. agency residential mortgage-backed
  
135,853
   
1,541
   
377
   
137,017
 
U.S. agency commercial mortgage-backed
  
12,183
   
99
   
44
   
12,238
 
Private label mortgage-backed
  
29,617
   
588
   
76
   
30,129
 
Other asset backed
  
91,196
   
186
   
231
   
91,151
 
Obligations of states and political subdivisions
  
103,652
   
1,378
   
203
   
104,827
 
Corporate
  
32,964
   
929
   
11
   
33,882
 
Trust preferred
  
1,966
   
-
   
115
   
1,851
 
Foreign government
  
2,030
   
1
   
4
   
2,027
 
Total
 
$
426,458
  
$
4,922
  
$
1,075
  
$
430,305
 
                 
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
 

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)
 
                   
June 30, 2019
                  
U.S. agency
 
$
-
  
$
-
  
$
4,427
  
$
14
  
$
4,427
  
$
14
 
U.S. agency residential mortgage-backed
  
5,109
   
11
   
36,367
   
366
   
41,476
   
377
 
U.S. agency commercial mortgage-backed
  
-
   
-
   
4,322
   
44
   
4,322
   
44
 
Private label mortgage-backed
  
2,682
   
3
   
3,273
   
73
   
5,955
   
76
 
Other asset backed
  
38,729
   
140
   
9,794
   
91
   
48,523
   
231
 
Obligations of states and political subdivisions
  
9,211
   
15
   
27,595
   
188
   
36,806
   
203
 
Corporate
  
288
   
1
   
3,188
   
10
   
3,476
   
11
 
Trust preferred
  
941
   
60
   
910
   
55
   
1,851
   
115
 
Foreign government
  
-
   
-
   
1,526
   
4
   
1,526
   
4
 
Total
 
$
56,960
  
$
230
  
$
91,402
  
$
845
  
$
148,362
  
$
1,075
 
                         
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).

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 June 30, 2019, we had 22 U.S. agency, 104 U.S. agency residential mortgage-backed and nine 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 June 30, 2019, we had 11 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 (including two of the three 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 June 30, 2019, we had 65 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 June 30, 2019, we had 86 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 June 30, 2019, we had five 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.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Trust preferred securities — at June 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 $0.94 million as of June 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 June 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 six month periods ended June 30, 2019 and 2018, respectively.

At June 30, 2019, 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)
 
             
Fair value
 
$
713
  
$
700
  
$
17
  
$
1,430
 
Amortized cost
  
595
   
521
   
-
   
1,116
 
Non-credit unrealized loss
  
-
   
-
   
-
   
-
 
Unrealized gain
  
118
   
179
   
17
   
314
 
Cumulative credit related OTTI
  
757
   
457
   
380
   
1,594
 

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 June 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.

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
June 30,
  
Six months ended
June 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
  
-
   
-
   
-
   
-
 
Balance at end of period
 
$
1,594
  
$
1,594
  
$
1,594
  
$
1,594
 

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

  
Amortized
Cost
  
Fair
Value
 
  
(In thousands)
 
Maturing within one year
 
$
13,478
  
$
13,481
 
Maturing after one year but within five years
  
55,186
   
55,754
 
Maturing after five years but within ten years
  
50,659
   
51,759
 
Maturing after ten years
  
38,286
   
38,776
 
   
157,609
   
159,770
 
U.S. agency residential mortgage-backed
  
135,853
   
137,017
 
U.S. agency commercial mortgage-backed
  
12,183
   
12,238
 
Private label mortgage-backed
  
29,617
   
30,129
 
Other asset backed
  
91,196
   
91,151
 
Total
 
$
426,458
  
$
430,305
 

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 six month periods ending June 30, follows:

   
Proceeds
    
Realized
  
Gains
  
Losses
  
(In thousands)
 
2019
 
$
42,236
  
$
169
  
$
32
 
2018
 
$
31,445
  
$
81
  
$
126
 

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 six months ended June 30, 2019 and 2018 we recognized gains (losses) on these preferred stocks of $0.167 million and $(0.119) million, respectively, that are included in net gains (losses) on securities in the Condensed Consolidated Statements of Operations.  Zero and $(0.119) million of these gains (losses) during the six months ended June 30, 2019 and 2018, respectively relate to preferred stock still held at each respective period end.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

4.  Loans

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

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

  
Commercial
  
Mortgage
  
Installment
  
Subjective
Allocation
  
Total
 
  
(In thousands)
 
2019
               
Balance at beginning of period
 
$
7,518
  
$
8,412
  
$
1,251
  
$
8,073
  
$
25,254
 
Additions (deductions)
                    
Provision for loan losses
  
475
   
(386
)
  
209
   
354
   
652
 
Recoveries credited to the allowance
  
378
   
327
   
184
   
-
   
889
 
Loans charged against the allowance
  
(250
)
  
(291
)
  
(351
)
  
-
   
(892
)
Balance at end of period
 
$
8,121
  
$
8,062
  
$
1,293
  
$
8,427
  
$
25,903
 
                     
2018
                    
Balance at beginning of period
 
$
6,026
  
$
8,621
  
$
795
  
$
7,629
  
$
23,071
 
Additions (deductions)
                    
Provision for loan losses
  
(362
)
  
216
   
138
   
658
   
650
 
Recoveries credited to the allowance
  
434
   
177
   
235
   
-
   
846
 
Loans charged against the allowance
  
(25
)
  
(718
)
  
(320
)
  
-
   
(1,063
)
Balance at end of period
 
$
6,073
  
$
8,296
  
$
848
  
$
8,287
  
$
23,504
 

An analysis of the allowance for loan losses by portfolio segment for the six months ended June 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
  
895
   
187
   
732
   
(498
)
  
1,316
 
Recoveries credited to the allowance
  
505
   
551
   
401
   
-
   
1,457
 
Loans charged against the allowance
  
(369
)
  
(654
)
  
(735
)
  
-
   
(1,758
)
Balance at end of period
 
$
8,121
  
$
8,062
  
$
1,293
  
$
8,427
  
$
25,903
 
                     
2018
                    
Balance at beginning of period
 
$
5,595
  
$
8,733
  
$
864
  
$
7,395
  
$
22,587
 
Additions (deductions)
                    
Provision for loan losses
  
(497
)
  
363
   
207
   
892
   
965
 
Recoveries credited to the allowance
  
1,040
   
357
   
463
   
-
   
1,860
 
Loans charged against the allowance
  
(65
)
  
(1,157
)
  
(686
)
  
-
   
(1,908
)
Balance at end of period
 
$
6,073
  
$
8,296
  
$
848
  
$
8,287
  
$
23,504
 

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)
 
June 30, 2019
               
Allowance for loan losses:
               
Individually evaluated for impairment
 
$
1,047
  
$
4,715
  
$
265
  
$
-
  
$
6,027
 
Collectively evaluated for impairment
  
7,074
   
3,347
   
1,028
   
8,427
   
19,876
 
Loans acquired with deteriorated credit quality
  
-
   
-
   
-
   
-
   
-
 
Total ending allowance for loan losses balance
 
$
8,121
  
$
8,062
  
$
1,293
  
$
8,427
  
$
25,903
 
                     
Loans
                    
Individually evaluated for impairment
 
$
8,082
  
$
44,095
  
$
3,258
      
$
55,435
 
Collectively evaluated for impairment
  
1,169,792
   
1,046,177
   
441,859
       
2,657,828
 
Loans acquired with deteriorated credit quality
  
1,490
   
587
   
324
       
2,401
 
Total loans recorded investment
  
1,179,364
   
1,090,859
   
445,441
       
2,715,664
 
Accrued interest included in recorded investment
  
3,394
   
4,550
   
1,194
       
9,138
 
Total loans
 
$
1,175,970
  
$
1,086,309
  
$
444,247
      
$
2,706,526
 
                     
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
  
$
24,888
 
                     
Loans
                    
Individually evaluated for impairment
 
$
8,697
  
$
46,394
  
$
3,370
      
$
58,461
 
Collectively evaluated for impairment
  
1,137,586
   
1,000,038
   
392,460
       
2,530,084
 
Loans acquired with deteriorated credit quality
  
1,609
   
555
   
349
       
2,513
 
Total loans recorded investment
  
1,147,892
   
1,046,987
   
396,179
       
2,591,058
 
Accrued interest included in recorded investment
  
3,411
   
4,097
   
1,030
       
8,538
 
Total loans
 
$
1,144,481
  
$
1,042,890
  
$
395,149
      
$
2,582,520
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                          (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)
 
June 30, 2019
         
Commercial
         
Income producing - real estate
 
$
-
  
$
-
  
$
-
 
Land, land development and construction - real estate
  
-
   
-
   
-
 
Commercial and industrial
  
-
   
803
   
803
 
Mortgage
            
1-4 family
  
-
   
4,142
   
4,142
 
Resort lending
  
-
   
720
   
720
 
Home equity - 1st lien
  
-
   
196
   
196
 
Home equity - 2nd lien
  
-
   
600
   
600
 
Installment
            
Home equity - 1st lien
  
-
   
168
   
168
 
Home equity - 2nd lien
  
-
   
220
   
220
 
Boat lending
  
-
   
278
   
278
 
Recreational vehicle lending
  
-
   
2
   
2
 
Other
  
-
   
234
   
234
 
Total recorded investment
 
$
-
  
$
7,363
  
$
7,363
 
Accrued interest included in recorded investment
 
$
-
  
$
-
  
$
-
 
December 31, 2018
            
Commercial
            
Income producing - real estate
 
$
-
  
$
-
  
$
-
 
Land, land development and construction - real estate
  
-
   
-
   
-
 
Commercial and industrial
  
-
   
2,220
   
2,220
 
Mortgage
            
1-4 family
  
5
   
4,695
   
4,700
 
Resort lending
  
-
   
755
   
755
 
Home equity - 1st lien
  
-
   
159
   
159
 
Home equity - 2nd lien
  
-
   
419
   
419
 
Installment
            
Home equity - 1st lien
  
-
   
178
   
178
 
Home equity - 2nd lien
  
-
   
226
   
226
 
Boat lending
  
-
   
166
   
166
 
Recreational vehicle lending
  
-
   
7
   
7
 
Other
  
-
   
204
   
204
 
Total recorded investment
 
$
5
  
$
9,029
  
$
9,034
 
Accrued interest included in recorded investment
 
$
-
  
$
-
  
$
-
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(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)
 
June 30, 2019
                  
Commercial
                  
Income producing - real estate
 
$
50
  
$
-
  
$
-
  
$
50
  
$
398,697
  
$
398,747
 
Land, land development and construction - real estate
  
-
   
-
   
-
   
-
   
93,213
   
93,213
 
Commercial and industrial
  
132
   
37
   
705
   
874
   
686,530
   
687,404
 
Mortgage
                        
1-4 family
  
4,488
   
1,663
   
1,734
   
7,885
   
851,775
   
859,660
 
Resort lending
  
484
   
238
   
433
   
1,155
   
73,578
   
74,733
 
Home equity - 1st lien
  
178
   
96
   
51
   
325
   
36,201
   
36,526
 
Home equity - 2nd lien
  
458
   
234
   
195
   
887
   
119,053
   
119,940
 
Installment
                        
Home equity - 1st lien
  
97
   
1
   
11
   
109
   
6,320
   
6,429
 
Home equity - 2nd lien
  
188
   
19
   
113
   
320
   
5,431
   
5,751
 
Boat lending
  
287
   
24
   
32
   
343
   
197,315
   
197,658
 
Recreational vehicle lending
  
72
   
3
   
2
   
77
   
144,403
   
144,480
 
Other
  
200
   
46
   
172
   
418
   
90,705
   
91,123
 
Total recorded investment
 
$
6,634
  
$
2,361
  
$
3,448
  
$
12,443
  
$
2,703,221
  
$
2,715,664
 
Accrued interest included in recorded investment
 
$
66
  
$
32
  
$
-
  
$
98
  
$
9,040
  
$
9,138
 
                         
December 31, 2018
                        
Commercial
                        
Income producing - real estate
 
$
44
  
$
-
  
$
-
  
$
44
  
$
388,729
  
$
388,773
 
Land, land development and construction - real estate
  
-
   
-
   
-
   
-
   
84,458
   
84,458
 
Commercial and industrial
  
1,538
   
-
   
-
   
1,538
   
673,123
   
674,661
 
Mortgage
                        
1-4 family
  
1,608
   
194
   
4,882
   
6,684
   
833,760
   
840,444
 
Resort lending
  
252
   
-
   
755
   
1,007
   
80,774
   
81,781
 
Home equity - 1st lien
  
176
   
-
   
159
   
335
   
38,909
   
39,244
 
Home equity - 2nd lien
  
446
   
100
   
419
   
965
   
84,553
   
85,518
 
Installment
                        
Home equity - 1st lien
  
200
   
55
   
197
   
452
   
6,985
   
7,437
 
Home equity - 2nd lien
  
111
   
24
   
226
   
361
   
6,683
   
7,044
 
Boat lending
  
316
   
295
   
166
   
777
   
169,117
   
169,894
 
Recreational vehicle lending
  
28
   
21
   
7
   
56
   
125,780
   
125,836
 
Other
  
241
   
131
   
204
   
576
   
85,392
   
85,968
 
Total recorded investment
 
$
4,960
  
$
820
  
$
7,015
  
$
12,795
  
$
2,578,263
  
$
2,591,058
 
Accrued interest included in recorded investment
 
$
44
  
$
11
  
$
-
  
$
55
  
$
8,483
  
$
8,538
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Impaired loans are as follows:



  
June 30,
2019
    
December 31,
2018
  
Impaired loans with no allocated allowance for loan losses
 
(In thousands)
 
Troubled debt restructurings (“TDR”)
 
$
266
  
$
-
 
Non - TDR
  
500
   
-
 
Impaired loans with an allocated allowance for loan losses
        
TDR - allowance based on collateral
  
1,611
   
2,787
 
TDR - allowance based on present value cash flow
  
50,262
   
53,258
 
Non - TDR - allowance based on collateral
  
2,536
   
2,145
 
Total impaired loans
 
$
55,175
  
$
58,190
 
         
Amount of allowance for loan losses allocated
        
TDR - allowance based on collateral
 
$
272
  
$
769
 
TDR - allowance based on present value cash flow
  
4,874
   
4,849
 
Non - TDR - allowance based on collateral
  
881
   
692
 
Total amount of allowance for loan losses allocated
 
$
6,027
  
$
6,310
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Impaired loans by class are as follows:

  
June 30, 2019
  
December 31, 2018
 
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
For Loan
Losses
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
For Loan
Losses
 
With no related allowance for loan losses recorded:
 
(In thousands)
    
Commercial
                  
Income producing - real estate
 
$
-
  
$
-
  
$
-
  
$
-
  
$
-
  
$
-
 
Land, land development & construction-real estate
  
-
   
-
   
-
   
-
   
-
   
-
 
Commercial and industrial
  
-
   
-
   
-
   
-
   
-
   
-
 
Mortgage
                        
1-4 family
  
613
   
800
   
-
   
3
   
474
   
-
 
Resort lending
  
-
   
-
   
-
   
-
   
-
   
-
 
Home equity - 1st lien
  
-
   
-
   
-
   
-
   
-
   
-
 
Home equity - 2nd lien
  
-
   
-
   
-
   
-
   
-
   
-
 
Installment
                        
Home equity - 1st lien
  
-
   
-
   
-
   
1
   
122
   
-
 
Home equity - 2nd lien
  
-
   
16
   
-
   
-
   
-
   
-
 
Boat lending
  
-
   
5
   
-
   
-
   
5
   
-
 
Recreational vehicle lending
  
-
   
-
   
-
   
-
   
-
   
-
 
Other
  
-
   
15
   
-
   
-
   
15
   
-
 
   
613
   
836
   
-
   
4
   
616
   
-
 
With an allowance for loan losses recorded:
                        
Commercial
                        
Income producing - real estate
 
$
5,874
  
$
5,863
   
518
   
4,770
   
4,758
   
303
 
Land, land development & construction-real estate
  
290
   
288
   
31
   
290
   
289
   
35
 
Commercial and industrial
  
1,918
   
2,184
   
498
   
3,637
   
3,735
   
967
 
Mortgage
                        
1-4 family
  
30,411
   
32,568
   
3,171
   
32,842
   
34,427
   
2,859
 
Resort lending
  
12,392
   
12,704
   
1,397
   
13,328
   
13,354
   
1,927
 
Home equity - 1st lien
  
125
   
187
   
26
   
65
   
64
   
4
 
Home equity - 2nd lien
  
554
   
564
   
121
   
156
   
155
   
9
 
Installment
                        
Home equity - 1st lien
  
1,264
   
1,440
   
77
   
1,440
   
1,524
   
89
 
Home equity - 2nd lien
  
1,434
   
1,442
   
100
   
1,471
   
1,491
   
92
 
Boat lending
  
32
   
48
   
11
   
-
   
-
   
-
 
Recreational vehicle lending
  
51
   
51
   
4
   
79
   
79
   
4
 
Other
  
477
   
553
   
73
   
379
   
406
   
21
 
   
54,822
   
57,892
   
6,027
   
58,457
   
60,282
   
6,310
 
Total
                        
Commercial
                        
Income producing - real estate
  
5,874
   
5,863
   
518
   
4,770
   
4,758
   
303
 
Land, land development & construction-real estate
  
290
   
288
   
31
   
290
   
289
   
35
 
Commercial and industrial
  
1,918
   
2,184
   
498
   
3,637
   
3,735
   
967
 
Mortgage
                        
1-4 family
  
31,024
   
33,368
   
3,171
   
32,845
   
34,901
   
2,859
 
Resort lending
  
12,392
   
12,704
   
1,397
   
13,328
   
13,354
   
1,927
 
Home equity - 1st lien
  
125
   
187
   
26
   
65
   
64
   
4
 
Home equity - 2nd lien
  
554
   
564
   
121
   
156
   
155
   
9
 
Installment
                        
Home equity - 1st lien
  
1,264
   
1,440
   
77
   
1,441
   
1,646
   
89
 
Home equity - 2nd lien
  
1,434
   
1,458
   
100
   
1,471
   
1,491
   
92
 
Boat lending
  
32
   
53
   
11
   
-
   
5
   
-
 
Recreational vehicle lending
  
51
   
51
   
4
   
79
   
79
   
4
 
Other
  
477
   
568
   
73
   
379
   
421
   
21
 
Total
 
$
55,435
  
$
58,728
  
$
6,027
  
$
58,461
  
$
60,898
  
$
6,310
 
                         
Accrued interest included in recorded investment
 
$
260
          
$
271
         

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Average recorded investment in and interest income earned on impaired loans by class for the three month periods ending June 30, follows:

  
2019
  
2018
 
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance for loan losses recorded:
 
(In thousands)
 
Commercial
            
Income producing - real estate
 
$
-
  
$
-
  
$
-
  
$
-
 
Land, land development & construction-real estate
  
-
   
-
   
1,201
   
-
 
Commercial and industrial
  
-
   
-
   
509
   
9
 
Mortgage
                
1-4 family
  
484
   
2
   
138
   
3
 
Resort lending
  
-
   
-
   
-
   
-
 
Home equity - 1st lien
  
-
   
-
   
-
   
-
 
Home equity - 2nd lien
  
-
   
-
   
-
   
-
 
Installment
                
Home equity - 1st lien
  
-
   
-
   
1
   
2
 
Home equity - 2nd lien
  
-
   
-
   
-
   
-
 
Boat lending
  
-
   
-
   
-
   
-
 
Recreational vehicle lending
  
-
   
-
   
-
   
-
 
Other
  
-
   
-
   
-
   
1
 
   
484
   
2
   
1,849
   
15
 
With an allowance for loan losses recorded:
                
Commercial
                
Income producing - real estate
  
5,297
   
81
   
5,142
   
70
 
Land, land development & construction-real estate
  
290
   
2
   
155
   
2
 
Commercial and industrial
  
2,418
   
16
   
2,522
   
34
 
Mortgage
              
-
 
1-4 family
  
31,364
   
414
   
35,345
   
431
 
Resort lending
  
12,680
   
147
   
15,098
   
150
 
Home equity - 1st lien
  
122
   
2
   
111
   
1
 
Home equity - 2nd lien
  
556
   
3
   
167
   
1
 
Installment
                
Home equity - 1st lien
  
1,326
   
19
   
1,596
   
25
 
Home equity - 2nd lien
  
1,453
   
19
   
1,746
   
25
 
Boat lending
  
67
   
-
   
1
   
-
 
Recreational vehicle lending
  
67
   
-
   
86
   
1
 
Other
  
479
   
5
   
414
   
7
 
   
56,119
   
708
   
62,383
   
747
 
Total
                
Commercial
                
Income producing - real estate
  
5,297
   
81
   
5,142
   
70
 
Land, land development & construction-real estate
  
290
   
2
   
1,356
   
2
 
Commercial and industrial
  
2,418
   
16
   
3,031
   
43
 
Mortgage
                
1-4 family
  
31,848
   
416
   
35,483
   
434
 
Resort lending
  
12,680
   
147
   
15,098
   
150
 
Home equity - 1st lien
  
122
   
2
   
111
   
1
 
Home equity - 2nd lien
  
556
   
3
   
167
   
1
 
Installment
                
Home equity - 1st lien
  
1,326
   
19
   
1,597
   
27
 
Home equity - 2nd lien
  
1,453
   
19
   
1,746
   
25
 
Boat lending
  
67
   
-
   
1
   
-
 
Recreational vehicle lending
  
67
   
-
   
86
   
1
 
Other
  
479
   
5
   
414
   
8
 
Total
 
$
56,603
  
$
710
  
$
64,232
  
$
762
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Average recorded investment in and interest income earned on impaired loans by class for the six month periods ending June 30, follows:

  
2019
  
2018
 
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance for loan losses recorded:
 
(In thousands)
 
Commercial
            
Income producing - real estate
 
$
-
  
$
-
  
$
-
  
$
-
 
Land, land development & construction-real estate
  
-
   
-
   
801
   
-
 
Commercial and industrial
  
-
   
-
   
514
   
13
 
Mortgage
                
1-4 family
  
324
   
2
   
92
   
9
 
Resort lending
  
-
   
-
   
-
   
-
 
Home equity - 1st lien
  
-
   
-
   
-
   
-
 
Home equity - 2nd lien
  
-
   
-
   
-
   
-
 
Installment
                
Home equity - 1st lien
  
-
   
-
   
1
   
4
 
Home equity - 2nd lien
  
-
   
-
   
-
   
-
 
Boat lending
  
-
   
-
   
-
   
-
 
Recreational vehicle lending
  
-
   
-
   
-
   
-
 
Other
  
-
   
-
   
-
   
1
 
   
324
   
2
   
1,408
   
27
 
With an allowance for loan losses recorded:
                
Commercial
                
Income producing - real estate
  
5,121
   
146
   
5,160
   
138
 
Land, land development & construction-real estate
  
290
   
4
   
159
   
4
 
Commercial and industrial
  
2,824
   
36
   
2,526
   
66
 
Mortgage
                
1-4 family
  
31,857
   
860
   
35,846
   
889
 
Resort lending
  
12,896
   
322
   
15,391
   
314
 
Home equity - 1st lien
  
103
   
3
   
131
   
3
 
Home equity - 2nd lien
  
423
   
6
   
171
   
3
 
Installment
                
Home equity - 1st lien
  
1,364
   
43
   
1,619
   
54
 
Home equity - 2nd lien
  
1,459
   
41
   
1,762
   
52
 
Boat lending
  
44
   
-
   
1
   
-
 
Recreational vehicle lending
  
71
   
1
   
87
   
2
 
Other
  
446
   
11
   
407
   
13
 
   
56,898
   
1,473
   
63,260
   
1,538
 
Total
                
Commercial
                
Income producing - real estate
  
5,121
   
146
   
5,160
   
138
 
Land, land development & construction-real estate
  
290
   
4
   
960
   
4
 
Commercial and industrial
  
2,824
   
36
   
3,040
   
79
 
Mortgage
                
1-4 family
  
32,181
   
862
   
35,938
   
898
 
Resort lending
  
12,896
   
322
   
15,391
   
314
 
Home equity - 1st lien
  
103
   
3
   
131
   
3
 
Home equity - 2nd lien
  
423
   
6
   
171
   
3
 
Installment
                
Home equity - 1st lien
  
1,364
   
43
   
1,620
   
58
 
Home equity - 2nd lien
  
1,459
   
41
   
1,762
   
52
 
Boat lending
  
44
   
-
   
1
   
-
 
Recreational vehicle lending
  
71
   
1
   
87
   
2
 
Other
  
446
   
11
   
407
   
14
 
Total
 
$
57,222
  
$
1,475
  
$
64,668
  
$
1,565
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Cash receipts on impaired loans on non-accrual status are generally applied to the principal balance.

TDRs follow:


 
June 30, 2019
 

 
Commercial
  
Retail (1)
    
Total
 

 

   (In thousands)       
Performing TDRs
 
$
7,166
  
$
42,136
    
$
49,302
 
Non-performing TDRs (2)
  
54
   
2,783
  
(3) 
  
2,837
 
Total
 
$
7,220
  
$
44,919
    
$
52,139
 


 
December 31, 2018
 

 
Commercial
  
Retail (1)
    
Total
 

 

   (In thousands)       
Performing TDRs
 
$
6,460
  
$
46,627
    
$
53,087
 
Non-performing TDRs (2)
  
74
   
2,884
  
(3) 
  
2,958
 
Total
 
$
6,534
  
$
49,511
    
$
56,045
 

(1)
Retail loans include mortgage and installment loan segments.
(2)
Included in non-performing loans table above.
(3)
Also includes loans on non-accrual at the time of modification until six payments are received on a timely basis.

We allocated $5.1 million and $5.6 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2019 and December 31, 2018, respectively.

During the six months ended June 30, 2019 and 2018, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans generally included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan have generally been for periods ranging from 9 months to 36 months but have extended to as much as 480 months in certain circumstances. Modifications involving an extension of the maturity date have generally been for periods ranging from 1 month to 60 months but have extended to as much as 230 months in certain circumstances.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Loans that have been classified as troubled debt restructurings during the three-month periods ended June 30 follow:


 
Number of
Contracts
  
Pre-modification
Recorded
Balance
  
Post-modification
Recorded
Balance
 
  
(Dollars in thousands)
 
2019
         
Commercial
         
Income producing - real estate
  
2
  
$
1,329
  
$
1,329
 
Land, land development & construction-real estate
  
-
   
-
   
-
 
Commercial and industrial
  
-
   
-
   
-
 
Mortgage
            
1-4 family
  
1
   
506
   
505
 
Resort lending
  
-
   
-
   
-
 
Home equity - 1st lien
  
-
   
-
   
-
 
Home equity - 2nd lien
  
-
   
-
   
-
 
Installment
            
Home equity - 1st lien
  
1
   
25
   
26
 
Home equity - 2nd lien
  
3
   
75
   
76
 
Boat lending
  
-
   
-
   
-
 
Recreational vehicle lending
  
-
   
-
   
-
 
Other
  
-
   
-
   
-
 
Total
  
7
  
$
1,935
  
$
1,936
 
             
2018
            
Commercial
            
Income producing - real estate
  
-
  
$
-
  
$
-
 
Land, land development & construction-real estate
  
-
   
-
   
-
 
Commercial and industrial
  
2
   
153
   
153
 
Mortgage
            
1-4 family
  
1
   
66
   
69
 
Resort lending
  
-
   
-
   
-
 
Home equity - 1st lien
  
-
   
-
   
-
 
Home equity - 2nd lien
  
-
   
-
   
-
 
Installment
            
Home equity - 1st lien
  
2
   
90
   
91
 
Home equity - 2nd lien
  
1
   
32
   
32
 
Boat lending
  
-
   
-
   
-
 
Recreational vehicle lending
  
-
   
-
   
-
 
Other
  
1
   
41
   
41
 
Total
  
7
  
$
382
  
$
386
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Loans that have been classified as troubled debt restructurings during the six-month periods ended June 30 follow:

  
Number of
Contracts
  
Pre-modification
Recorded
Balance
  
Post-modification
Recorded
Balance
 
  
(Dollars in thousands)
 
2019
         
Commercial
         
Income producing - real estate
  
2
  
$
1,329
  
$
1,329
 
Land, land development & construction-real estate
  
-
   
-
   
-
 
Commercial and industrial
  
1
   
49
   
49
 
Mortgage
            
1-4 family
  
2
   
787
   
786
 
Resort lending
  
-
   
-
   
-
 
Home equity - 1st lien
  
-
   
-
   
-
 
Home equity - 2nd lien
  
-
   
-
   
-
 
Installment
            
Home equity - 1st lien
  
2
   
49
   
51
 
Home equity - 2nd lien
  
4
   
111
   
112
 
Boat lending
  
-
   
-
   
-
 
Recreational vehicle lending
  
-
   
-
   
-
 
Other
  
-
   
-
   
-
 
Total
  
11
  
$
2,325
  
$
2,327
 
             
2018
            
Commercial
            
Income producing - real estate
  
1
  
$
67
  
$
67
 
Land, land development & construction-real estate
  
-
   
-
   
-
 
Commercial and industrial
  
5
   
587
   
587
 
Mortgage
            
1-4 family
  
4
   
294
   
280
 
Resort lending
  
-
   
-
   
-
 
Home equity - 1st lien
  
-
   
-
   
-
 
Home equity - 2nd lien
  
-
   
-
   
-
 
Installment
            
Home equity - 1st lien
  
5
   
188
   
190
 
Home equity - 2nd lien
  
2
   
93
   
93
 
Boat lending
  
-
   
-
   
-
 
Recreational vehicle lending
  
-
   
-
   
-
 
Other
  
2
   
76
   
73
 
Total
  
19
  
$
1,305
  
$
1,290
 

The troubled debt restructurings described above for 2019 increased the allowance for loan losses by $0.04 million and resulted in zero charge offs during the three months ended June 30, 2019, and increased the allowance for loan losses by $0.05 million and resulted in zero charge offs during the six months ended June 30, 2019.

The troubled debt restructurings described above for 2018 increased the allowance for loan losses by $0.04 million and resulted in zero charge offs during the three months ended June 30, 2018, and increased the allowance for loan losses by $0.01 million and resulted in zero charge offs during the six months ended June 30, 2018.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

There were no troubled debt restructurings that subsequently defaulted within twelve months following the modification during the three and six months periods ended June 30, 2019 and 2018.

A loan is considered to be in payment default generally once it is 90 days contractually past due under the modified terms.

In order to determine whether a borrower is experiencing financial difficulty, we perform an evaluation of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under our internal underwriting policy.

Credit Quality Indicators – As part of our on-going monitoring of the credit quality of our loan portfolios, we track certain credit quality indicators including (a) weighted-average risk grade of commercial loans, (b) the level of classified commercial loans, (c) credit scores of mortgage and installment loan borrowers, and (d) delinquency history and non-performing loans.

For commercial loans, we use a loan rating system that is similar to those employed by state and federal banking regulators. Loans are graded on a scale of 1 to 12. A description of the general characteristics of the ratings follows:

Rating 1 through 6: These loans are generally referred to as our “non-watch” commercial credits that include very high or exceptional credit fundamentals through acceptable credit fundamentals.

Rating 7 and 8: These loans are generally referred to as our “watch” commercial credits. These ratings include loans to borrowers that exhibit potential credit weakness or downward trends. If not checked or cured these trends could weaken our asset or credit position. While potentially weak, no loss of principal or interest is envisioned with these ratings.

Rating 9: These loans are generally referred to as our “substandard accruing” commercial credits. This rating includes loans to borrowers that exhibit a well-defined weakness where payment default is probable and loss is possible if deficiencies are not corrected. Generally, loans with this rating are considered collectible as to both principal and interest primarily due to collateral coverage.

Rating 10 and 11: These loans are generally referred to as our ‘‘substandard - non-accrual’’ and ‘‘doubtful’’ commercial credits. Our doubtful rating includes a sub classification for a loss rate other than 50% (which is the standard doubtful loss rate).  These ratings include loans to borrowers with weaknesses that make collection of debt in full, on the basis of current facts, conditions and values at best questionable and at worst improbable. All of these loans are placed in non-accrual.

Rating 12: These loans are generally referred to as our “loss” commercial credits. This rating includes loans to borrowers that are deemed incapable of repayment and are charged-off.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The following table summarizes loan ratings by loan class for our commercial loan segment:

  
Commercial
 
  
Non-watch
1-6
  
Watch
7-8
  
Substandard
Accrual
9
  
Non-
Accrual
10-11
  
Total
 
        
(In thousands)
       
June 30, 2019
               
Income producing - real estate
 
$
382,198
  
$
15,777
  
$
772
  
$
-
  
$
398,747
 
Land, land development and construction - real estate
  
83,971
   
8,467
   
775
   
-
   
93,213
 
Commercial and industrial
  
634,098
   
48,598
   
3,905
   
803
   
687,404
 
Total
 
$
1,100,267
  
$
72,842
  
$
5,452
  
$
803
  
$
1,179,364
 
Accrued interest included in total
 
$
3,158
  
$
219
  
$
17
  
$
-
  
$
3,394
 
                     
December 31, 2018
                    
Income producing - real estate
 
$
375,142
  
$
13,387
  
$
200
  
$
44
  
$
388,773
 
Land, land development and construction - real estate
  
76,120
   
8,328
   
-
   
10
   
84,458
 
Commercial and industrial
  
631,248
   
35,469
   
5,577
   
2,367
   
674,661
 
Total
 
$
1,082,510
  
$
57,184
  
$
5,777
  
$
2,421
  
$
1,147,892
 
Accrued interest included in total
 
$
3,107
  
$
174
  
$
130
  
$
-
  
$
3,411
 

For each of our mortgage and installment segment classes, we generally monitor credit quality based on the credit scores of the borrowers. These credit scores are generally updated semi-annually.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The following tables summarize credit scores by loan class for our mortgage and installment loan segments:

   
Mortgage (1)
 
   
1-4 Family
  
Resort
Lending
  
Home
Equity
1st Lien
  
Home
Equity
2nd Lien
  
Total
 
   
(In thousands)
 
June 30, 2019
                
800 and above
  
$
110,599
  
$
11,748
  
$
5,783
  
$
12,623
  
$
140,753
 
750-799
   
391,241
   
32,894
   
15,624
   
52,785
   
492,544
 
700-749
   
195,867
   
15,747
   
9,584
   
33,377
   
254,575
 
650-699
   
89,819
   
8,074
   
3,623
   
13,055
   
114,571
 
600-649
   
31,668
   
2,597
   
663
   
4,212
   
39,140
 
550-599
   
16,755
   
1,465
   
652
   
1,929
   
20,801
 
500-549
   
11,333
   
684
   
325
   
1,148
   
13,490
 
Under 500
   
4,192
   
81
   
272
   
392
   
4,937
 
Unknown
   
8,186
   
1,443
   
-
   
419
   
10,048
 
Total
  
$
859,660
  
$
74,733
  
$
36,526
  
$
119,940
  
$
1,090,859
 
Accrued interest included in total
  
$
3,503
  
$
367
  
$
176
  
$
504
  
$
4,550
 
                       
December 31, 2018
                     
800 and above
  
$
94,492
  
$
10,898
  
$
6,784
  
$
8,838
  
$
121,012
 
750-799
   
384,344
   
36,542
   
17,303
   
38,295
   
476,484
 
700-749
   
202,440
   
17,282
   
9,155
   
23,249
   
252,126
 
650-699
   
91,847
   
9,945
   
3,987
   
8,681
   
114,460
 
600-649
   
34,342
   
3,088
   
959
   
3,359
   
41,748
 
550-599
   
13,771
   
1,867
   
427
   
1,236
   
17,301
 
500-549
   
8,439
   
106
   
418
   
826
   
9,789
 
Under 500
   
2,533
   
143
   
98
   
381
   
3,155
 
Unknown
   
8,236
   
1,910
   
113
   
653
   
10,912
 
Total
  
$
840,444
  
$
81,781
  
$
39,244
  
$
85,518
  
$
1,046,987
 
Accrued interest included in total
  
$
3,079
  
$
363
  
$
199
  
$
456
  
$
4,097
 

(1)
Credit scores have been updated within the last twelve months.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

   
Installment(1)
 
   
Home
Equity
1st Lien
  
Home
Equity
2nd Lien
  
Boat Lending
  
Recreational
Vehicle
Lending
  
Other
  
Total
 
   
(In thousands)
 
June 30, 2019
                   
800 and above
  
$
449
  
$
231
  
$
26,585
  
$
22,213
  
$
6,683
  
$
56,161
 
750-799
   
1,219
   
1,517
   
115,402
   
85,635
   
34,760
   
238,533
 
700-749
   
1,390
   
1,224
   
41,608
   
28,261
   
23,945
   
96,428
 
650-699
   
1,496
   
1,161
   
10,612
   
5,728
   
10,426
   
29,423
 
600-649
   
993
   
730
   
1,879
   
1,767
   
2,954
   
8,323
 
550-599
   
550
   
573
   
831
   
653
   
853
   
3,460
 
500-549
   
313
   
217
   
486
   
181
   
859
   
2,056
 
Under 500
   
19
   
55
   
229
   
42
   
187
   
532
 
Unknown
   
-
   
43
   
26
   
-
   
10,456
   
10,525
 
Total
  
$
6,429
  
$
5,751
  
$
197,658
  
$
144,480
  
$
91,123
  
$
445,441
 
Accrued interest included in total
  
$
23
  
$
19
  
$
493
  
$
368
  
$
291
  
$
1,194
 
                           
December 31, 2018
                         
800 and above
  
$
555
  
$
235
  
$
20,767
  
$
20,197
  
$
6,272
  
$
48,026
 
750-799
   
1,502
   
1,642
   
100,191
   
74,154
   
31,483
   
208,972
 
700-749
   
1,582
   
1,682
   
35,455
   
24,890
   
24,369
   
87,978
 
650-699
   
1,606
   
1,217
   
10,581
   
4,918
   
9,840
   
28,162
 
600-649
   
996
   
1,272
   
1,657
   
992
   
2,751
   
7,668
 
550-599
   
759
   
658
   
652
   
453
   
838
   
3,360
 
500-549
   
384
   
229
   
286
   
225
   
651
   
1,775
 
Under 500
   
51
   
6
   
266
   
7
   
218
   
548
 
Unknown
   
2
   
103
   
39
   
-
   
9,546
   
9,690
 
Total
  
$
7,437
  
$
7,044
  
$
169,894
  
$
125,836
  
$
85,968
  
$
396,179
 
Accrued interest included in total
  
$
28
  
$
25
  
$
403
  
$
311
  
$
263
  
$
1,030
 

(1)
Credit scores have been updated within the last twelve months.

Foreclosed residential real estate properties included in other real estate and repossessed assets on our Condensed Consolidated Statements of Financial Condition totaled $1.2 million at both June 30, 2019 and December 31, 2018, respectively.  Retail mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements totaled $0.6 million and $0.3 million at June 30, 2019 and December 31, 2018, respectively.

During the first quarter of 2019, we sold $40.6 million, of residential adjustable rate mortgage loans servicing released (classified on the Condensed Consolidated Statements of Financial Condition as held for sale, carried at the lower of cost or fair value at December 31, 2018) to another financial institution and recognized a gain on sale of $0.01 million.  During the first quarter of 2019 we also securitized $29.8 million, of portfolio residential fixed rate mortgage loans servicing retained with Freddie Mac and recognized a gain on sale of $0.53 million.  These transactions were done primarily for asset/liability management purposes.

During the first quarter of 2018, we sold $16.5 million, of residential fixed and adjustable rate portfolio mortgage loans servicing retained to another financial institution and recognized a gain on sale of $0.05 million.  These mortgage loans were sold primarily for asset/liability management purposes.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Purchase Credit Impaired (“PCI”) Loans

Loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses. In determining the estimated fair value of purchased loans, we consider a number of factors including, among others, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received. Purchased loans are accounted for in accordance with guidance for certain loans acquired in a transfer (ASC 310-30), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

As a result of our acquisition of TCSB Bancorp, Inc. (“TCSB”) (see note #17) we purchased loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. For these loans that meet the criteria of ASC 310-30 treatment, the carrying amount was as follows:

  
June 30,
2019
  
December 31,
2018
 
  
(In thousands)
 
Commercial
 
$
1,490
  
$
1,609
 
Mortgage
  
587
   
555
 
Installment
  
324
   
349
 
Total carrying amount
  
2,401
   
2,513
 
Allowance for loan losses
  
-
   
-
 
Carrying amount, net of allowance for loan losses
 
$
2,401
  
$
2,513
 

The accretable difference on PCI loans is the difference between the expected cash flows and the net present value of expected cash flows with such difference accreted into earnings using the effective yield method over the term of the loans. Accretion recorded as loan interest income is included in the table below.  Accretable yield of PCI loans, or income expected to be collected follows:

  
Three months ended
June 30,
  
Six months ended
June 30,
 
  
2019
  
2018
  
2019
  
2018
 
  
(unaudited)
  
(unaudited)
 
  
(In thousands)
  
(In thousands)
 
             
Balance at beginning of period
 
$
788
  
$
-
  
$
462
  
$
-
 
New loans purchased
  
-
   
568
   
-
   
568
 
Accretion recorded as loan interest income
  
(39
)
  
(35
)
  
(78
)
  
(35
)
Reclassification from (to) nonaccretable difference
  
-
   
-
   
365
   
-
 
Displosals/other adjustments
  
-
   
-
   
-
   
-
 
Balance at end of period
 
$
749
  
$
533
  
$
749
  
$
533
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

5.    Shareholders’ Equity and Earnings Per Common Share

In December, 2018, our Board of Directors authorized a share repurchase plan (the “Repurchase Plan”) to buy back up to 5% of our outstanding common stock through December 31, 2019.  During the first six months of 2019, we completed the repurchase of 5% of our outstanding common shares.  In June 2019, our Board of Directors authorized a 300,000 share expansion of the 2019 repurchase plan.  We expect to accomplish any remaining repurchases through open market transactions, though we could execute repurchases through other means, such as privately negotiated transactions.  The timing and amount of any share repurchases will depend on a variety of factors, including, among others, securities law restrictions, the trading price of our common stock, regulatory requirements, potential alternative uses for capital, and our financial performance. The Repurchase Plan does not obligate us to acquire any particular amount of common stock, and it may be modified or suspended at any time at our discretion. We expect to fund any repurchases from cash on hand.  During the six month periods ended June 30, 2019 and 2018 repurchases were made totaling 1,179,688 shares and zero shares of common stock, respectively for an aggregate purchase price of $25.8 million and zero, respectively.

A reconciliation of basic and diluted net income per common share follows:

  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  
2019
  
2018
  
2019
  
2018
 
  
(In thousands, except per share data)
 
Net income
 
$
10,730
  
$
8,817
  
$
20,111
  
$
17,978
 
                 
Weighted average shares outstanding (1)
  
23,036
   
24,109
   
23,310
   
22,745
 
Stock units for deferred compensation plan for non-employee directors
  
128
   
126
   
130
   
125
 
Effect of stock options
  
112
   
224
   
119
   
179
 
Performance share units
  
37
   
51
   
39
   
50
 
Weighted average shares outstanding for calculation of diluted earnings per share
  
23,313
   
24,510
   
23,598
   
23,099
 
                 
Net income per common share
                
Basic (1)
 
$
0.47
  
$
0.37
  
$
0.86
  
$
0.79
 
Diluted
 
$
0.46
  
$
0.36
  
$
0.85
  
$
0.78
 
 
(1)Basic net income per common share includes weighted average common shares outstanding during the period and participating share awards.
 
Weighted average stock options outstanding that were not considered in computing diluted net income per common share because they were anti-dilutive were zero for the three and six month periods ended June 30, 2019 and 2018, respectively.

6.    Derivative Financial Instruments
 
We are required to record derivatives on our Condensed Consolidated Statements of Financial Condition as assets and liabilities measured at their fair value.  The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
 
Our derivative financial instruments according to the type of hedge in which they are designated follows:

  
June 30, 2019
 
  
Notional
Amount
  
Average
Maturity
(years)
  
Fair
Value
 
  
(Dollars in thousands)
 

         
Fair value hedge designation - Pay-fixed interest rate swap agreements
 
$
7,117
   
9.9
  
$
(203
)
             
Cash flow hedge designation
            
Pay-fixed interest rate swap agreements
 
$
25,000
   
2.1
  
$
(171
)
Interest rate cap agreements
  
150,000
   
3.1
   
576
 
Total
 
$
175,000
   
3.0
  
$
405
 
             
No hedge designation
            
Rate-lock mortgage loan commitments
 
$
81,784
   
0.1
  
$
2,147
 
Mandatory commitments to sell mortgage loans
  
141,434
   
0.1
   
(334
)
Pay-fixed interest rate swap agreements - commercial
  
108,895
   
5.3
   
(3,179
)
Pay-variable interest rate swap agreements - commercial
  
108,895
   
5.3
   
3,179
 
Purchased options
  
3,095
   
2.0
   
171
 
Written options
  
3,035
   
2.0
   
(170
)
Total
 
$
447,138
   
2.7
  
$
1,814
 

  
December 31, 2018
 
  
Notional
Amount
  
Average
Maturity
(years)
  
Fair
Value
 
  
(Dollars in thousands)
 
Cash flow hedge designation
         
Pay-fixed interest rate swap agreements
 
$
25,000
   
2.6
  
$
280
 
Interest rate cap agreements
  
150,000
   
3.6
   
2,245
 
Total
 
$
175,000
   
3.5
  
$
2,525
 
             
No hedge designation
            
Rate-lock mortgage loan commitments
 
$
32,473
   
0.1
  
$
687
 
Mandatory commitments to sell mortgage loans
  
57,583
   
0.1
   
(383
)
Pay-fixed interest rate swap agreements - commercial
  
94,451
   
5.5
   
405
 
Pay-variable interest rate swap agreements - commercial
  
94,451
   
5.5
   
(405
)
Purchased options
  
3,095
   
2.5
   
116
 
Written options
  
3,095
   
2.5
   
(116
)
Total
 
$
285,148
   
3.7
  
$
304
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

We use variable-rate and short-term fixed-rate (less than 12 months) debt obligations to fund a portion of our Condensed Consolidated Statements of Financial Condition, which exposes us to variability in interest rates. To meet our asset/liability management objectives, we may periodically enter into derivative financial instruments to mitigate exposure to fluctuations in cash flows resulting from changes in interest rates (“Cash Flow Hedges”).  Cash Flow Hedges included certain pay-fixed interest rate swaps and interest rate cap agreements.  Pay-fixed interest rate swaps convert the variable-rate cash flows on debt obligations to fixed-rates.  Under interest-rate cap agreements, we will receive cash if interest rates rise above a predetermined level. As a result, we effectively have variable-rate debt with an established maximum rate. We pay an upfront premium on interest rate caps which is recognized in earnings in the same period in which the hedged item affects earnings.  Unrecognized premiums from interest rate caps aggregated to $2.5 million at June 30, 2019 and $2.7 million at December 31, 2018.

We record the fair value of Cash Flow Hedges in accrued income and other assets and accrued expenses and other liabilities on our Condensed Consolidated Statements of Financial Condition.  On an ongoing basis, we adjust our Condensed Consolidated Statements of Financial Condition to reflect the then current fair value of Cash Flow Hedges.  The related gains or losses are reported in other comprehensive income or loss and are subsequently reclassified into earnings, as a yield adjustment in the same period in which the related interest on the hedged items (variable-rate debt obligations) affect earnings.  It is anticipated that approximately $0.12 million, of unrealized gains on Cash Flow Hedges at June 30, 2019 will be reclassified to earnings over the next twelve months.  To the extent that the Cash Flow Hedges are not effective, the ineffective portion of the Cash Flow Hedges is immediately recognized in interest expense.  The maximum term of the Cash Flow Hedge at June 30, 2019 is 4.3 years.

Beginning in the second quarter of 2019 we entered into a pay-fixed interest rate swap to protect a portion of the fair value of a certain fixed rate commercial loan (“Fair Value Hedge”).  As a result, changes in the fair value of the pay-fixed interest rate swap is expected to offset changes in the fair value of the fixed rate commercial loan due to fluctuations in interest rates.  We record the fair value of Fair Value Hedges in accrued income and other assets and accrued expenses and other liabilities on our Condensed Consolidated Statements of Financial Condition.  The hedged item (fixed rate commercial loan) is also recorded at fair value which offsets the adjustment to the Fair Value Hedge.  On an ongoing basis, we adjust our Condensed Consolidated Statements of Financial Condition to reflect the then current fair value of both the Fair Value Hedge and the hedged item.  The related gains or losses are reported in interest income – interest and fees on loans in our Condensed Consolidated Statements of Operations.

Certain financial derivative instruments have not been designated as hedges. The fair value of these derivative financial instruments has been recorded on our Condensed Consolidated Statements of Financial Condition and is adjusted on an ongoing basis to reflect their then current fair value. The changes in fair value of derivative financial instruments not designated as hedges are recognized in our Condensed Consolidated Statements of Operations.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

In the ordinary course of business, we enter into rate-lock mortgage loan commitments with customers (“Rate-Lock Commitments”).  These commitments expose us to interest rate risk.  We also enter into mandatory commitments to sell mortgage loans (“Mandatory Commitments”) to reduce the impact of price fluctuations of mortgage loans held for sale and Rate-Lock Commitments.  Mandatory Commitments help protect our loan sale profit margin from fluctuations in interest rates. The changes in the fair value of Rate-Lock Commitments and Mandatory Commitments are recognized currently as part of net gains on mortgage loans in our Condensed Consolidated Statements of Operations.  We obtain market prices on Mandatory Commitments and Rate-Lock Commitments.  Net gains on mortgage loans, as well as net income may be more volatile as a result of these derivative instruments, which are not designated as hedges.

In prior periods we offered to our deposit customers an equity linked time deposit product (“Altitude CD”).  The Altitude CD was a time deposit that provides the customer a guaranteed return of principal at maturity plus a potential equity return (a written option), while we receive a like stream of funds based on the equity return (a purchased option).  The written and purchased options will generally move in opposite directions resulting in little or no net impact on our Condensed Consolidated Statements of Operations.  All of the written and purchased options in the table above relate to this Altitude CD product.

We have a program that allows commercial loan customers to lock in a fixed rate for a longer period of time than we would normally offer for interest rate risk reasons.  We will enter into a variable rate commercial loan and an interest rate swap agreement with a customer and then enter into an offsetting interest rate swap agreement with an unrelated party.  The interest rate swap agreement fair values will generally move in opposite directions resulting in little or no net impact on our Condensed Consolidated Statements of Operations.  All of the interest rate swap agreements noted as commercial in the table above with no hedge designation relate to this program.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The following tables illustrate the impact that the derivative financial instruments discussed above have on individual line items in the Condensed Consolidated Statements of Financial Condition for the periods presented:

Fair Values of Derivative Instruments

 
Asset Derivatives
 
Liability Derivatives
 
 
June 30,
2019
 
December 31,
2018
 
June 30,
2019
 
December 31,
2018
 

 Balance
 Sheet
 Location
 
Fair
Value
 
 Balance
 Sheet
 Location
 
Fair
Value
 
 Balance
 Sheet
 Location
 
Fair
Value
 
 Balance
 Sheet
 Location
 
Fair
Value
 
 
(In thousands)
 
Derivatives designated as hedging instruments
 
   
 
   
 
   
 
   
Pay-fixed interest rate swap agreements
Other assets
 
$
-
 
Other assets
 
$
280
 
Other liabilities
 
$
374
 
Other liabilities
 
$
-
 
Interest rate cap agreements
Other assets
  
576
 
Other assets
  
2,245
 
Other liabilities
  
-
 
Other liabilities
  
-
 
 
 
  
576
 
 
  
2,525
 
 
  
374
 
 
  
-
 
 
 
    
 
    
 
    
 
    
Derivatives not designated as hedging instruments
 
    
 
    
 
    
 
    
Rate-lock mortgage loan commitments
Other assets
  
2,147
 
Other assets
  
687
 
Other liabilities
  
-
 
Other liabilities
  
-
 
Mandatory commitments to sell mortgage loans
Other assets
  
-
 
Other assets
  
-
 
Other liabilities
  
334
 
Other liabilities
  
383
 
Pay-fixed interest rate swap agreements -commercial
Other assets
  
80
 
Other assets
  
1,116
 
Other liabilities
  
3,259
 
Other liabilities
  
711
 
Pay-variable interest rate swap agreements -commercial
Other assets
  
3,259
 
Other assets
  
711
 
Other liabilities
  
80
 
Other liabilities
  
1,116
 
Purchased options
Other assets
  
171
 
Other assets
  
116
 
Other liabilities
  
-
 
Other liabilities
  
-
 
 
 
    
 
    
 
    
 
    
Written options
Other assets
  
-
 
Other assets
  
-
 
Other liabilities
  
170
 
Other liabilities
  
116
 
 
 
  
5,657
 
 
  
2,630
 
 
  
3,843
 
 
  
2,326
 
Total derivatives
 
 
$
6,233
 
 
 
$
5,155
 
 
 
$
4,217
 
 
 
$
2,326
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The effect of derivative financial instruments on the Condensed Consolidated Statements of Operations follows:

Three Month Periods Ended June 30,
 
  
Gain (Loss)
Recognized in
Other
Comprehensive
Income (Loss)
(Effective Portion)
 
 Location of
 Gain
 Reclassified
 from
 Accumulated
 Other
 Comprehensive
 Loss into
 Income
 (Effective
 
Gain
Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective Portion)
 
 Location of
 Gain (Loss)
 Recognized
 
Gain (Loss)
Recognized
in Income (1)
 
  
2019
  
2018
 
 Portion)
 
2019
  
2018
 
 in Income (1)
 
2019
  
2018
 
         (In thousands)        
Fair Value Hedges
                    
Pay-fixed interest rate swap agreements
 
  
 
 
  
 
Interest income
 
$
(203
)
 
$
-
 
Cash Flow Hedges
                      
Interest rate cap agreements
 
$
(489
)
 
$
244
 
Interest expense
 
$
115
  
$
45
 
Interest expense
 
$
-
  
$
-
 
Pay-fixed interest rate swap agreements
  
(267
)
  
83
 
Interest expense
  
27
   
8
 
Interest expense
  
-
   
(24
)
Total
 
$
(756
)
 
$
327
   
$
142
  
$
53
   
$
-
  
$
(24
)
                           
No hedge designation
                          
Rate-lock mortgage loan commitments
                 
Net gains on mortgage  loans
 
$
831
  
$
244
 
Mandatory commitments to sell mortgage loans
                 
Net gains on mortgage loans
  
(125
)
  
(110
)
Pay-fixed interest rate swap agreements -commercial
                 
Interest income
  
(2,437
)
  
487
 
Pay-variable interest rate swap agreements -commercial
                 
Interest income
  
2,437
   
(487
)
Pay-variable interest rate swap agreements
                 
Interest expense
  
-
   
36
 
Purchased options
                 
Interest expense
  
(31
)
  
(6
)
Written options
                 
Interest expense
  
30
   
6
 
Total
                        
$
705
  
$
170
 

(1)
 For cash flow hedges, this location and amount refers to the ineffective portion.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Six Month Periods Ended June 30,
 
  
Gain (Loss)
Recognized in
Other
Comprehensive
Income (Loss)
(Effective Portion)
 
 Location of
 Gain
 Reclassified
 from
 Accumulated
 Other
 Comprehensive
 Loss into
 Income
 (Effective
 
Gain
Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective Portion)
 
 Location of
 Gain (Loss)
 Recognized
 
Gain (Loss)
Recognized
in Income (1)
 
  
2019
  
2018
 
 Portion)
 
2019
  
2018
 
 in Income (1)
 
2019
  
2018
 
         
(In thousands)
        
  
    
Fair Value Hedges
                    
Pay-fixed interest rate swap agreements
             
Interest income
 
$
(203
)
 
$
-
 
Cash Flow Hedges
                      
Interest rate cap agreements
 
$
(1,274
)
 
$
757
 
Interest expense
 
$
233
  
$
52
 
Interest expense
 
$
-
  
$
-
 
Pay-fixed interest rate swap agreements
  
(394
)
  
254
 
Interest expense
  
58
   
7
 
Interest expense
  
-
   
(12
)
Total
 
$
(1,668
)
 
$
1,011
   
$
291
  
$
59
   
$
-
  
$
(12
)
                           
No hedge designation
                          
Rate-lock mortgage loan commitments
                 
Net gains on mortgage loans
 
$
1,460
  
$
672
 
Mandatory commitments to sell mortgage loans
                 
Net gains on mortgage  loans
  
49
   
(270
)
Pay-fixed interest rate swap agreements -commercial
                 
Interest income
  
(3,584
)
  
1,543
 
Pay-variable interest rate swap agreements -commercial
                 
Interest income
  
3,584
   
(1,543
)
Pay-variable interest rate swap agreements
                 
Interest expense
  
-
   
36
 
Purchased options
                 
Interest expense
  
55
   
(99
)
Written options
                 
Interest expense
  
(54
)
  
99
 
Total
                        
$
1,510
  
$
438
 

(1)
 For cash flow hedges, this location and amount refers to the ineffective portion.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

7.    Goodwill and other Intangibles

The following table summarizes intangible assets, net of amortization:

  
June 30, 2019
  
December 31, 2018
 
  
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Gross
Carrying
Amount
  
Accumulated
Amortization
 
  
(In thousands)
 
             
Amortized intangible assets - core deposits
 
$
11,916
  
$
6,046
  
$
11,916
  
$
5,501
 
Unamortized intangible assets - goodwill
 
$
28,300
      
$
28,300
     

A summary of estimated core deposit intangible amortization at June 30, 2019 follows:

  
(In thousands)
 
    
Six months ending December 31, 2019
 
$
544
 
2020
  
1,020
 
2021
  
970
 
2022
  
785
 
2023
  
547
 
2024 and thereafter
  
2,004
 
Total
 
$
5,870
 

8.    Share Based Compensation

We maintain share based payment plans that include a non-employee director stock purchase plan and a long-term incentive plan that permits the issuance of share based compensation, including stock options and non-vested share awards. The long-term incentive plan, which is shareholder approved, permits the grant of additional share based awards for up to 0.5 million shares of common stock as of June 30, 2019.  The non-employee director stock purchase plan permits the issuance of additional share based payments for up to 0.2 million shares of common stock as of June 30, 2019. Share based awards and payments are measured at fair value at the date of grant and are expensed over the requisite service period. Common shares issued upon exercise of stock options come from currently authorized but unissued shares.

During the three month periods ended June 30, 2019 and 2018 pursuant to our long-term incentive plan, we granted 0.004 million and 0.009 million shares of restricted stock to certain officers.  For both six month periods ended June 30, 2019 and 2018, pursuant to our long-term incentive plan, we granted 0.05 million shares of restricted stock and 0.02 million performance stock units (“PSU”) to certain officers.  Except for 0.002 million shares of restricted stock issued during the first quarters of 2019 and 2018 that vest ratably over three years, the shares of restricted stock and PSUs cliff vest after a period of three years.  The performance feature of the PSUs is based on a comparison of our total shareholder return over the three year period starting on the grant date to the total shareholder return over that period for a banking index of our peers.

Our directors may elect to receive a portion of their quarterly cash retainer fees in the form of common stock (either on a current basis or on a deferred basis pursuant to the non-employee director stock purchase plan referenced above). Shares equal in value to that portion of each director’s fees that he or she has elected to receive in stock are issued each quarter and vest immediately.  We issued 0.005 million shares during each six month period ended June 30, 2019 and 2018 pursuant to this plan and expensed their value during those same periods.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Total compensation expense recognized for grants pursuant to our long-term incentive plan was $0.4 million and $0.8 million during the three and six month periods ended June 30, 2019, respectively, and was $0.4 million and $0.7 million during the same periods in 2018, respectively.  The corresponding tax benefit relating to this expense was $0.1 million and $0.2 million for the three and six month periods ended June 30, 2019, respectively and $0.1 million and $0.2 million for the same periods in 2018. Total expense recognized for non-employee director share based payments was $0.06 million and $0.11 million during the three and six month periods ended June 30, 2019, respectively, and was $0.05 million and $0.11 million during the same periods in 2018, respectively.  The corresponding tax benefit relating to this expense was $0.01 million and $0.02 million for the three and six month periods ended June 30, 2019, respectively and $0.01 million and $0.02 million during the same periods in 2018.

At June 30, 2019, the total expected compensation cost related to non-vested restricted stock and PSUs not yet recognized was $2.7 million.  The weighted-average period over which this amount will be recognized is 2.0 years.

A summary of outstanding stock option grants and related transactions follows:

  
Number of
Shares
  
Average
Exercise
Price
  
Weighted-
Average
Remaining
Contractual
Term (Years)
  
Aggregated
Intrinsic
Value
 
           
(In thousands)
 
Outstanding at January 1, 2019
  
211,421
  
$
6.48
       
Granted
  
-
           
Exercised
  
(68,399
)
  
10.16
       
Forfeited
  
-
           
Expired
  
(558
)
  
22.35
       
Outstanding at June 30, 2019
  
142,464
  
$
4.66
   
3.5
  
$
2,442
 
                 
Vested and expected to vest at
                
June 30, 2019
  
142,464
  
$
4.66
   
3.5
  
$
2,442
 
Exercisable at June 30, 2019
  
142,464
  
$
4.66
   
3.5
  
$
2,442
 

A summary of outstanding non-vested restricted stock and PSUs and related transactions follows:

  
Number
of Shares
  
Weighted-
Average
Grant Date
Fair Value
 
Outstanding at January 1, 2019
  
258,419
  
$
19.00
 
Granted
  
78,283
   
22.98
 
Vested
  
(85,788
)
  
14.55
 
Forfeited
  
(11,475
)
  
22.91
 
Outstanding at June 30, 2019
  
239,439
  
$
21.72
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Certain information regarding options exercised during the periods follows:

  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  
2019
  
2018
  
2019
  
2018
 
             
Intrinsic value
 
$
-
  
$
1,596
  
$
836
  
$
1,674
 
Cash proceeds received
 
$
-
  
$
971
  
$
695
  
$
984
 
Tax benefit realized
 
$
-
  
$
336
  
$
176
  
$
352
 

9.    Income Tax

Income tax expense was $2.7 million and $2.1 million during the three month periods ended June 30, 2019 and 2018, respectively and $4.9 million and $4.1 million during the six months ended June 30, 2019 and 2018, respectively.  Our actual federal income tax expense is different than the amount computed by applying our statutory income tax rate to our income before income tax primarily due to tax-exempt interest income and tax-exempt income from the increase in the cash surrender value on life insurance.  In addition, the three and six month periods ending June 30, 2019 include reductions of zero and $0.2 million, respectively, of income tax expense related to the impact of the excess value of stock awards that vested and stock options that were exercised as compared to the initial fair values that were expensed.  These amounts during the same periods in 2018 were $0.1 million and $0.3 million, respectively.

We assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  The ultimate realization of this asset is primarily based on generating future income.  We concluded at June 30, 2019, June 30, 2018 and December 31, 2018 that the realization of substantially all of our deferred tax assets continues to be more likely than not.

At both June 30, 2019 and December 31, 2018, we had approximately $0.6 million, of gross unrecognized tax benefits.  We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease during the balance of 2019.

10.  Regulatory Matters

Capital guidelines adopted by federal and state regulatory agencies and restrictions imposed by law limit the amount of cash dividends our Bank can pay to us. Under these guidelines, the amount of dividends that may be paid in any calendar year is limited to the Bank’s current year net profits, combined with the retained net profits of the preceding two years. Further, the Bank cannot pay a dividend at any time that it has negative undivided profits.  As of June 30, 2019, the Bank had positive undivided profits of $32.6 million.  It is not our intent to have dividends paid in amounts that would reduce the capital of our Bank to levels below those which we consider prudent and in accordance with guidelines of regulatory authorities.

We are also subject to various regulatory capital requirements. The prompt corrective action regulations establish quantitative measures to ensure capital adequacy and require minimum amounts and ratios of total, Tier 1, and common equity Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. Failure to meet minimum capital requirements can result in certain mandatory, and possibly discretionary, actions by regulators that could have a material effect on our interim condensed consolidated financial statements. Under capital adequacy guidelines, we must meet specific capital requirements that involve quantitative measures as well as qualitative judgments by the regulators. The most recent regulatory filings as of June 30, 2019 and December 31, 2018, categorized our Bank as well capitalized. Management is not aware of any conditions or events that would have changed the most recent Federal Deposit Insurance Corporation (“FDIC”) categorization.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Our actual capital amounts and ratios follow (1):

  
Actual
  
Minimum for
Adequately Capitalized
Institutions
  
Minimum for
Well-Capitalized
Institutions
 
  
Amount
  
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
 
  
(Dollars in thousands)
 
                   
June 30, 2019
                  
Total capital to risk-weighted assets
                  
Consolidated
 
$
360,894
   
13.36
%
 
$
216,166
   
8.00
%
 
NA
  
NA
 
Independent Bank
  
346,015
   
12.81
   
216,074
   
8.00
  
$
270,093
   
10.00
%
 
                        
Tier 1 capital to risk-weighted assets
                        
Consolidated
 
$
333,508
   
12.34
%
 
$
162,125
   
6.00
%
 
NA
  
NA
 
Independent Bank
  
318,629
   
11.80
   
162,056
   
6.00
  
$
216,074
   
8.00
%
                         
Common equity tier 1 capital to risk-weighted assets
                        
Consolidated
 
$
295,310
   
10.93
%
 
$
121,594
   
4.50
%
 
NA
  
NA
 
Independent Bank
  
318,629
   
11.80
   
121,542
   
4.50
  
$
175,561
   
6.50
%
                         
Tier 1 capital to average assets
                        
Consolidated
 
$
333,508
   
9.95
%
 
$
134,131
   
4.00
%
 
NA
  
NA
 
Independent Bank
  
318,629
   
9.50
   
134,138
   
4.00
  
$
167,673
   
5.00
%
                         
December 31, 2018
                        
Total capital to risk-weighted assets
                        
Consolidated
 
$
371,603
   
14.25
%
 
$
208,572
   
8.00
%
 
NA
  
NA
 
Independent Bank
  
337,227
   
12.94
   
208,456
   
8.00
  
$
260,569
   
10.00
%
                         
Tier 1 capital to risk-weighted assets
                        
Consolidated
 
$
345,419
   
13.25
%
 
$
156,429
   
6.00
%
 
NA
  
NA
 
Independent Bank
  
311,043
   
11.94
   
156,342
   
6.00
  
$
208,456
   
8.00
%
                         
Common equity tier 1 capital to risk-weighted assets
                        
Consolidated
 
$
307,255
   
11.79
%
 
$
117,322
   
4.50
%
 
NA
  
NA
 
Independent Bank
  
311,043
   
11.94
   
117,256
   
4.50
  
$
169,370
   
6.50
%
                         
Tier 1 capital to average assets
                        
Consolidated
 
$
345,419
   
10.47
%
 
$
131,930
   
4.00
%
 
NA
  
NA
 
Independent Bank
  
311,043
   
9.44
   
131,778
   
4.00
  
$
164,723
   
5.00
%

(1) These ratios do not reflect a capital conservation buffer of 2.50% and 1.875% at June 30, 2019 and December 31, 2018, respectfully.
NA - Not applicable

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The components of our regulatory capital are as follows:

  
Consolidated
  
Independent Bank
 
  
June 30,
2019
  
December 31,
2018
  
June 30,
2019
  
December 31,
2018
 
  
(In thousands)
 
Total shareholders’ equity
 
$
330,846
  
$
338,994
  
$
354,165
  
$
341,496
 
Add (deduct)
                
Accumulated other comprehensive (income) loss for regulatory purposes
  
(1,366
)
  
4,311
   
(1,366
)
  
4,311
 
Goodwill and other intangibles
  
(34,170
)
  
(34,715
)
  
(34,170
)
  
(34,715
)
Disallowed deferred tax assets
  
-
   
(1,335
)
  
-
   
(49
)
Common equity tier 1 capital
  
295,310
   
307,255
   
318,629
   
311,043
 
Qualifying trust preferred securities
  
38,198
   
38,164
   
-
   
-
 
Tier 1 capital
  
333,508
   
345,419
   
318,629
   
311,043
 
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets
  
27,386
   
26,184
   
27,386
   
26,184
 
Total risk-based capital
 
$
360,894
  
$
371,603
  
$
346,015
  
$
337,227
 

11.  Fair Value Disclosures

FASB ASC topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 instruments include securities traded on active exchange markets, such as the New York Stock Exchange, as well as U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.

Level 2:  Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 instruments include securities traded in less active dealer or broker markets.

Level 3:  Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

We used the following methods and significant assumptions to estimate fair value:

Securities:  Where quoted market prices are available in an active market, securities (equity securities at fair value or available for sale) are classified as Level 1 of the valuation hierarchy.  Level 1 securities include certain preferred stocks included in our equity securities at fair value for which there are quoted prices in active markets (at December 31, 2018).  If quoted market prices are not available for the specific security, then fair values are estimated by (1) using quoted market prices of securities with similar characteristics, (2) matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or (3) a discounted cash flow analysis whose significant fair value inputs can generally be verified and do not typically involve judgment by management. These securities are classified as Level 2 of the valuation hierarchy and primarily include agency securities, private label mortgage-backed securities, other asset backed securities, obligations of states and political subdivisions, trust preferred securities, corporate securities and foreign government securities.

Loans held for sale:  The fair value of mortgage loans held for sale, carried at fair value is based on agency cash window loan pricing for comparable assets (recurring Level 2) and the fair value of mortgage loans held for sale, carried at the lower of cost or fair value (at December 31, 2018) is based on a quoted sales price (non-recurring Level 1).

Impaired loans with specific loss allocations based on collateral value:  From time to time, certain loans are considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. We measure our investment in an impaired loan based on one of three methods: the loan’s observable market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. Those impaired loans not requiring an allowance for loan losses represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2019 and December 31, 2018, all of our impaired loans were evaluated based on either the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. When the fair value of the collateral is based on an appraised value or when an appraised value is not available we record the impaired loan as nonrecurring Level 3.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and thus will typically result in a Level 3 classification of the inputs for determining fair value.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Other real estate:  At the time of acquisition, other real estate is recorded at fair value, less estimated costs to sell, which becomes the property’s new basis. Subsequent write-downs to reflect declines in value since the time of acquisition may occur from time to time and are recorded in net (gains) losses on other real estate and repossessed assets, which is part of non-interest expense - other in the Condensed Consolidated Statements of Operations. The fair value of the property used at and subsequent to the time of acquisition is typically determined by a third party appraisal of the property. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate  are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us. Once received, an independent third party, or a member of our Collateral Evaluation Department (for commercial properties), or a member of our Special Assets Group (for residential properties) reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. We compare the actual selling price of collateral that has been sold to the most recent appraised value of our properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. For commercial and residential properties we typically discount an appraisal to account for various factors that the appraisal excludes in its assumptions. These additional discounts generally do not result in material adjustments to the appraised value.

Capitalized mortgage loan servicing rights:  The fair value of capitalized mortgage loan servicing rights is based on a valuation model used by an independent third party that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Certain model assumptions are generally unobservable and are based upon the best information available including data relating to our own servicing portfolio, reviews of mortgage servicing assumption and valuation surveys and input from various mortgage servicers and, therefore, are recorded as Level 3.  Management evaluates the third party valuation for reasonableness each quarter as part of our financial reporting control processes.

Derivatives:  The fair value of rate-lock mortgage loan commitments is based on agency cash window loan pricing for comparable assets and the fair value of mandatory commitments to sell mortgage loans is based on mortgage backed security pricing for comparable assets (recurring Level 2). The fair value of interest rate swap and interest rate cap agreements are derived from proprietary models which utilize current market data.  The significant fair value inputs can generally be observed in the market place and do not typically involve judgment by management (recurring Level 2). The fair value of purchased and written options is based on prices of financial instruments with similar characteristics and do not typically involve judgment by management (recurring Level 2).

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Assets and liabilities measured at fair value, including financial assets for which we have elected the fair value option, were as follows:

     
Fair Value Measurements Using
 
  
Fair Value
Measure-
ments
  
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Un-
observable
Inputs
(Level 3)
 
  
(In thousands)
 
June 30, 2019:
            
Measured at Fair Value on a Recurring Basis
            
Assets
            
Securities available for sale
            
U.S. agency
 
$
17,183
  
$
-
  
$
17,183
  
$
-
 
U.S. agency residential mortgage-backed
  
137,017
   
-
   
137,017
   
-
 
U.S. agency commercial mortgage-backed
  
12,238
   
-
   
12,238
   
-
 
Private label mortgage-backed
  
30,129
   
-
   
30,129
   
-
 
Other asset backed
  
91,151
   
-
   
91,151
   
-
 
Obligations of states and political subdivisions
  
104,827
   
-
   
104,827
   
-
 
Corporate
  
33,882
   
-
   
33,882
   
-
 
Trust preferred
  
1,851
   
-
   
1,851
   
-
 
Foreign government
  
2,027
   
-
   
2,027
   
-
 
Loans held for sale, carried at fair value
  
62,883
   
-
   
62,883
   
-
 
Capitalized mortgage loan servicing rights
  
17,894
   
-
   
-
   
17,894
 
Derivatives (1)
  
6,233
   
-
   
6,233
   
-
 
Liabilities
                
Derivatives (2)
  
4,217
   
-
   
4,217
   
-
 
                 
Measured at Fair Value on a Non-recurring Basis:
                
Assets
                
Impaired loans (3)
                
Commercial
                
Income producing - real estate
  
116
   
-
   
-
   
116
 
Land, land development & construction-real estate
  
1,198
   
-
   
-
   
1,198
 
Commercial and industrial
  
106
   
-
   
-
   
106
 
Mortgage
                
1-4 family
  
839
   
-
   
-
   
839
 
Resort lending
  
360
   
-
   
-
   
360
 
Home equity - 1st lien
  
41
   
-
   
-
   
41
 
Home equity - 2nd lien
  
182
   
-
   
-
   
182
 
Installment
                
Home equity - 1st lien
  
2
   
-
   
-
   
2
 
Home equity - 2nd lien
  
31
   
-
   
-
   
31
 
Boat lending
  
21
   
-
   
-
   
21
 
Recreational vehicle lending
  
1
   
-
   
-
   
1
 
Other
  
97
   
-
   
-
   
97
 
Other real estate (4)
                
Mortgage
                
1-4 family
  
8
   
-
   
-
   
8
 
Home equity - 2nd lien
  
59
   
-
   
-
   
59
 

(1)
 Included in accrued income and other assets
(2)
 Included in accrued expenses and other liabilities
(3)
 Only includes impaired loans with specific loss allocations based on collateral value.
(4)
 Only includes other real estate with subsequent write downs to fair value.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

     
Fair Value Measurements Using
 
  
Fair Value
Measure-
ments
  
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Un-
observable
Inputs
(Level 3)
 
  
(In thousands)
 
December 31, 2018:
            
Measured at Fair Value on a Recurring Basis
            
Assets
            
Equity securities at fair value
 
$
393
  
$
393
  
$
-
  
$
-
 
Securities available for sale
                
U.S. agency
  
20,014
   
-
   
20,014
   
-
 
U.S. agency residential mortgage-backed
  
123,751
   
-
   
123,751
   
-
 
U.S. agency commercial mortgage-backed
  
5,726
   
-
   
5,726
   
-
 
Private label mortgage-backed
  
29,419
   
-
   
29,419
   
-
 
Other asset backed
  
83,319
   
-
   
83,319
   
-
 
Obligations of states and political subdivisions
  
127,555
   
-
   
127,555
   
-
 
Corporate
  
34,309
   
-
   
34,309
   
-
 
Trust preferred
  
1,819
   
-
   
1,819
   
-
 
Foreign government
  
2,014
   
-
   
2,014
   
-
 
Loans held for sale, carried at fair value
  
44,753
   
-
   
44,753
   
-
 
Capitalized mortgage loan servicing rights
  
21,400
   
-
   
-
   
21,400
 
Derivatives (1)
  
5,155
   
-
   
5,155
   
-
 
Liabilities
                
Derivatives (2)
  
2,326
   
-
   
2,326
   
-
 
                 
Measured at Fair Value on a Non-recurring Basis:
                
Assets
                
Loans held for sale, carried at the lower of cost or fair value
  
41,471
   
41,471
   
-
   
-
 
Impaired loans (3)
                
Commercial
                
Income producing - real estate
  
217
   
-
   
-
   
217
 
Land, land development & construction-real estate
  
106
   
-
   
-
   
106
 
Commercial and industrial
  
2,243
   
-
   
-
   
2,243
 
Mortgage
                
1-4 family
  
333
   
-
   
-
   
333
 
Resort lending
  
572
   
-
   
-
   
572
 
Other real estate (4)
                
Mortgage
                
1-4 family
  
95
   
-
   
-
   
95
 
Home equity - 2nd lien
  
59
   
-
   
-
   
59
 

(1)
 Included in accrued income and other assets
(2)
 Included in accrued expenses and other liabilities
(3)
 Only includes impaired loans with specific loss allocations based on collateral value.
(4)
 Only includes other real estate with subsequent write downs to fair value.

There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2019 and 2018.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Changes in fair values for financial assets which we have elected the fair value option for the periods presented were as follows:


 
Changes in Fair Values for the Six-Month Periods
Ended June 30 for Items Measured at Fair Value
Pursuant to Election of the Fair Value Option
 
  
Net Gains (Losses)
on Assets
   
Mortgage
  
Total
Change
in Fair
Values
Included
in Current
 
 
Securities
  
Mortgage
Loans
Loan
Servicing, net
Period
Earnings
  
(In thousands)
 
2019
            
Equity securities at fair value
 
$
167
  
$
-
  
$
-
  
$
167
 
Loans held for sale
  
-
   
577
   
-
   
577
 
Capitalized mortgage loan servicing rights
  
-
   
-
   
(6,113
)
  
(6,113
)
                 
2018
                
Equity securities at fair value
 
$
(119
)
 
$
-
  
$
-
  
$
(119
)
Loans held for sale
  
-
   
367
   
-
   
367
 
Capitalized mortgage loan servicing rights
  
-
   
-
   
892
   
892
 

For those items measured at fair value pursuant to our election of the fair value option, interest income is recorded within the Condensed Consolidated Statements of Operations based on the contractual amount of interest income earned on these financial assets and dividend income is recorded based on cash dividends received.

The following represent impairment charges recognized during the three and six month periods ended June 30, 2019 and 2018 relating to assets measured at fair value on a non-recurring basis:
 •

Loans which are measured for impairment using the fair value of collateral for collateral dependent loans had a carrying amount of $3.0 million, which is net of a valuation allowance of $1.2 million at June 30, 2019, and had a carrying amount of $3.5 million, which is net of a valuation allowance of $1.5 million at December 31, 2018.  The provision for loan losses included in our results of operations relating to impaired loans was a net expense of $0.3 million and $0.5 million for the three month periods ending June 30, 2019 and 2018, respectively, and a net expense of $0.4 million and $0.5 million for the six month periods ending June 30, 2019 and 2018, respectively.

 •

Other real estate,which is measured using the fair value of the property,had a carrying amount of $0.1 million which is net of a valuation allowance of $0.1 million at June 30,2019, and a carrying amount of $0.2 million, which is net of a valuation allowance of $0.1 million, at December 31, 2018.  Charges included in our results of operations relating to other real estate measured at fair value were zero and $0.01 million during each of the three and six month periods ended June 30, 2019, and were zero during each of the three and six month periods ended June 30, 2018.


NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

A reconciliation for all assets and (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) follows:

  
Capitalized Mortgage Loan Servicing Rights
 
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  
2019
  
2018
  
2019
  
2018
 
  
(In thousands)
  
(In thousands)
 
Beginning balance
 
$
19,909
  
$
17,783
  
$
21,400
  
$
15,699
 
Total gains (losses) realized and unrealized:
                
Included in results of operations
  
(3,422
)
  
(137
)
  
(6,113
)
  
892
 
Included in other comprehensive income (loss)
  
-
   
-
   
-
   
-
 
Purchases, issuances, settlements, maturities and calls
  
1,407
   
4,202
   
2,607
   
5,257
 
Transfers in and/or out of Level 3
  
-
   
-
   
-
   
-
 
Ending balance
 
$
17,894
  
$
21,848
  
$
17,894
  
$
21,848
 
Amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at June 30
 
$
(3,422
)
 
$
(137
)
 
$
(6,113
)
 
$
892
 

The fair value of our capitalized mortgage loan servicing rights has been determined based on a valuation model used by an independent third party as discussed above.  The significant unobservable inputs used in the fair value measurement of the capitalized mortgage loan servicing rights are discount rate, cost to service, ancillary income and float rate.  Significant changes in all four of these assumptions in isolation would result in significant changes to the value of our capitalized mortgage loan servicing rights.  Quantitative information about our Level 3 fair value measurements measured on a recurring basis follows:

  
Asset
Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 
Range
  
Weighted
Average
 
  
(In thousands)
        
June 30, 2019
            
Capitalized mortgage loan servicing rights
 
$
17,894
 
Present value of net
 
Discount rate
 
10.00% to 13.00
%  
10.14
%
     
servicing revenue
 
Cost to service
 
$
66 to $216
  
$
80
 
         
Ancillary income
 
20 to 36
   
22
 
         
Float rate
  
1.77
%
  
1.77
%
                
December 31, 2018
               
Capitalized mortgage loan servicing rights
 
$
21,400
 
Present value of net
 
Discount rate
 
10.00% to 13.00
%  
10.15
%
     
servicing revenue
 
Cost to service
 
$
68 to $216
  
$
81
 
         
Ancillary income
 
20 to 36
   
23
 
         
Float rate
  
2.57
%
  
2.57
%

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Quantitative information about Level 3 fair value measurements measured on a non-recurring basis follows:

  
Asset
Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 
Range
 
Weighted
Average
 
  
(In thousands)
       
June 30, 2019
           
Impaired loans
           
Commercial(1)
 
$
1,420
 
Sales comparison approach
 
Adjustment for differences between comparable sales
 
(48.0)% to 40.0
%
 
(6.0
)%
              
Mortgage and
             
Installment(2)
  
1,574
 
Sales comparison approach
 
Adjustment for  differences between comparable sales
 
(40.1) to 56.7
  
(2.6
)
              
Other real estate
             
Mortgage
  
67
 
Sales comparison approach
 
Adjustment for differences between comparable sales
 
(0.0) to 10.2
  
4.1
 
              
December 31, 2018
             
Impaired loans
             
Commercial(1)
 
$
2,566
 
Sales comparison approach
 
Adjustment for differences between comparable sales
 
(32.5)% to 60.0
%
 
(1.9
)%
              
Mortgage
  
905
 
Sales comparison approach
 
Adjustment for differences between comparable sales
 
(40.1) to 25.6
  
0.7
 
              
Other real estate
             
Mortgage
  
154
 
Sales comparison approach
 
Adjustment for  differences between comparable sales
 
0.0 to 34.1
  
11.2
 

(1)
In addition to the valuation techniques and unobservable inputs discussed above, at June 30, 2019 and December 31, 2018, we had an impaired collateral dependent commercial relationship that totaled $0.5 million and $0.7 million, respectively that was secured by collateral other than real estate. Collateral securing this relationship primarily included accounts receivable, inventory and cash at June 30, 2019 and December 31, 2018. Valuation techniques at June 30, 2019 and December 31, 2018, included discounting financial statement values for each particular asset type. Discount rates used ranged from 5% to 97% of stated values at June 30, 2019 and 20% to 80% of stated values at December 31, 2018.
(2)
In addition to the valuation techniques and unobservable inputs discussed above, at June 30, 2019 certain impaired collateral dependent installment loans totaling approximately $0.1 million are secured by collateral other than real estate.  For the majority of these loans, we apply internal discount rates to industry valuation guides.

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding for loans held for sale for which the fair value option has been elected for the periods presented.

  
Aggregate
Fair Value
  
Difference
  
Contractual
Principal
 
  
(In thousands)
 
Loans held for sale
         
June 30, 2019
 
$
62,883
  
$
1,834
  
$
61,049
 
December 31, 2018
  
44,753
   
1,257
   
43,496
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

12.  Fair Values of Financial Instruments

Most of our assets and liabilities are considered financial instruments. Many of these financial instruments lack an available trading market and it is our general practice and intent to hold the majority of our financial instruments to maturity. Significant estimates and assumptions were used to determine the fair value of financial instruments. These estimates are subjective in nature, involving uncertainties and matters of judgment, and therefore, fair values may not be a precise estimate. Changes in assumptions could significantly affect the estimates.

Estimated fair values have been determined using available data and methodologies that are considered suitable for each category of financial instrument. For instruments with adjustable interest rates which reprice frequently and without significant credit risk, it is presumed that estimated fair values approximate the recorded book balances.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The estimated recorded book balances and fair values follow:

 
       
Fair Value Using
 
 
 
Recorded
Book
Balance
  
Fair Value
  
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Un-
observable
Inputs
(Level 3)
 
 
 
(In thousands)
 
June 30, 2019
               
Assets
               
Cash and due from banks
 
$
34,461
  
$
34,461
  
$
34,461
  
$
-
  
$
-
 
Interest bearing deposits
  
20,676
   
20,676
   
20,676
   
-
   
-
 
Interest bearing deposits - time
  
498
   
498
   
-
   
498
   
-
 
Securities available for sale
  
430,305
   
430,305
   
-
   
430,305
   
-
 
Federal Home Loan Bank and Federal Reserve Bank Stock
  
18,359
  
NA
  
NA
  
NA
  
NA
 
Net loans and loans held for sale
  
2,743,506
   
2,747,828
   
-
   
62,883
   
2,684,945
 
Accrued interest receivable
  
10,816
   
10,816
   
1
   
1,634
   
9,181
 
Derivative financial instruments
  
6,233
   
6,233
   
-
   
6,233
   
-
 
 
                    
Liabilities
                    
Deposits with no stated maturity (1)
 
$
2,294,255
  
$
2,294,255
  
$
2,294,255
  
$
-
  
$
-
 
Deposits with stated maturity (1)
  
684,630
   
683,547
   
-
   
683,547
   
-
 
Other borrowings
  
41,144
   
41,271
   
-
   
41,271
   
-
 
Subordinated debentures
  
39,422
   
33,214
   
-
   
33,214
   
-
 
Accrued interest payable
  
1,668
   
1,668
   
128
   
1,540
   
-
 
Derivative financial instruments
  
4,217
   
4,217
   
-
   
4,217
   
-
 
 
                    
December 31, 2018
                    
Assets
                    
Cash and due from banks
 
$
23,350
  
$
23,350
  
$
23,350
  
$
-
  
$
-
 
Interest bearing deposits
  
46,894
   
46,894
   
46,894
   
-
   
-
 
Interest bearing deposits - time
  
595
   
594
   
-
   
594
   
-
 
Equity securities at fair value
  
393
   
393
   
393
   
-
   
-
 
Securities available for sale
  
427,926
   
427,926
   
-
   
427,926
   
-
 
Federal Home Loan Bank and Federal Reserve Bank Stock
  
18,359
  
NA
  
NA
  
NA
  
NA
 
Net loans and loans held for sale
  
2,643,856
   
2,606,256
   
41,471
   
44,753
   
2,520,032
 
Accrued interest receivable
  
10,164
   
10,164
   
22
   
1,789
   
8,353
 
Derivative financial instruments
  
5,155
   
5,155
   
-
   
5,155
   
-
 
 
                    
Liabilities
                    
Deposits with no stated maturity (1)
 
$
2,197,494
  
$
2,197,494
  
$
2,197,494
  
$
-
  
$
-
 
Deposits with stated maturity (1)
  
715,934
   
711,312
   
-
   
711,312
   
-
 
Other borrowings
  
25,700
   
25,706
   
-
   
25,706
   
-
 
Subordinated debentures
  
39,388
   
35,021
   
-
   
35,021
   
-
 
Accrued interest payable
  
1,646
   
1,646
   
114
   
1,532
   
-
 
Derivative financial instruments
  
2,326
   
2,326
   
-
   
2,326
   
-
 

(1)
Deposits with no stated maturity include reciprocal deposits with a recorded book balance of $270.864 million and $123.080 million at June 30, 2019 and December 31, 2018, respectively. Deposits with a stated maturity include reciprocal deposits with a recorded book balance of $55.462 million and $58.992 million at June 30, 2019 and December 31, 2018, respectively.
 
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The fair values for commitments to extend credit and standby letters of credit are estimated to approximate their aggregate book balance, which is nominal and therefore are not disclosed.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the entire holdings of a particular financial instrument.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, the value of future earnings attributable to off-balance sheet activities and the value of assets and liabilities that are not considered financial instruments.

Fair value estimates for deposit accounts do not include the value of the core deposit intangible asset resulting from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

13. Contingencies

We are involved in various litigation matters in the ordinary course of business. At the present time, we do not believe any of these matters will have a significant impact on our consolidated financial position or results of operations. The aggregate amount we have accrued for losses we consider probable as a result of these litigation matters is immaterial. However, because of the inherent uncertainty of outcomes from any litigation matter, we believe it is reasonably possible we may incur losses in addition to the amounts we have accrued.  At this time, we estimate the maximum amount of additional losses that are reasonably possible is insignificant.  However, because of a number of factors, including the fact that certain of these litigation matters are still in their early stages, this maximum amount may change in the future.

The litigation matters described in the preceding paragraph primarily include claims that have been brought against us for damages, but do not include litigation matters where we seek to collect amounts owed to us by third parties (such as litigation initiated to collect delinquent loans). These excluded, collection-related matters may involve claims or counterclaims by the opposing party or parties, but we have excluded such matters from the disclosure contained in the preceding paragraph in all cases where we believe the possibility of us paying damages to any opposing party is remote. Risks associated with the likelihood that we will not collect the full amount owed to us, net of reserves, are disclosed elsewhere in this report.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The provision for loss reimbursement on sold loans represents our estimate of incurred losses related to mortgage loans that we have sold to investors (primarily Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Bank of Indianapolis). Since we sell mortgage loans without recourse, loss reimbursements only occur in those instances where we have breached a representation or warranty or other contractual requirement related to the loan sale. The provision for loss reimbursement on sold loans was an expense of $0.03 million and $0.02 million for the three month periods ended June 30, 2019 and 2018 and an expense of $0.15 million and $0.03 million for the six month periods ended June 30, 2019 and 2018, respectively. The reserve for loss reimbursements on sold mortgage loans totaled $0.83 million and $0.78 million at June 30, 2019 and December 31, 2018, respectively. This reserve is included in accrued expenses and other liabilities in our Condensed Consolidated Statements of Financial Condition. This reserve is based on an analysis of mortgage loans that we have sold which are further categorized by delinquency status, loan to value, and year of origination. The calculation includes factors such as probability of default, probability of loss reimbursement (breach of representation or warranty) and estimated loss severity. We believe that the amounts that we have accrued for incurred losses on sold mortgage loans are appropriate given our analyses. However, future losses could exceed our current estimate.

We own 12,566 shares of VISA Class B common stock. At the present time, these shares can only be sold to other Class B shareholders. As a result, there has generally been limited transfer activityin private transactions between buyers and sellers. Given the limited activity that we have become aware of  and the continuing uncertainty regarding the likelihood, ultimate timing and eventual exchange rate for Class B shares into Class A shares, we have elected to value these shares at zero. However, given the current conversion ratio of 1.6298 to Class A shares and the closing price of VISA Class A shares on July 30, 2019 of $181.53 per share, our 12,566 Class B shareswould have a current “value” of approximately $3.7 million. We continue to monitor Class B trading activity and the status of the resolution of certain litigation matters at VISA that would trigger the conversion of Class B common shares into Class A common shares that would have no trading restrictions.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

14.  Accumulated Other Comprehensive Loss (“AOCL”)

A summary of changes in AOCL follows:

  
Unrealized
Gains
(Losses) on
Securities
Available
for Sale
  
Dispropor-
tionate
Tax Effects
from
Securities
Available
for Sale
  
Unrealized
Gains
(Losses) on
Cash Flow
Hedges
  
Total
 
  
(In thousands)
 
For the three months ended June 30,
            
2019
                
Balances at beginning of period
 
$
(57
)
 
$
(5,798
)
 
$
(962
)
 
$
(6,817
)
Other comprehensive income (loss) before reclassifications
  
3,097
   
-
   
(599
)
  
2,498
 
Amounts reclassified from AOCL
  
-
   
-
   
(112
)
  
(112
)
Net current period other comprehensive income (loss)
  
3,097
   
-
   
(711
)
  
2,386
 
Balances at end of period
 
$
3,040
  
$
(5,798
)
 
$
(1,673
)
 
$
(4,431
)
                 
2018
                
Balances at beginning of period
 
$
(3,509
)
 
$
(5,798
)
 
$
805
  
$
(8,502
)
Other comprehensive income (loss) before reclassifications
  
(949
)
  
-
   
258
   
(691
)
Amounts reclassified from AOCL
  
21
   
-
   
(42
)
  
(21
)
Net current period other comprehensive income (loss)
  
(928
)
  
-
   
216
   
(712
)
Balances at end of period
 
$
(4,437
)
 
$
(5,798
)
 
$
1,021
  
$
(9,214
)
                 
For the six months ended June 30,
                
2019
                
Balances at beginning of period
 
$
(4,185
)
 
$
(5,798
)
 
$
(125
)
 
$
(10,108
)
Other comprehensive income (loss) before reclassifications
  
7,333
   
-
   
(1,318
)
  
6,015
 
Amounts reclassified from AOCL
  
(108
)
  
-
   
(230
)
  
(338
)
Net current period other comprehensive income (loss)
  
7,225
   
-
   
(1,548
)
  
5,677
 
Balances at end of period
 
$
3,040
  
$
(5,798
)
 
$
(1,673
)
 
$
(4,431
)
                 
2018
                
Balances at beginning of period
 
$
(470
)
 
$
(5,798
)
 
$
269
  
$
(5,999
)
Other comprehensive income (loss) before reclassifications
  
(4,003
)
  
-
   
799
   
(3,204
)
Amounts reclassified from AOCL
  
36
   
-
   
(47
)
  
(11
)
Net current period other comprehensive income (loss)
  
(3,967
)
  
-
   
752
   
(3,215
)
Balances at end of period
 
$
(4,437
)
 
$
(5,798
)
 
$
1,021
  
$
(9,214
)

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The disproportionate tax effects from securities available for sale arose due to tax effects of other comprehensive income (“OCI”) in the presence of a valuation allowance against our deferred tax assets and a pretax loss from operations.  Generally, the amount of income tax expense or benefit allocated to operations is determined without regard to the tax effects of other categories of income or loss, such as OCI. However, an exception to the general rule is provided when, in the presence of a valuation allowance against deferred tax assets, there is a pretax loss from operations and pretax income from other categories in the current period.  In such instances, income from other categories must offset the current loss from operations, the tax benefit of such offset being reflected in operations. Release of material disproportionate tax effects from other comprehensive income to earnings is done by the portfolio method whereby the effects will remain in AOCL as long as we carry a more than inconsequential portfolio of securities available for sale.

A summary of reclassifications out of each component of AOCL for the three months ended June 30 follows:

AOCL Component
 
Amount
Reclassified
From
AOCL
 
 Affected Line Item in Condensed
 Consolidated Statements of Operations
  
(In thousands)
  
2019
     
Unrealized gains (losses) on securities available for sale
     
  
$
-
 
Net gains (losses) on securities
   
-
 
Net impairment loss recognized in earnings
   
-
 
Total reclassifications before tax
   
-
 
Income tax expense
  
$
-
 
Reclassifications, net of tax
        
Unrealized gains (losses) on cash flow hedges
      
  
$
(142
)
Interest expense
   
(30
)
Income tax expense
  
$
(112
)
Reclassification, net of tax
        
  
$
112
 
Total reclassifications for the period, net of tax
     
2018
    
Unrealized gains (losses) on securities available for sale
    
  
$
(26
)
Net gains (losses) on securities
   
-
 
Net impairment loss recognized in earnings
   
(26
)
Total reclassifications before tax
   
(5
)
Income tax expense
  
$
(21
)
Reclassifications, net of tax
     
Unrealized gains (losses) on cash flow hedges
    
  
$
(53
)
Interest expense
   
(11
)
Income tax expense
  
$
(42
)
Reclassification, net of tax
     
  
$
21
 
Total reclassifications for the period, net of tax

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

A summary of reclassifications out of each component of AOCL for the six months ended June 30 follows:

AOCL Component
 
Amount
Reclassified
From
AOCL
 
 Affected Line Item in Condensed
 Consolidated Statements of Operations
  
(In thousands)
  
2019
     
Unrealized gains (losses) on securities available for sale
     
  
$
137
 
Net gains (losses) on securities
   
-
 
Net impairment loss recognized in earnings
   
137
 
Total reclassifications before tax
   
29
 
Income tax expense
  
$
108
 
Reclassifications, net of tax
        
Unrealized gains (losses) on cash flow hedges
      
  
$
(291
)
Interest expense
   
(61
)
Income tax expense
  
$
(230
)
Reclassification, net of tax
        
  
$
338
 
Total reclassifications for the period, net of tax
        
2018
      
Unrealized gains (losses) on securities available for sale
      
  
$
(45
)
Net gains (losses) on securities
   
-
 
Net impairment loss recognized in earnings
   
(45
)
Total reclassifications before tax
   
(9
)
Income tax expense
  
$
(36
)
Reclassifications, net of tax
        
Unrealized gains (losses) on cash flow hedges
      
  
$
(59
)
Interest expense
   
(12
)
Income tax expense
  
$
(47
)
Reclassification, net of tax
        
  
$
11
 
Total reclassifications for the period, net of tax

15.  Revenue from Contracts with Customers

We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. We derive the majority of our revenue from financial instruments and their related contractual rights and obligations which for the most part are excluded from the scope of this topic.  These sources of revenue that are excluded from the scope of this topic include interest income, net gains on mortgage loans, net gains (losses) on securities, mortgage loan servicing, net and bank owned life insurance and were approximately 84.6% and 82.8% of total revenues at June 30, 2019 and 2018, respectively.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Material sources of revenue that are included in the scope of this topic include service charges on deposit accounts, other deposit related income, interchange income and investment and insurance commissions and are discussed in the following paragraphs.  Generally these sources of revenue are earned at the time the service is delivered or over the course of a monthly period and do not result in any contract asset or liability balance at any given period end.  As a result, there were no contract assets or liabilities recorded as of June 30, 2019 and December 31, 2018.

Service charges on deposit accounts and other deposit related income: Revenues are earned on depository accounts for commercial and retail customers and include fees for transaction-based, account maintenance and overdraft services. Transaction-based fees, which includes services such as ATM use fees, stop payment charges and ACH fees are recognized at the time the transaction is executed as that is the time we fulfill our customer’s request.  Account maintenance fees, which includes monthly maintenance services are earned over the course of a month representing the period over which the performance obligation is satisfied. Our obligation for overdraft services is satisfied at the time of the overdraft.

Interchange income: Interchange income primarily includes debit card interchange and network revenues.  Debit card interchange and network revenues are earned on debit card transactions conducted through payment networks such as MasterCard and NYCE. Interchange income is recognized concurrently with the delivery of services on a daily basis. Interchange and network revenues are presented gross of interchange expenses, which are presented separately as a component of non-interest expense.

Investment and insurance commissions:  Investment and insurance commissions include fees and commissions from asset management, custody, recordkeeping, investment advisory and other services provided to our customers. Revenue is recognized on an accrual basis at the time the services are performed and are generally based on either the market value of the assets managed or the services provided.  We have an agent relationship with a third party provider of these services and net certain direct costs charged by the third party provider associated with providing these services to our customers.

Net (gains) losses on other real estate and repossessed assets:  We record a gain or loss from the sale of other real estate when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.  If we were to finance the sale of other real estate to the buyer, we would assess whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction is probable.  Once these criteria are met, the other real estate asset would be derecognized and the gain or loss on sale would be recorded upon the transfer of control of the property to the buyer.  There were no other real estate properties sold during the three and six month periods ending June 30, 2019 and 2018 that were financed by us.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Disaggregation of our revenue sources by attribute follows:

Three months ending June 30, 2019
 
  
Service
Charges
on Deposit
Accounts
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  
Total
 
  
(In thousands)
 
Retail
               
Overdraft fees
 
$
1,882
   
-
   
-
   
-
  
$
1,882
 
Account service charges
  
541
   
-
   
-
   
-
   
541
 
ATM fees
  
-
  
$
346
   
-
   
-
   
346
 
Other
  
-
   
212
   
-
   
-
   
212
 
Business
                    
Overdraft fees
  
377
   
-
   
-
   
-
   
377
 
Account service charges
  
-
   
-
   
-
   
-
   
-
 
ATM fees
  
-
   
9
   
-
   
-
   
9
 
Other
  
-
   
89
   
-
   
-
   
89
 
Interchange income
  
-
   
-
  
$
2,604
   
-
   
2,604
 
Asset management revenue
  
-
   
-
   
-
  
$
277
   
277
 
Transaction based revenue
  
-
   
-
   
-
   
173
   
173
 
                     
Total
 
$
2,800
  
$
656
  
$
2,604
  
$
450
  
$
6,510
 
                     
Reconciliation to Condensed Consolidated Statement of Operations:
         
Non-interest income - other:
                    
Other deposit related income
                 
$
656
 
Investment and insurance commissions
               
450
 
Bank owned life insurance
                  
270
 
Other
                  
730
 
Total
                 
$
2,106
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Three months ending June 30, 2018
               
  
Service
Charges
on Deposit
Accounts
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  
Total
 
  
(In thousands)
 
Retail
               
Overdraft fees
 
$
2,044
   
-
   
-
   
-
  
$
2,044
 
Account service charges
  
588
   
-
   
-
   
-
   
588
 
ATM fees
  
-
  
$
358
   
-
   
-
   
358
 
Other
  
-
   
230
   
-
   
-
   
230
 
Business
                    
Overdraft fees
  
380
   
-
   
-
   
-
   
380
 
Account service charges
  
83
   
-
   
-
   
-
   
83
 
ATM fees
  
-
   
8
   
-
   
-
   
8
 
Other
  
-
   
146
   
-
   
-
   
146
 
Interchange income
  
-
   
-
  
$
2,504
   
-
   
2,504
 
Asset management revenue
  
-
   
-
   
-
  
$
281
   
281
 
Transaction based revenue
  
-
   
-
   
-
   
202
   
202
 
                     
Total
 
$
3,095
  
$
742
  
$
2,504
  
$
483
  
$
6,824
 
                     
Reconciliation to Condensed Consolidated Statement of Operations:
         
Non-interest income - other:
                    
Other deposit related income
                 
$
742
 
Investment and insurance commissions
               
483
 
Bank owned life insurance
                  
220
 
Other
                  
772
 
Total
                 
$
2,217
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Six months ending June 30, 2019
 
  
Service
Charges
on Deposit
Accounts
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  
Total
 
  
(In thousands)
 
Retail
               
Overdraft fees
 
$
3,612
   
-
   
-
   
-
  
$
3,612
 
Account service charges
  
1,057
   
-
   
-
   
-
   
1,057
 
ATM fees
  
-
  
$
668
   
-
   
-
   
668
 
Other
  
-
   
463
   
-
   
-
   
463
 
Business
                    
Overdraft fees
  
762
   
-
   
-
   
-
   
762
 
Account service charges
  
9
   
-
   
-
   
-
   
9
 
ATM fees
  
-
   
17
   
-
   
-
   
17
 
Other
  
-
   
218
   
-
   
-
   
218
 
Interchange income
  
-
   
-
  
$
4,959
   
-
   
4,959
 
Asset management revenue
  
-
   
-
   
-
  
$
531
   
531
 
Transaction based revenue
  
-
   
-
   
-
   
216
   
216
 
                     
Total
 
$
5,440
  
$
1,366
  
$
4,959
  
$
747
  
$
12,512
 
                     
Reconciliation to Condensed Consolidated Statement of Operations:
         
Non-interest income - other:
                    
Other deposit related income
                 
$
1,366
 
Investment and insurance commissions
               
747
 
Bank owned life insurance
                  
512
 
Other
                  
1,745
 
Total
                 
$
4,370
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Six months ending June 30, 2018
 
  
Service
Charges
on Deposit
Accounts
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  
Total
 
  
(In thousands)
 
Retail
               
Overdraft fees
 
$
4,016
   
-
   
-
   
-
  
$
4,016
 
Account service charges
  
1,088
   
-
   
-
   
-
   
1,088
 
ATM fees
  
-
  
$
703
   
-
   
-
   
703
 
Other
  
-
   
437
   
-
   
-
   
437
 
Business
                    
Overdraft fees
  
745
   
-
   
-
   
-
   
745
 
Account service charges
  
151
   
-
   
-
   
-
   
151
 
ATM fees
  
-
   
16
   
-
   
-
   
16
 
Other
  
-
   
275
   
-
   
-
   
275
 
Interchange income
  
-
   
-
  
$
4,750
   
-
   
4,750
 
Asset management revenue
  
-
   
-
   
-
  
$
552
   
552
 
Transaction based revenue
  
-
   
-
   
-
   
369
   
369
 
                     
Total
 
$
6,000
  
$
1,431
  
$
4,750
  
$
921
  
$
13,102
 
                     
Reconciliation to Condensed Consolidated Statement of Operations:
         
Non-interest income - other:
                    
Other deposit related income
                 
$
1,431
 
Investment and insurance commissions
               
921
 
Bank owned life insurance
                  
476
 
Other
                  
1,332
 
Total
                 
$
4,160
 

16.  Leases

We have operating leases, primarily relating to certain office facilities, some of which include renewal options and escalation clauses.  Certain leases also include both lease components (fixed payments including rent, taxes and insurance costs) and non-lease components (common area or other maintenance costs) which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases.  Most of our leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion and are included in our ROU assets and lease liabilities if they are reasonably certain of exercise.  As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

The cost components of our operating leases follows:

  
Three Months
Ended
  
Six Months
Ended
 
  
June 30, 2019
 
  
(In thousands)
 
Operating lease cost
 
$
563
  
$
1,127
 
Variable lease cost
  
49
   
72
 
Short-term lease cost
  
5
   
10
 
Total
 
$
617
  
$
1,209
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities.

Supplemental balance sheet information related to our operating leases follows:

  
June 30, 2019
 
  
(In thousands)
 
Lease right of use asset (1)
 
$
6,692
 
Lease liabilities (2)
 
$
6,700
 
     
Weighted average remaining lease term (years)
  
5.58
 
Weighted average discount rate
  
3.2
%

(1)
 Included in Accrued income and other assets in our Condensed Consolidated Statements of Financial Condition.
(2)
 Included in Accrued expenses and other liabilities in our Condensed Consolidated Statements of Financial Condition.

Maturity analysis of our lease liabilities at June 30, 2019 based on required contractual payments follows:

  
(In thousands)
 
    
Six months ending December 31, 2019
 
$
1,098
 
2020
  
1,711
 
2021
  
1,248
 
2022
  
963
 
2023
  
925
 
2024 and thereafter
  
1,428
 
Total lease payments
  
7,373
 
Less imputed interest
  
(673
)
Total
 
$
6,700
 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

17.  Recent Acquisition

Effective April 1, 2018, we completed the acquisition of all of the issued and outstanding shares of common stock of TCSB through a merger of TCSB into Independent Bank Corporation (“IBCP”), with IBCP as the surviving corporation (the ‘‘Merger’’).  On that same date we also consolidated Traverse City State Bank, TCSB’s wholly-owned subsidiary bank, into Independent Bank (with Independent Bank as the surviving institution).  Under the terms of the merger agreement each holder of TCSB common stock received 1.1166 shares of IBCP common stock plus cash in lieu of fractional shares totaling $0.005 million.  TCSB option holders had their options converted into IBCP stock options.  As a result we issued 2.71 million shares of common stock and 0.19 million stock options with a fair value of approximately $64.5 million to the shareholders and option holders of TCSB.  The fair value of common stock and stock options issued as the consideration paid for TCSB was determined using the closing price of our common stock on the acquisition date.  This acquisition was accounted for under the acquisition method of accounting.  Accordingly, we recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values.  TCSB results of operations are included in our results beginning April 1, 2018.

The following table reflects our final valuation of the assets acquired and liabilities assumed:

  
(In thousands)
 
Cash and cash equivalents
 
$
23,521
 
Interest bearing deposits - time
  
4,054
 
Securities available for sale
  
6,066
 
Federal Home Loan Bank stock
  
778
 
Loans, net
  
295,799
 
Property and equipement, net
  
1,067
 
Capitalized mortgage loan servicing rights
  
3,047
 
Accrued income and other assets
  
3,362
 
Other intangibles (1)
  
5,798
 
Total assets acquired
  
343,492
 
     
Deposits
  
287,710
 
Other borrowings
  
14,345
 
Subordinated debentures
  
3,768
 
Accrued expenses and other liabilities
  
1,429
 
Total liabilities assumed
  
307,252
 
Net assets acquired
  
36,240
 
Goodwill
  
28,300
 
Purchase price (fair value of consideration)
 
$
64,540
 

(1)
Relates to core deposit intangibles (see note #7).

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Management views the disclosed fair values presented above to be final as the one-year measurement period for finalizing acquisition-date fair values has expired.  During this measurement period we had one adjustment to our acquisition date fair values.  During the third quarter of 2018, goodwill was reduced by $0.7 million (to $28.3 million) related to the collection of a TCSB acquired loan that had been charged off in full prior to the Merger.  Because of the status of the collection activities related to this loan at the time of the Merger, we determined that this transaction was a measurement period adjustment and reduced goodwill accordingly.

Goodwill related to this acquisition will not be deductible for tax purposes and consists largely of synergies and cost savings resulting from the combining of the operations of TCSB into ours as well as expansion into a new market.

The estimated fair value of the core deposit intangible was $5.8 million and is being amortized over an estimated useful life of 10 years.

The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows.  However, we believe that all contractual cash flows related to these financial instruments will be collected.  As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans which have shown evidence of credit deterioration since origination.  Receivables acquired that are not subject to these requirements included non-impaired customer receivables with a fair value and gross contractual amounts receivable of $292.9 million and $298.6 million on the date of acquisition.

ITEM 2.

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

Introduction. The following section presents additional information to assess the financial condition and results of operations of Independent Bank Corporation (“IBCP”), its wholly-owned bank, Independent Bank (the “Bank”), and their subsidiaries. This section should be read in conjunction with the Condensed Consolidated Financial Statements. We also encourage you to read our 2018 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”). That report includes a list of risk factors that you should consider in connection with any decision to buy or sell our securities.

Overview. We provide banking services to customers located primarily in Michigan’s Lower Peninsula.  We also have two loan production offices in Ohio (Columbus and Fairlawn).  As a result, our success depends to a great extent upon the economic conditions in Michigan’s Lower Peninsula.

Recent Developments. On December 4, 2017, we entered into an Agreement and Plan of Merger with TCSB Bancorp, Inc. (“TCSB”) (the “Merger Agreement”) providing for a business combination of IBCP and TCSB.  On April 1, 2018, TCSB was merged with and into IBCP, with IBCP as the surviving corporation (the “Merger”).  In connection with the Merger, on April 1, 2018, IBCP consolidated Traverse City State Bank, TCSB’s wholly-owned subsidiary bank, with and into Independent Bank (with Independent Bank as the surviving institution). See note #17.

It is against this backdrop that we discuss our results of operations and financial condition in the second quarter and first six months of 2019 as compared to 2018.

Results of Operations

Summary.  We recorded net income of $10.7 million and $8.8 million during the three months ended June 30, 2019 and 2018, respectively.  The increase in 2019 second quarter results as compared to 2018 primarily reflects an increase in net interest income and a decrease in non-interest expense that were partially offset by a decline in non-interest income and an increase in income tax expense.

We recorded net income of $20.1 million and $18.0 million during the six months ended June 30, 2019 and 2018, respectively.  The increase in 2019 year-to-date results as compared to 2018 is primarily due to an increase in net interest income that was partially offset by a decline in non-interest income as well as increases in the provision for loan losses, non-interest expense and income tax expense.

Key performance ratios



Three months ended
June 30,


Six months ended
June 30,

  
2019
  
2018
  
2019
  
2018
 
Net income (annualized) to
            
Average assets
  
1.27
%
  
1.12
%
  
1.20
%
  
1.22
%
Average common shareholders’ equity
  
12.72
   
10.57
   
11.93
   
12.09
 
                 
Net income per common share
                
Basic
 
$
0.47
  
$
0.37
  
$
0.86
  
$
0.79
 
Diluted
  
0.46
   
0.36
   
0.85
   
0.78
 

Net interest income.  Net interest income is the most important source of our earnings and thus is critical in evaluating our results of operations. Changes in our net interest income are primarily influenced by our level of interest-earning assets and the income or yield that we earn on those assets and the manner and cost of funding our interest-earning assets. Certain macro-economic factors can also influence our net interest income such as the level and direction of interest rates, the difference between short-term and long-term interest rates (the steepness of the yield curve) and the general strength of the economies in which we are doing business. Finally, risk management plays an important role in our level of net interest income. The ineffective management of credit risk and interest-rate risk in particular can adversely impact our net interest income.

Our net interest income totaled $30.8 million during the second quarter of 2019, an increase of $1.8 million, or 6.1% from the year-ago period.  This increase primarily reflects a $227.3 million increase in average interest-earning assets that was partially offset by a six basis point decrease in our tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”).

For the first six months of 2019, net interest income totaled $61.0 million, an increase of $8.1 million, or 15.3% from 2018.  This increase primarily reflects a $382.9 million increase in average interest-earning assets as well as a five basis point increase in our net interest margin.

Interest and fees on loans include $0.4 million and $0.8 million for the second quarter and first six months of 2019, respectively, and include $0.6 million for both the second quarter and first six months of 2018, of accretion of the discount recorded on loans acquired in the Merger.

The increase in average interest-earning assets primarily reflects loan growth utilizing funds from increases in deposits and borrowed funds as well as the impact of the Merger (for the year-to-date comparative periods).  The quarterly comparative decrease in the net interest margin reflects the impact of the flattening yield curve during 2019 and rising funding costs. The year-to-date comparative increase in the net interest margin reflects a change in the mix of average-interest earning assets (higher percentage of loans), increases in short-term market interest rates during 2018 and the impact of the Merger.
 
Our net interest income is also adversely impacted by our level of non-accrual loans. In the second quarter and first six months of 2019, non-accrual loans averaged $8.4 million and $8.8 million, respectively. In the second quarter and first six months of 2018, non-accrual loans averaged $7.5 million in each period.  In addition, in the second quarter and first six months of 2019, we had net recoveries of $0.20 million and $0.43 million, respectively, of unpaid interest on loans placed on or taken off non-accrual during each period or on loans previously charged-off compared to net recoveries of $0.18 million and $0.35 million, respectively, during the same periods in 2018.

Average Balances and Tax Equivalent Rates

  
Three Months Ended
June 30,
 
  
2019
  
2018
 

 
Average
Balance
  
Interest
  
Rate (2)
  
Average
Balance
  
Interest
  
Rate (2)
 
  
(Dollars in thousands)
 
Assets
                  
Taxable loans
 
$
2,692,168
  
$
33,762
   
5.02
%
 
$
2,442,159
  
$
29,606
   
4.86
%
Tax-exempt loans (1)
  
7,480
   
94
   
5.04
   
6,897
   
85
   
4.94
 
Taxable securities
  
392,075
   
3,034
   
3.10
   
401,102
   
2,720
   
2.71
 
Tax-exempt securities (1)
  
49,448
   
406
   
3.28
   
69,325
   
559
   
3.23
 
Interest bearing cash
  
31,734
   
115
   
1.45
   
28,187
   
66
   
0.94
 
Other investments
  
18,359
   
264
   
5.77
   
16,312
   
199
   
4.89
 
Interest Earning Assets
  
3,191,264
   
37,675
   
4.73
   
2,963,982
   
33,235
   
4.49
 
Cash and due from banks
  
33,252
           
31,564
         
Other assets, net
  
163,882
           
172,650
         
Total Assets
 
$
3,388,398
          
$
3,168,196
         
                         
Liabilities
                        
Savings and interest- bearing checking
 
$
1,413,073
   
2,647
   
0.75
  
$
1,241,700
   
1,011
   
0.33
 
Time deposits
  
664,909
   
3,374
   
2.04
   
603,833
   
2,198
   
1.46
 
Other borrowings
  
77,678
   
796
   
4.11
   
100,754
   
914
   
3.64
 
Interest Bearing Liabilities
  
2,155,660
   
6,817
   
1.27
   
1,946,287
   
4,123
   
0.85
 
Non-interest bearing deposits
  
851,903
           
855,829
         
Other liabilities
  
42,581
           
31,454
         
Shareholders’ equity
  
338,254
           
334,626
         
Total liabilities and shareholders’ equity
 
$
3,388,398
          
$
3,168,196
         
                         
Net Interest Income
     
$
30,858
          
$
29,112
     
                         
Net Interest Income as a Percent of Average Interest Earning Assets
          
3.87
%
          
3.93
%

(1)
Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21%.
(2)
Annualized

Average Balances and Tax Equivalent Rates


 
Six Months Ended
June 30,
 
  
2019
  
2018
 

 
Average
Balance
  
Interest
  
Rate (2)
  
Average
Balance
  
Interest
  
Rate (2)
 
  
(Dollars in thousands)
 
Assets
                  
Taxable loans
 
$
2,652,893
  
$
66,362
   
5.03
%
 
$
2,252,492
  
$
52,945
   
4.72
%
Tax-exempt loans (1)
  
8,081
   
197
   
4.92
   
4,526
   
104
   
4.63
 
Taxable securities
  
390,966
   
6,040
   
3.09
   
411,619
   
5,355
   
2.60
 
Tax-exempt securities (1)
  
53,148
   
875
   
3.29
   
73,810
   
1,162
   
3.15
 
Interest bearing cash
  
48,381
   
426
   
1.78
   
30,531
   
148
   
0.98
 
Other investments
  
18,359
   
528
   
5.80
   
15,930
   
447
   
5.66
 
Interest Earning Assets
  
3,171,828
   
74,428
   
4.72
   
2,788,908
   
60,161
   
4.33
 
Cash and due from banks
  
33,744
           
31,848
         
Other assets, net
  
167,270
           
152,912
         
Total Assets
 
$
3,372,842
          
$
2,973,668
         
                         
Liabilities
                        
Savings and interest- bearing checking
 
$
1,387,208
   
4,969
   
0.72
  
$
1,168,747
   
1,562
   
0.27
 
Time deposits
  
676,606
   
6,733
   
2.01
   
584,167
   
3,934
   
1.36
 
Other borrowings
  
71,901
   
1,508
   
4.23
   
82,920
   
1,488
   
3.62
 
Interest Bearing Liabilities
  
2,135,715
   
13,210
   
1.25
   
1,835,834
   
6,984
   
0.77
 
Non-interest bearing deposits
  
855,732
           
807,504
         
Other liabilities
  
41,481
           
30,531
         
Shareholders’ equity
  
339,914
           
299,799
         
Total liabilities and shareholders’ equity
 
$
3,372,842
          
$
2,973,668
         
                         
Net Interest Income
     
$
61,218
          
$
53,177
     
                         
Net Interest Income as a Percent of Average Interest Earning Assets
          
3.88
%
          
3.83
%

(1)
Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21%.
(2)
Annualized

Reconciliation of Non-GAAP Financial Measures

  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  
2019
  
2018
  
2019
  
2018
 
  
(Dollars in thousands)
 
Net Interest Margin, Fully Taxable Equivalent (“FTE”)
            
             
Net interest income
 
$
30,756
  
$
28,980
  
$
60,999
  
$
52,916
 
Add:  taxable equivalent adjustment
  
102
   
132
   
219
   
261
 
Net interest income - taxable equivalent
 
$
30,858
  
$
29,112
  
$
61,218
  
$
53,177
 
Net interest margin (GAAP) (1)
  
3.86
%
  
3.92
%
  
3.86
%
  
3.81
%
Net interest margin (FTE) (1)
  
3.87
%
  
3.93
%
  
3.88
%
  
3.83
%

(1)
Annualized.

Provision for loan losses.  The provision for loan losses was an expense of $0.7 million during both the three months ended June 30, 2019 and 2018. During the six-month periods ended June 30, 2019 and 2018, the provision was an expense of $1.3 million and $1.0 million, respectively. The provision reflects our assessment of the allowance for loan losses taking into consideration factors such as loan growth, loan mix, levels of non-performing and classified loans and loan net charge-offs.  While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors.  See “Portfolio Loans and asset quality” for a discussion of the various components of the allowance for loan losses and their impact on the provision for loan losses in the second quarter and first half of 2019.

Non-interest income.  Non-interest income is a significant element in assessing our results of operations. Non-interest income totaled $9.9 million during the second quarter of 2019 compared to $12.3 million in the second quarter of 2018.  For the first six months of 2019, non-interest income totaled $19.9 million compared to $24.0 million for the first six months of 2018.

The components of non-interest income are as follows:

Non-Interest Income

 
Three months ended
June 30,
  
Six months ended
June 30,
 

 
2019
  
2018
  2019  
2018
 
   
(In thousands)
    
Service charges on deposit accounts
 
$
2,800
  
$
3,095
  
$
5,440
  
$
6,000
 
Interchange income
  
2,604
   
2,504
   
4,959
   
4,750
 
Net gains (losses) on assets:
                
Mortgage loans
  
4,302
   
3,255
   
7,913
   
5,826
 
Securities
  
--
   
9
   
304
   
(164
)
Mortgage loan servicing, net
  
(1,907
)
  
1,235
   
(3,122
)
  
3,456
 
Investment and insurance commissions
  
450
   
483
   
747
   
921
 
Bank owned life insurance
  
270
   
220
   
512
   
476
 
Other
  
1,386
   
1,514
   
3,111
   
2,763
 
Total non-interest income
 
$
9,905
  
$
12,315
  
$
19,864
  
$
24,028
 

Service charges on deposit accounts decreased on both a comparative quarterly and year-to-date basis in 2019 as compared to 2018.  These decreases were principally due to lower service charges on commercial accounts and a decrease in non-sufficient funds occurrences.

Interchange income increased on both a comparative quarterly and year-to-date basis in 2019 as compared to 2018 due primarily to an increase in debit card transaction volume.

Net gains on mortgage loans increased from 2018 on both a quarterly and a year to date basis. Mortgage loan activity is summarized as follows:

Mortgage Loan Activity

 
Three months ended
June 30,
  
Six months ended
June 30,
 
  
2019
  
2018
  
2019
  
2018
 
  
(Dollars in thousands)
 
Mortgage loans originated
 
$
241,402
  
$
226,264
  
$
379,160
  
$
385,231
 
Mortgage loans sold
  
131,636
   
115,299
   
286,161
   
221,642
 
Net gains on mortgage loans
  
4,302
   
3,255
   
7,913
   
5,826
 
Net gains as a percent of mortgage loans sold (“Loan Sales Margin”)
  
3.27
%
  
2.82
%
  
2.77
%
  
2.63
%
Fair value adjustments included in the Loan Sales Margin
  
0.74
   
0.57
   
0.66
   
0.35
 

The quarterly comparative increase in mortgage loans originated is due primarily to lower interest rates in the second quarter of 2019 which have begun to increase refinance volumes.  On a year-to-date comparative basis, mortgage loans originated were relatively unchanged. Mortgage loans sold increased due to a higher mix of salable loans in our origination volumes and some portfolio mortgage loan sales that were completed during the first quarter of 2019. Net gains on mortgage loans also increased in 2019 as compared to 2018 due to fair value adjustments as discussed below.

The volume of loans sold is dependent upon our ability to originate mortgage loans as well as the demand for fixed-rate obligations and other loans that we choose to not put into portfolio because of our established interest-rate risk parameters. (See “Portfolio Loans and asset quality.”) Net gains on mortgage loans are also dependent upon economic and competitive factors as well as our ability to effectively manage exposure to changes in interest rates and thus can often be a volatile part of our overall revenues.

Our Loan Sales Margin is impacted by several factors including competition and the manner in which the loan is sold. Net gains on mortgage loans are also impacted by recording fair value accounting adjustments.  Excluding these fair value accounting adjustments, the Loan Sales Margin would have been 2.53% and 2.25% in the second quarters of 2019 and 2018, respectively and 2.11% and 2.28% for the comparative 2019 and 2018 year-to-date periods, respectively.  The increase in the Loan Sales Margin (excluding fair value adjustments) in the second quarter of 2019 was generally due to a widening of primary-to-secondary market pricing spreads as market interest rates fell during this period.  The lower Loan Sales Margin (excluding fair value adjustments) for the first six months of 2019, primarily reflects the impact of some portfolio mortgage loan sales in the first quarter of 2019 that were executed at lower pricing spreads. The changes in the fair value accounting adjustments are primarily due to changes in the amount of commitments to originate mortgage loans for sale.

Net gains (losses) on securities were relatively nominal for the comparative quarterly periods.  We recorded a net gain of $0.3 million and a net loss of $0.2 million on securities for the first six months of 2019 and 2018, respectively.  We recorded no net impairment losses in either 2019 or 2018 for other than temporary impairment of securities available for sale.  See “Securities” below and note #3 to the Condensed Consolidated Financial Statements.

Mortgage loan servicing, net, generated a loss of $1.9 million and income of $1.2 million in the second quarters of 2019 and 2018, respectively. For the first six months of 2019, mortgage loan servicing, net, generated a loss of $3.1 million as compared to income of $3.5 million for the comparable period in 2018. The significant variances in mortgage loan servicing, net are primarily due to changes in the fair value of capitalized mortgage loan servicing rights associated with changes in mortgage loan interest rates (a decline in 2019 as compared to an increase in 2018) and expected future prepayment levels. Mortgage loan servicing, net activity is summarized in the following table:


 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  
2019
  
2018
  
2019
  
2018
 
Mortgage loan servicing, net:
 
(In thousands)
 
Revenue, net
 
$
1,515
  
$
1,372
  
$
2,991
  
$
2,564
 
Fair value change due to price
  
(2,670
)
  
518
   
(4,873
)
  
1,976
 
Fair value change due to pay-downs
  
(752
)
  
(655
)
  
(1,240
)
  
(1,084
)
Total
 
$
(1,907
)
 
$
1,235
  
$
(3,122
)
 
$
3,456
 

Activity related to capitalized mortgage loan servicing rights is as follows:

Capitalized Mortgage Loan Servicing Rights
  
Three months ended
June 30,
  
Six months ended
June 30,
 
  
2019
  
2018
  
2019
  
2018
 
  
(In thousands)
 
Balance at beginning of period
 
$
19,909
  
$
17,783
  
$
21,400
  
$
15,699
 
Servicing rights acquired
  
-
  
$
3,047
   
-
  
$
3,047
 
Originated servicing rights capitalized
  
1,407
   
1,155
   
2,607
   
2,210
 
Change in fair value
  
(3,422
)
  
(137
)
  
(6,113
)
  
892
 
Balance at end of period
 
$
17,894
  
$
21,848
  
$
17,894
  
$
21,848
 

At June 30, 2019 we were servicing approximately $2.41 billion in mortgage loans for others on which servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 4.27% and a weighted average service fee of approximately 25.8 basis points. Capitalized mortgage loan servicing rights at June 30, 2019 totaled $17.9 million, representing approximately 74.1 basis points on the related amount of mortgage loans serviced for others.

Investment and insurance commissions represent revenues generated on the sale or management of investments and insurance for our customers.  These revenues were relatively comparable on a quarterly basis, but declined on a year-to-date basis in 2019 as compared to 2018.  The year-to-date decline in 2019 was primarily due to slower sales in the first quarter of 2019, principally reflecting market volatility and uncertainty.

Income from bank owned life insurance (“BOLI”) increased on both a comparative quarterly and year-to-date basis in 2019 compared to 2018 reflecting a higher crediting rate on our cash surrender value. Our BOLI separate account is primarily invested in agency mortgage-backed securities. The crediting rate (on which the earnings are based) reflects the performance of the separate account.  The total cash surrender value of our BOLI was $55.6 million and $55.1 million at June 30, 2019 and December 31, 2018, respectively.

Other non-interest income decreased slightly on a comparative quarterly basis, but increased on a year-to-date basis in 2019 compared to 2018.  The year-to-date increase in 2019 compared to 2018 is primarily due to $0.38 million of recoveries recorded in the first quarter of 2019 on TCSB loans that had been charged-off prior to the Merger.

Non-interest expense.  Non-interest expense is an important component of our results of operations. We strive to efficiently manage our cost structure.

Non-interest expense decreased by $3.2 million to $26.6 million and increased by $0.7 million to $54.6 million during the three- and six-month periods ended June 30, 2019, respectively, compared to the same periods in 2018.  On a year-to-date basis, several of our components of non-interest expense increased in 2019 due to the Merger.

The components of non-interest expense are as follows:

Non-Interest Expense



Three months ended
June 30,


Six months ended
June 30,

  
2019
  
2018
  
2019
  
2018
 
  
(In thousands)
 
Compensation
 
$
10,185
  
$
9,574
  
$
20,666
  
$
18,504
 
Performance-based compensation
  
2,296
   
3,150
   
4,516
   
5,933
 
Payroll taxes and employee benefits
  
3,450
   
3,145
   
7,100
   
5,900
 
Compensation and employee benefits
  
15,931
   
15,869
   
32,282
   
30,337
 
Occupancy, net
  
2,131
   
2,170
   
4,636
   
4,434
 
Data processing
  
2,171
   
2,251
   
4,315
   
4,129
 
Furniture, fixtures and equipment
  
1,006
   
1,019
   
2,035
   
1,986
 
Communications
  
717
   
704
   
1,486
   
1,384
 
Interchange expense
  
753
   
661
   
1,441
   
1,259
 
Advertising
  
627
   
543
   
1,299
   
984
 
Loan and collection
  
628
   
692
   
1,262
   
1,369
 
Legal and professional
  
371
   
456
   
740
   
834
 
FDIC deposit insurance
  
342
   
250
   
710
   
480
 
Amortization of intangible assets
  
273
   
295
   
545
   
381
 
Supplies
  
153
   
178
   
311
   
343
 
Credit card and bank service fees
  
97
   
106
   
200
   
202
 
Costs (recoveries) related to unfunded lending commitments
  
27
   
37
   
187
   
(77
)
Provision for loss reimbursement on sold loans
  
35
   
20
   
146
   
31
 
Net gains on other real estate and repossessed assets
  
(198
)
  
(4
)
  
(79
)
  
(294
)
Merger related expenses
  
--
   
3,082
   
--
   
3,256
 
Other
  
1,528
   
1,432
   
3,066
   
2,858
 
Total non-interest expense
 
$
26,592
  
$
29,761
  
$
54,582
  
$
53,896
 

Compensation and employee benefits expenses, in total, increased $0.1 million on a quarterly comparative basis and increased $1.9 million for the first six months of 2019 compared to the same periods in 2018.

Compensation expense increased by $0.6 million and $2.2 million in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018.  The quarterly comparative increase in 2019 is primarily due to salary increases that were predominantly effective on January 1, 2019.  The higher year-to-date comparative increase in 2019 also reflects the impact of the Merger.

Performance-based compensation decreased by $0.9 million and $1.4 million in the second quarter and first six months of 2019, respectively, versus the same periods in 2018, due primarily to relative comparative changes in the accrual for anticipated incentive compensation based on our estimated full-year performance as compared to goals.

Payroll taxes and employee benefits increased by $0.3 million and $1.2 million in the second quarter and first six months of 2019, respectively, compared to the same periods in 2018, due primarily to increases in health care costs (due to increased claims in 2019) and workers’ compensation insurance costs and for the year-to-date comparative periods, the impact of the Merger.

Occupancy, net, data processing, furniture, fixtures and equipment, communications, supplies, and credit card and bank service fees expenses were all relatively unchanged on a comparative quarterly basis in 2019 as compared to 2018.

Interchange expense primarily represents our third-party cost to process debit card transactions.  This cost increased in 2019 on both a comparative quarterly and year-to-date basis as compared to 2018 due principally to an increase in transaction volume.

Total advertising expenses increased in 2019 on both a comparative quarterly and year-to-date basis as compared to 2018 due primarily to an increase in outdoor (billboard) advertising.

Loan and collection expenses reflect costs related to new lending activity as well as the management and collection of non-performing loans and other problem credits.  These costs did not vary significantly in 2019 as compared to 2018.

Legal and professional fees declined in 2019 on both a comparative quarterly and year-to-date basis as compared to 2018 due primarily to a decrease in consulting fees related to certain deposit account acquisition and branch evaluation projects.

FDIC deposit insurance expense increased in 2019 on both a comparative quarterly and year-to-date basis as compared to 2018 due to a combination of an increase in our assessment rate and growth in our total assets.

The amortization of intangible assets relates to the Merger and prior branch acquisitions and the amortization of the deposit customer relationship value, including core deposit value, which was acquired in connection with those acquisitions. We had remaining unamortized intangible assets of $5.9 million and $6.4 million at June 30, 2019 and December 31, 2018, respectively. See note #7 to the Condensed Consolidated Financial Statements for a schedule of future amortization of intangible assets.

The changes in cost (recoveries) related to unfunded lending commitments are primarily impacted by changes in the amounts of such commitments to originate portfolio loans as well as (for commercial loan commitments) the grade (pursuant to our loan rating system) of such commitments.

The provision for loss reimbursement on sold loans was an expense of $0.04 million and $0.15 million in the second quarter and first six months of 2019, respectively, compared to an expense of $0.02 million and $0.03 million in the second quarter and first six months of 2018, respectively. This provision represents our estimate of incurred losses related to mortgage loans that we have sold to investors (primarily Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Bank of Indianapolis).  The small expense provisions in 2019 and 2018 are primarily due to growth in the balance of loans serviced for investors.  Since we sell mortgage loans without recourse, loss reimbursements only occur in those instances where we have breached a representation or warranty or other contractual requirement related to the loan sale.  The reserve for loss reimbursements on sold mortgage loans totaled $0.83 million and $0.78 million at June 30, 2019 and December 31, 2018, respectively. This reserve is included in accrued expenses and other liabilities in our Condensed Consolidated Statements of Financial Condition.

Net gains on other real estate and repossessed assets primarily represent the gain or loss on the sale or additional write downs on these assets subsequent to the transfer of the asset from our loan portfolio. This transfer occurs at the time we acquire the collateral that secured the loan. At the time of acquisition, the other real estate or repossessed asset is valued at fair value, less estimated costs to sell, which becomes the new basis for the asset. Any write-downs at the time of acquisition are charged to the allowance for loan losses.

Merger related expenses totaled $3.1 million and $3.3 million for the second quarter and first six months of 2018, respectively.  These expenses included our investment banking fees, certain accounting and legal costs, various contract termination fees, data processing conversion costs, payments made on officer change-in-control contracts, and employee severance costs.

Other non-interest expenses increased in 2019 on both a comparative quarterly and year-to-date basis as compared to 2018 due primarily to an increase in deposit account/debit card fraud costs.

Income tax expense.  We recorded an income tax expense of $2.7 million and $4.9 million in the second quarter and the first six months of 2019, respectively. This compares to an income tax expense of $2.1 million and $4.1 million in the second quarter and the first six months of 2018, respectively.

Our actual income tax expense is different than the amount computed by applying our statutory income tax rate to our income before income tax primarily due to tax-exempt interest income, tax-exempt income from the increase in the cash surrender value on life insurance, and differences in the value of stock awards that vest and stock options that are exercised as compared to the initial fair values that were expensed.

We assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  The ultimate realization of this asset is primarily based on generating future income.  We concluded at June 30, 2019 and 2018 and at December 31, 2018, that the realization of substantially all of our deferred tax assets continues to be more likely than not.

Financial Condition

Summary.  Our total assets increased by $85.0 million during the first six months of 2019.  Loans, excluding loans held for sale (“Portfolio Loans”), totaled $2.71 billion at June 30, 2019, an increase of $124.0 million, or 4.8%, from December 31, 2018.  (See “Portfolio Loans and asset quality.”)

Deposits totaled $2.98 billion at June 30, 2019, compared to $2.91 billion at December 31, 2018.  The $65.5 million increase in total deposits during the period is due to growth in reciprocal deposits.

Securities.  We maintain diversified securities portfolios, which include obligations of U.S. government-sponsored agencies, securities issued by states and political subdivisions, residential and commercial mortgage-backed securities, asset-backed securities, corporate securities, trust preferred securities and foreign government securities (that are denominated in U.S. dollars). We regularly evaluate asset/liability management needs and attempt to maintain a portfolio structure that provides sufficient liquidity and cash flow. Except as discussed below, we believe that the unrealized losses on securities available for sale are temporary in nature and are expected to be recovered within a reasonable time period. We believe that we have the ability to hold securities with unrealized losses to maturity or until such time as the unrealized losses reverse. (See “Asset/liability management.”)

Securities
       
Unrealized
     


Amortized
Cost


 
Gains



 
Losses

Fair
Value

     
(In thousands)
    
Securities available for sale
             
June 30, 2019
 
$
426,458
  
$
4,922
   
$
1,075
  
$
430,305
 
December 31, 2018
  
433,224
   
1,520
    
6,818
   
427,926
 

Securities available for sale increased $2.4 million during the first six months of 2019.  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 these 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).  We recorded no impairment losses related to other than temporary impairment on securities available for sale in either of the first six months of 2019 or 2018.

Sales of securities were as follows (See “Non-interest income.”):



Six months ended
June 30,

 
2019
  
2018



(In thousands)
 
  
    
Proceeds
 
$
42,236
  
$
31,445
 
         
Gross gains
 
$
169
  
$
81
 
Gross losses
  
(32
)
  
(126
)
Net impairment charges
  
--
   
-
 
Fair value adjustments
  
167
   
(119
)
Net gains (losses)
 
$
304
  
$
(164
)

Portfolio Loans and asset quality.  In addition to the communities served by our Bank branch and loan production office network, our principal lending markets also include nearby communities and metropolitan areas. Subject to established underwriting criteria, we also may participate in commercial lending transactions with certain non-affiliated banks and make whole loan purchases from other financial institutions.

The senior management and board of directors of our Bank retain authority and responsibility for credit decisions and we have adopted uniform underwriting standards. Our loan committee structure and the loan review process attempt to provide requisite controls and promote compliance with such established underwriting standards. However, there can be no assurance that our lending procedures and the use of uniform underwriting standards will prevent us from incurring significant credit losses in our lending activities.

We generally retain loans that may be profitably funded within established risk parameters. (See “Asset/liability management.”) As a result, we may hold adjustable-rate conventional and fixed rate jumbo mortgage loans as Portfolio Loans, while 15- and 30-year fixed-rate non-jumbo mortgage loans are generally sold to mitigate exposure to changes in interest rates. (See “Non-interest income.”) Due primarily to the expansion of our mortgage-banking activities and a change in mix in our mortgage loan originations, we are now originating and putting into Portfolio Loans more fixed rate mortgage loans than as compared to past periods.  These fixed rate mortgage loans generally have terms from 15 to 30 years, do not have prepayment penalties and expose us to more interest rate risk.  To date, our interest rate risk profile has not changed significantly.  However, we are carefully monitoring this change in the composition of our Portfolio Loans and the impact of potential future changes in interest rates on our changes in market value of portfolio equity and changes in net interest income. (See “Asset/liability management.”).  As a result, we have added and may continue to add some longer-term borrowings, may utilize derivatives (interest rate swaps and interest rate caps) to manage interest rate risk and may begin to attempt to sell fixed rate jumbo mortgage loans in the future.

A summary of our Portfolio Loans follows:

  
June 30,
2019
  
December 31,
2018
 
  
(In thousands)
 
Real estate(1)
      
Residential first mortgages
 
$
844,151
  
$
811,719
 
Residential home equity and other junior mortgages
  
175,330
   
177,574
 
Construction and land development
  
202,997
   
180,286
 
Other(2)
  
713,008
   
707,347
 
Consumer
  
431,227
   
379,607
 
Commercial
  
333,522
   
319,058
 
Agricultural
  
6,291
   
6,929
 
Total loans
 
$
2,706,526
  
$
2,582,520
 

(1)
Includes both residential and non-residential commercial loans secured by real estate.
(2)
Includes loans secured by multi-family residential and non-farm, non-residential property.

Non-performing assets(1)


June 30,
2019


December 31,
2018


 
(Dollars in thousands)
 
Non-accrual loans
 
$
7,798
  
$
9,029
 
Loans 90 days or more past due and still accruing interest
  
--
   
5
 
Less - government guaranteed loans
  
(436
)
  
(460
)
Total non-performing loans
  
7,362
   
8,574
 
Other real estate and repossessed assets
  
1,990
   
1,299
 
Total non-performing assets
 
$
9,352
  
$
9,873
 
As a percent of Portfolio Loans
  

  

Non-performing loans
  0.27
%  
0.33
%
Allowance for loan losses
  
0.96
   
0.96
 
Non-performing assets to total assets
  
0.27
   
0.29
 
Allowance for loan losses as a percent of non-performing loans
  
351.85
   
290.27
 

 
(1)
Excludes loans classified as “troubled debt restructured” that are not past due.

Troubled debt restructurings (“TDR”)
  
June 30, 2019
 
  
Commercial
  
Retail (1)
  
Total
 
  
(In thousands)
 
Performing TDR’s
 
$
7,166
  
$
42,136
  
$
49,302
 
Non-performing TDR’s (2)
  
54
   
2,783
(3) 
  
2,837
 
Total
 
$
7,220
  
$
44,919
  
$
52,139
 

  
December 31, 2018
 
  
Commercial
  
Retail (1)
  
Total
 
  
(In thousands)
 
Performing TDR’s
 
$
6,460
  
$
46,627
  
$
53,087
 
Non-performing TDR’s (2)
  
74
   
2,884
(3) 
  
2,958
 
Total
 
$
6,534
  
$
49,511
  
$
56,045
 

(1)
Retail loans include mortgage and installment loan segments.
(2)
Included in non-performing assets table above.
(3)
Also includes loans on non-accrual at the time of modification until six payments are received on a timely basis.

Non-performing loans decreased by $1.2 million during the first six months of 2019 due principally to a decline in non-performing commercial loans. This decline primarily reflects reduced levels of new loan defaults as well as loan charge-offs, pay-offs, negotiated transactions, and the migration of loans into other real estate. In general, stable economic conditions in our market areas, as well as our collection and resolution efforts, have resulted in a downward trend in non-performing loans.  However, we are still experiencing some loan defaults, particularly related to commercial loans secured by income-producing property and mortgage loans secured by resort/vacation property.

Non-performing loans exclude performing loans that are classified as troubled debt restructurings (“TDRs”). Performing TDRs totaled $49.3 million, or 1.8% of total Portfolio Loans, and $53.1 million, or 2.1% of total Portfolio Loans, at June 30, 2019 and December 31, 2018, respectively. The decrease in the amount of performing TDRs in the first six months of 2019 primarily reflects pay downs and payoffs.

Other real estate and repossessed assets totaled $2.0 million and $1.3 million at June 30, 2019 and December 31, 2018, respectively. This increase is primarily due to the addition of a $0.6 million commercial office building located in Grand Rapids, Michigan during the second quarter of 2019.

We will place a loan that is 90 days or more past due on non-accrual, unless we believe the loan is both well secured and in the process of collection. Accordingly, we have determined that the collection of the accrued and unpaid interest on any loans that are 90 days or more past due and still accruing interest is probable.

The ratio of loan net charge-offs to average Portfolio Loans was 0.02% and 0.00% (on an annualized basis) in the first six months of 2019 and 2018, respectively.  This year-over-year change was primarily due to a decline in recoveries on previously charged-off commercial loans that was partially offset by a decline in mortgage loan charge-offs.

Allowance for loan losses
  
Six months ended
June 30,
 
  
2019
  
2018
 


 
Loans


Unfunded
Commitments


 
Loans


Unfunded
Commitments

  
(Dollars in thousands)
 
Balance at beginning of period
 
$
24,888
  
$
1,296
  
$
22,587
  
$
1,125
 
Additions (deductions)
                
Provision for loan losses
  
1,316
   
-
   
965
   
-
 
Recoveries credited to allowance
  
1,457
   
-
   
1,860
   
-
 
Loans charged against the allowance
  
(1,758
)
  
-
   
(1,908
)
  
-
 
Additions included in non-interest expense
  
-
   
187
   
-
   
(77
)
Balance at end of period
 
$
25,903
  
$
1,483
  
$
23,504
  
$
1,048
 
                 
Net loans charged against the allowance to average Portfolio Loans
  
0.02
%
      
0.00
%
    

Allocation of the Allowance for Loan Losses


June 30,
2019


December 31,
2018

  
(In thousands)
 
Specific allocations
 
$
6,027
  
$
6,310
 
Other adversely rated commercial loans
  
2,908
   
1,861
 
Historical loss allocations
  
8,541
   
7,792
 
Additional allocations based on subjective factors
  
8,427
   
8,925
 
Total
 
$
25,903
  
$
24,888
 

Some loans will not be repaid in full. Therefore, an allowance for loan losses (“AFLL”) is maintained at a level which represents our best estimate of losses incurred. In determining the AFLL and the related provision for loan losses, we consider four principal elements: (i) specific allocations based upon probable losses identified during the review of the loan portfolio, (ii) allocations established for other adversely rated commercial loans, (iii) allocations based principally on historical loan loss experience, and (iv) additional allowances based on subjective factors, including local and general economic business factors and trends, portfolio concentrations and changes in the size and/or the general terms of the loan portfolios.

The first AFLL element (specific allocations) reflects our estimate of probable incurred losses based upon our systematic review of specific loans. These estimates are based upon a number of factors, such as payment history, financial condition of the borrower, discounted collateral exposure and discounted cash flow analysis. Impaired commercial, mortgage and installment loans are allocated AFLL amounts using this first element. The second AFLL element (other adversely rated commercial loans) reflects the application of our commercial loan rating system. This rating system is similar to those employed by state and federal banking regulators. Commercial loans that are rated below a certain predetermined classification are assigned a loss allocation factor for each loan classification category that is based upon a historical analysis of both the probability of default and the expected loss rate (“loss given default”). The lower the rating assigned to a loan or category, the greater the allocation percentage that is applied. The third AFLL element (historical loss allocations) is determined by assigning allocations to higher rated (“non-watch credit”) commercial loans using a probability of default and loss given default similar to the second AFLL element and to homogenous mortgage and installment loan groups based upon borrower credit score and portfolio segment.  For homogenous mortgage and installment loans a probability of default for each homogenous pool is calculated by way of credit score migration.  Historical loss data for each homogenous pool coupled with the associated probability of default is utilized to calculate an expected loss allocation rate.  The fourth AFLL element (additional allocations based on subjective factors) is based on factors that cannot be associated with a specific credit or loan category and reflects our attempt to ensure that the overall AFLL appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses. We consider a number of subjective factors when determining this fourth element, including local and general economic business factors and trends, portfolio concentrations and changes in the size, mix and the general terms of the overall loan portfolio.

Increases in the AFLL are recorded by a provision for loan losses charged to expense. Although we periodically allocate portions of the AFLL to specific loans and loan portfolios, the entire AFLL is available for incurred losses. We generally charge-off commercial, homogenous residential mortgage and installment loans when they are deemed uncollectible or reach a predetermined number of days past due based on product, industry practice and other factors. Collection efforts may continue and recoveries may occur after a loan is charged against the AFLL.

While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors.

The AFLL increased $1.0 million to $25.9 million at June 30, 2019 from $24.9 million at December 31, 2018 and was equal to 0.96% of total Portfolio Loans at both June 30, 2019 and December 31, 2018, respectively.

During the first quarter of 2019, we deployed a third-party software solution (we previously used spreadsheet software) to assist in the determination of our AFLL.  This new third-party software will also assist us in moving to the expected loss framework that is required to be implemented on January 1, 2020.  Although the use of this new third-party software did not have any material impact on our overall AFLL, it did result in some classification shifts from the AFLL related to subjective factors into the AFLL related to historical losses as the new software model allowed us to capture longer historical look-back periods (previously this was being captured in the subjective portion of the AFLL).

Two of the four components of the AFLL outlined above increased during the first six months of 2019. The AFLL related to specific loans decreased $0.3 million during the first six months of 2019 due primarily to a $3.0 million decline in the amount of such loans.  The AFLL related to other adversely rated commercial loans increased $1.0 million during the first six months of 2019, primarily due to an increase in the balance of such loans included in this component to $59.0 million at June 30, 2019 from $44.7 million at December 31, 2018.  The increase in other adversely rated commercial loans was primarily in early watch credit categories and these loans are largely performing.  We do not believe that we will experience any significant loan losses as a result of this rise in other adversely rated commercial loans.  The AFLL related to historical losses increased $0.7 million during the first six months of 2019, and the AFLL related to subjective factors decreased $0.5 million during the first six months of 2019, due primarily to the classification shifts discussed above.

Deposits and borrowings.  Historically, the loyalty of our customer base has allowed us to price deposits competitively, contributing to a net interest margin that compares favorably to our peers. However, we still face a significant amount of competition for deposits within many of the markets served by our branch network, which limits our ability to materially increase deposits without adversely impacting the weighted-average cost of core deposits.

To attract new core deposits, we have implemented various account acquisition strategies as well as branch staff sales training. Account acquisition initiatives have historically generated increases in customer relationships. Over the past several years, we have also expanded our treasury management products and services for commercial businesses and municipalities or other governmental units and have also increased our sales calling efforts in order to attract additional deposit relationships from these sectors. We view long-term core deposit growth as an important objective. Core deposits generally provide a more stable and lower cost source of funds than alternative sources such as short-term borrowings. (See “Liquidity and capital resources.”)

Deposits totaled $2.98 billion and $2.91 billion at June 30, 2019 and December 31, 2018, respectively.  The $65.5 million increase in deposits during the first six months of 2019 is primarily due to growth in reciprocal deposits.  Reciprocal deposits totaled $326.3 million and $182.1 million at June 30, 2019 and December 31, 2018, respectively.  These deposits represent demand, money market and time deposits from our customers that have been placed through Promontory Interfinancial Network’s Insured Cash Sweep® service and Certificate of Deposit Account Registry Service®.  These services allow our customers to access multi-million dollar FDIC deposit insurance on deposit balances greater than the standard FDIC insurance maximum.  The significant increase in reciprocal deposits is due in part to an automated sweep product that we introduced in mid-2018 as well as the marketing and sales efforts of our treasury management team.

We cannot be sure that we will be able to maintain our current level of core deposits. In particular, those deposits that are uninsured may be susceptible to outflow. At June 30, 2019, we had approximately $491.9 million of uninsured deposits. A reduction in core deposits would likely increase our need to rely on wholesale funding sources.

We have also implemented strategies that incorporate using federal funds purchased, other borrowings and Brokered CDs to fund a portion of our interest-earning assets. The use of such alternate sources of funds supplements our core deposits and is also an integral part of our asset/liability management efforts.

Other borrowings, comprised primarily of advances from the FHLB, totaled $41.1 million and $25.7 million at June 30, 2019 and December 31, 2018, respectively.

As described above, we utilize wholesale funding, including FHLB borrowings and Brokered CDs to augment our core deposits and fund a portion of our assets. At June 30, 2019, our use of such wholesale funding sources (including reciprocal deposits) amounted to approximately $612.2 million, or 20.3% of total funding (deposits and total borrowings, excluding subordinated debentures). Because wholesale funding sources are affected by general market conditions, the availability of such funding may be dependent on the confidence these sources have in our financial condition and operations. The continued availability to us of these funding sources is not certain, and Brokered CDs may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity may be constrained if we are unable to renew our wholesale funding sources or if adequate financing is not available in the future at acceptable rates of interest or at all.  Our financial performance could also be affected if we are unable to maintain our access to funding sources or if we are required to rely more heavily on more expensive funding sources. In such case, our net interest income and results of operations could be adversely affected.

We historically employed derivative financial instruments to manage our exposure to changes in interest rates.  During the first six months of 2019 and 2018, we entered into $17.6 million and $10.4 million (aggregate notional amounts), respectively, of interest rate swaps with commercial loan customers, which were offset with interest rate swaps that the Bank entered into with a broker-dealer. We recorded $0.25 million and $0.33 million of fee income related to these transactions during the first six months of 2019 and 2018, respectively. See note #6 to the Condensed Consolidated Financial Statements included within this report for more information on our derivative financial instruments.

Liquidity and capital resources. Liquidity risk is the risk of being unable to timely meet obligations as they come due at a reasonable funding cost or without incurring unacceptable losses. Our liquidity management involves the measurement and monitoring of a variety of sources and uses of funds. Our Condensed Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus our liquidity management on maintaining adequate levels of liquid assets (primarily funds on deposit with the FRB and certain securities available for sale) as well as developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for purchasing securities available for sale or originating Portfolio Loans as well as to be able to respond to unforeseen liquidity needs.

Our primary sources of funds include our deposit base, secured advances from the FHLB, federal funds purchased borrowing facilities with other banks, and access to the capital markets (for Brokered CDs).

At June 30, 2019, we had $556.2 million of time deposits that mature in the next 12 months. Historically, a majority of these maturing time deposits are renewed by our customers. Additionally, $2.29 billion of our deposits at June 30, 2019, were in account types from which the customer could withdraw the funds on demand. Changes in the balances of deposits that can be withdrawn upon demand are usually predictable and the total balances of these accounts have generally grown or have been stable over time as a result of our marketing and promotional activities. However, there can be no assurance that historical patterns of renewing time deposits or overall growth or stability in deposits will continue in the future.

We have developed contingency funding plans that stress test our liquidity needs that may arise from certain events such as an adverse change in our financial metrics (for example, credit quality or regulatory capital ratios). Our liquidity management also includes periodic monitoring that measures quick assets (defined generally as highly liquid or short-term assets) to total assets, short-term liability dependence and basic surplus (defined as quick assets less volatile liabilities to total assets). Policy limits have been established for our various liquidity measurements and are monitored on a quarterly basis. In addition, we also prepare cash flow forecasts that include a variety of different scenarios.

We believe that we currently have adequate liquidity at our Bank because of our cash and cash equivalents, our portfolio of securities available for sale, our access to secured advances from the FHLB and our ability to issue Brokered CDs.

We also believe that the available cash on hand at the parent company (including time deposits) of approximately $13.3 million as of June 30, 2019 provides sufficient liquidity resources at the parent company to meet operating expenses, to make interest payments on the subordinated debentures, and to pay projected cash dividends on our common stock.

Effective management of capital resources is critical to our mission to create value for our shareholders. In addition to common stock, our capital structure also currently includes cumulative trust preferred securities.

Capitalization
  
June 30,
2019
  
December 31,
2018
 
  
(In thousands)
 
Subordinated debentures
 
$
39,422
  
$
39,388
 
Amount not qualifying as regulatory capital
  
(1,224
)
  
(1,224
)
Amount qualifying as regulatory capital
  
38,198
   
38,164
 
Shareholders’ equity
        
Common stock
  
351,894
   
377,372
 
Accumulated deficit
  
(16,617
)
  
(28,270
)
Accumulated other comprehensive loss
  
(4,431
)
  
(10,108
)
Total shareholders’ equity
  
330,846
   
338,994
 
Total capitalization
 
$
369,044
  
$
377,158
 

We currently have four special purpose entities with $39.4 million of outstanding cumulative trust preferred securities as of June 30, 2019.  These special purpose entities issued common securities and provided cash to our parent company that in turn issued subordinated debentures to these special purpose entities equal to the trust preferred securities and common securities. The subordinated debentures represent the sole asset of the special purpose entities. The common securities and subordinated debentures are included in our Condensed Consolidated Statements of Financial Condition.

The FRB has issued rules regarding trust preferred securities as a component of the Tier 1 capital of bank holding companies. The aggregate amount of trust preferred securities (and certain other capital elements) are limited to 25 percent of Tier 1 capital elements, net of goodwill (net of any associated deferred tax liability). The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital, subject to restrictions. At the parent company, all of these securities qualified as Tier 1 capital at June 30, 2019 and December 31, 2018.

Common shareholders’ equity decreased to $330.8 million at June 30, 2019, from $339.0 million at December 31, 2018, due primarily to our share repurchases and cash dividend payments that were partially offset by our net income and a decrease in our accumulated other comprehensive loss. Our tangible common equity (“TCE”) totaled $296.7 million and $304.3 million, respectively, at those same dates. Our ratio of TCE to tangible assets was 8.72% and 9.17% at June 30, 2019, and December 31, 2018, respectively.  TCE and the ratio of TCE to tangible assets are non-GAAP measures.  TCE represents total common equity less goodwill and other intangible assets.

In December 2018, our Board of Directors authorized a 2019 share repurchase plan.  Under the terms of the original 2019 share repurchase plan, we were authorized to buy back up to 5% of our outstanding common stock.  During the first six months of 2019, we completed the repurchase of 5% of our outstanding common shares (1,179,688 shares at a weighted average purchase price of $21.85 per share). In June 2019, our Board of Directors supplemented the 2019 share repurchase plan and authorized the repurchase of up to 300,000 additional common shares. The 2019 share repurchase plan is authorized to last through December 31, 2019.
 
We pay a quarterly cash dividend on our common stock.  These dividends totaled $0.18 per share in the first and second quarters of 2019 and $0.15 per share in the first and second quarters 2018.    We generally favor a dividend payout ratio between 30% and 50% of net income.

As of June 30, 2019 and December 31, 2018, our Bank (and holding company) continued to meet the requirements to be considered “well-capitalized” under federal regulatory standards (also see note #10 to the Condensed Consolidated Financial Statements included within this report).

Asset/liability management.  Interest-rate risk is created by differences in the cash flow characteristics of our assets and liabilities. Options embedded in certain financial instruments, including caps on adjustable-rate loans as well as borrowers’ rights to prepay fixed-rate loans, also create interest-rate risk.

Our asset/liability management efforts identify and evaluate opportunities to structure our assets and liabilities in a manner that is consistent with our mission to maintain profitable financial leverage within established risk parameters. We evaluate various opportunities and alternate asset/liability management strategies carefully and consider the likely impact on our risk profile as well as the anticipated contribution to earnings. The marginal cost of funds is a principal consideration in the implementation of our asset/liability management strategies, but such evaluations further consider interest-rate and liquidity risk as well as other pertinent factors. We have established parameters for interest-rate risk. We regularly monitor our interest-rate risk and report at least quarterly to our board of directors.

We employ simulation analyses to monitor our interest-rate risk profile and evaluate potential changes in our net interest income and market value of portfolio equity that result from changes in interest rates. The purpose of these simulations is to identify sources of interest-rate risk. The simulations do not anticipate any actions that we might initiate in response to changes in interest rates and, accordingly, the simulations do not provide a reliable forecast of anticipated results. The simulations are predicated on immediate, permanent and parallel shifts in interest rates and generally assume that current loan and deposit pricing relationships remain constant. The simulations further incorporate assumptions relating to changes in customer behavior, including changes in prepayment rates on certain assets and liabilities.

CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY AND NET INTEREST INCOME

Change in Interest Rates
 
Market
Value of
Portfolio
Equity(1)
  
Percent
Change
  
Net
Interest
Income(2)
  
Percent
Change
 
  
(Dollars in thousands)
 
June 30, 2019
            
200 basis point rise
 
$
407,000
   
(5.66
)%
 
$
124,500
   
1.55
%
100 basis point rise
  
427,000
   
(1.02
)
  
123,900
   
1.06
 
Base-rate scenario
  
431,400
   
-
   
122,600
   
-
 
100 basis point decline
  
407,200
   
(5.61
)
  
120,500
   
(1.71
)
                 
December 31, 2018
                
200 basis point rise
 
$
481,100
   
(3.37
)%
 
$
126,200
   
3.27
%
100 basis point rise
  
495,400
   
(0.50
)
  
124,800
   
2.13
 
Base-rate scenario
  
497,900
   
-
   
122,200
   
-
 
100 basis point decline
  
482,800
   
(3.03
)
  
119,600
   
(2.13
)


(1)
Simulation analyses calculate the change in the net present value of our assets and liabilities, including debt and related financial derivative instruments, under parallel shifts in interest rates by discounting the estimated future cash flows using a market-based discount rate. Cash flow estimates incorporate anticipated changes in prepayment speeds and other embedded options.
(2)
Simulation analyses calculate the change in net interest income under immediate parallel shifts in interest rates over the next twelve months, based upon a static statement of financial condition, which includes debt and related financial derivative instruments, and do not consider loan fees.

Accounting standards update. See note #2  to  the Condensed Consolidated Financial Statements included elsewhere in this report for details on recently issued accounting pronouncements and their impact on our financial statements.

Fair valuation of financial instruments.  Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) topic 820 - “Fair Value Measurements and Disclosures” (“FASB ASC topic 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

We utilize fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. FASB ASC topic 820 differentiates between those assets and liabilities required to be carried at fair value at every reporting period (“recurring”) and those assets and liabilities that are only required to be adjusted to fair value under certain circumstances (“nonrecurring”). Certain equity securities (at December 31, 2018), securities available for sale, loans held for sale, derivatives and capitalized mortgage loan servicing rights are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other financial assets on a nonrecurring basis, such as loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. See note #11 to the Condensed Consolidated Financial Statements included within this report for a complete discussion on our use of fair valuation of financial instruments and the related measurement techniques.

Litigation Matters

The aggregate amount we have accrued for losses we consider probable as a result of litigation matters is immaterial. However, because of the inherent uncertainty of outcomes from any litigation matter, we believe it is reasonably possible we may incur losses in addition to the amounts we have accrued.  At this time, we estimate the maximum amount of additional losses that are reasonably possible is insignificant.  However, because of a number of factors, including the fact that certain of these litigation matters are still in their early stages, this maximum amount may change in the future.

The litigation matters described in the preceding paragraph primarily include claims that have been brought against us for damages, but do not include litigation matters where we seek to collect amounts owed to us by third parties (such as litigation initiated to collect delinquent loans). These excluded, collection-related matters may involve claims or counterclaims by the opposing party or parties, but we have excluded such matters from the disclosure contained in the preceding paragraph in all cases where we believe the possibility of us paying damages to any opposing party is remote. Risks associated with the likelihood that we will not collect the full amount owed to us, net of reserves, are disclosed elsewhere in this report.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for the AFLL and capitalized mortgage loan servicing rights are deemed critical since they involve the use of estimates and require significant management judgments. Application of assumptions different than those that we have used could result in material changes in our consolidated financial position or results of operations.  There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

See applicable disclosures set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 under the caption “Asset/liability management.”

Item 4.

Controls and Procedures

(a)
Evaluation of Disclosure Controls and Procedures.

With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)) for the period ended June 30, 2019, have concluded that, as of such date, our disclosure controls and procedures were effective.

(b)
Changes in Internal Controls.

During the quarter ended June 30, 2019, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II

Item 1A.
Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

The Company maintains a Deferred Compensation and Stock Purchase Plan for Non-Employee Directors (the “Plan”) pursuant to which non-employee directors can elect to receive shares of the Company’s common stock in lieu of fees otherwise payable to the director for his or her service as a director.  A director can elect to receive shares on a current basis or to defer receipt of the shares, in which case the shares are issued to a trust to be held for the account of the director and then generally distributed to the director after his or her retirement from the Board.  Pursuant to this Plan, during the second quarter of 2019, the Company issued 731 shares of common stock to non-employee directors on a current basis and 2,093 shares of common stock to the trust for distribution to directors on a deferred basis.  These shares were issued on April 1, 2019 representing aggregate fees of $0.06 million. The shares on a current basis were issued at a price of $21.50 per share and the shares on a deferred basis were issued at a price of $19.35 per share, representing 90% of the fair value of the shares on the credit date.  The price per share was the consolidated closing bid price per share of the Company’s common stock as of the date of issuance, as determined in accordance with NASDAQ Marketplace Rules.  The Company issued the shares pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933 due to the fact that the issuance of the shares was made on a private basis pursuant to the Plan.

The following table shows certain information relating to repurchases of common stock for the three-months ended June 30, 2019:

Period
 
Total Number of
Shares Purchased
  
Average Price
Paid Per Share
  
Total Number of
Shares Purchased
as Part of a
Publicly
Announced Plan
  
Remaining
Number of
Shares Authorized
for Purchase
Under the Plan
 
April 2019
  
65,196
  
$
21.28
   
65,196
   
998,003
 
May 2019
  
998,705
   
21.89
   
998,705
   
(702
)(1)
June 2019
  
--
   
--
   
--
   
299,298
 
Total
  
1,063,901
  
$
21.86
   
1,063,901
   
299,298
 

(1)
In May 2019, the Company repurchased a large number of shares in a private transaction. The number of shares repurchased included an immaterial number of shares (702 shares) in excess of the remaining shares under the publicly-announced plan. As previously disclosed, the Company’s Board of Directors expanded the repurchase plan in June 2019.

Item 6.
Exhibits


(a)
The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report:

 
31.1
 Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
31.2
 Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
32.1
 Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
32.2
 Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
101.INS Instance Document
 
101.SCH XBRL Taxonomy Extension Schema Document
 
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
 
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
 
101.LAB XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date
August 2, 2019
 
By
/s/ Robert N. Shuster
    
Robert N. Shuster, Principal Financial Officer
    
Date
August 2, 2019
 
By
/s/ James J. Twarozynski
    
James J. Twarozynski, Principal Accounting Officer


92

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