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Independent Bank Corporation
IBCP
#6579
Rank
$0.67 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$32.75
Share price
1.05%
Change (1 day)
8.19%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Independent Bank Corporation
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2022 Q1

Independent Bank Corporation - 10-Q quarterly report FY2022 Q1


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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2022

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, 21,047,519 as of May 4, 2022.

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
INDEX

 
 
Number(s)
PART I -
Financial Information
 
Item 1.
Condensed Consolidated Statements of Financial Condition March 31, 2022 and December 31, 2021
3
 
Condensed Consolidated Statements of Operations Three-month periods ended March 31, 2022 and 2021
4
 
Condensed Consolidated Statements of Comprehensive Income Three-month periods ended March 31, 2022 and 2021
5
 
Condensed Consolidated Statements of Cash Flows Three-month periods ended March 31, 2022 and 2021
6
 
Condensed Consolidated Statements of Shareholders' Equity Three-month periods ended March 31, 2022 and 2021
7
 
Notes to Interim Condensed Consolidated Financial Statements
8-57
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
58-79
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 80
Item 4.
Controls and Procedures
80
 
 
 
PART II -
Other Information
 
Item 1A
Risk Factors
81
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
81
Item 6.
Exhibits
82

1
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 including the impact of the ongoing COVID-19 pandemic on each of these items;
•
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 including the economic impact of the ongoing COVID-19 pandemic in each of these areas;
•
the failure of assumptions underlying the establishment of, and provisions made to, our allowance for credit 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, 2021, as updated by any new or modified risk factors disclosed in Part II – Item 1A of any subsequently filed Quarterly Report on Form 10-Q, include the known risks our management believes could materially affect the results described by forward-looking statements in this report. However, those risks may not be the only risks we face. Our results of operations, cash flows, financial position, and prospects could also be materially and adversely affected by additional factors that are not presently known to us that we currently consider to be immaterial, or that develop after the date of this report. We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this report are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.

2

Part I - Item 1.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
 
Condensed Consolidated Statements ofFinancial Condition

 
March 31,
2022
  
December 31,
2021
 
  
(Unaudited)
 
  
(In thousands, except share
amounts)
 
Assets      
Cash and due from banks
 
$
46,600
  
$
51,069
 
Interest bearing deposits
  
63,221
   
58,404
 
Cash and Cash Equivalents
  
109,821
   
109,473
 
Securities available for sale
  
1,400,137
   
1,412,830
 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost
  
17,653
   
18,427
 
Loans held for sale, carried at fair value
  
29,514
   
55,470
 
Loans held for sale, carried at lower of cost or fair value
  -   34,811 
Loans
        
Commercial
  
1,257,601
   
1,203,581
 
Mortgage
  
1,170,059
   
1,139,659
 
Installment
  
576,405
   
561,805
 
Total Loans
  
3,004,065
   
2,905,045
 
Allowance for credit losses
  
(45,627
)
  
(47,252
)
Net Loans
  
2,958,438
   
2,857,793
 
Other real estate and repossessed assets, net
  
438
   
245
 
Property and equipment, net
  
37,385
   
36,404
 
Bank-owned life insurance
  
54,984
   
55,279
 
Capitalized mortgage loan servicing rights, carried at fair value
  
35,933
   
26,232
 
Other intangibles
  
3,104
   
3,336
 
Goodwill
  
28,300
   
28,300
 
Accrued income and other assets
  
86,276
   
66,140
 
Total Assets
 
$
4,761,983
  
$
4,704,740
 
         
Liabilities and Shareholders' Equity
 
Deposits
        
Non-interest bearing
 
$
1,318,377
  
$
1,321,601
 
Savings and interest-bearing checking
  
1,972,462
   
1,897,487
 
Reciprocal
  
605,332
   
586,626
 
Time
  
306,382
   
308,438
 
Brokered time
  
2,945
   
2,938
 
Total Deposits
  
4,205,498
   
4,117,090
 
Other borrowings
  
30,006
   
30,009
 
Subordinated debt
  
39,376
   
39,357
 
Subordinated debentures
  
39,609
   
39,592
 
Accrued expenses and other liabilities
  
92,045
   
80,208
 
Total Liabilities
  
4,406,534
   
4,306,256
 
Commitments and contingent liabilities
       
Shareholders’ Equity
        
Preferred stock, nopar value, 200,000 shares authorized;  none issued or outstanding
  
-
   
-
 
Common stock, nopar value, 500,000,000 shares authorized; issued and outstanding: 21,168,230 shares at March 31, 2022 and 21,171,036 shares at December 31, 2021
  
321,981
   
323,401
 
Retained earnings
  
87,882
   
74,582
 
Accumulated other comprehensive income (loss)
  
(54,414
)
  
501
 
Total Shareholders’ Equity
  
355,449
   
398,484
 
Total Liabilities and Shareholders’ Equity
 
$
4,761,983
  
$
4,704,740
 

See notes to interim condensed consolidated financial statements (Unaudited)

3
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations

 
Three months ended
March 31,
 
  
2022
  
2021
 
  
(Unaudited)
 
  
(In thousands,
except per share amounts)
 
Interest Income
      
Interest and fees on loans
 
$
28,418
  
$
28,105
 
Interest on securities available for sale
        
Taxable
  
4,552
   
2,796
 
Tax-exempt
  
1,554
   
1,384
 
Other investments
  
217
   
217
 
Total Interest Income
  
34,741
   
32,502
 
Interest Expense
        
Deposits
  
767
   
1,256
 
Other borrowings and subordinated debt and debentures
  
973
   
962
 
Total Interest Expense
  
1,740
   
2,218
 
Net Interest Income
  
33,001
   
30,284
 
Provision for credit losses
  
(1,573
)
  
(474
)
Net Interest Income After Provision for Credit Losses
  
34,574
   
30,758
 
Non-interest Income
        
Interchange income
  
3,082
   
3,049
 
Service charges on deposit accounts
  
2,957
   
1,916
 
Net gains on assets
        
Mortgage loans
  
835
   
12,828
 
Securities available for sale
  
70
   
1,416
 
Mortgage loan servicing, net
  
9,641
   
5,167
 
Other
  
2,363
   
2,030
 
Total Non-interest Income
  
18,948
   
26,406
 
Non-interest Expense
        
Compensation and employee benefits
  
20,130
   
18,522
 
Occupancy, net
  
2,543
   
2,343
 
Data processing
  
2,216
   
2,374
 
Furniture, fixtures and equipment
  
1,045
   
1,003
 
Interchange expense
  
1,011
   
948
 
Communications
  
757
   
881
 
Advertising
  
680
   
489
 
Loan and collection
  
559
   
759
 
FDIC deposit insurance
  
522
   
330
 
Legal and professional
  
493
   
499
 
Conversion related expense
  44   218 
Net gains on other real estate and repossessed assets
  (55)  (180)
Recoveries related to unfunded lending commitments
  (355)  (32)
Other
  
1,860
   
1,867
 
Total Non-interest Expense
  
31,450
   
30,021
 
Income Before Income Tax
  
22,072
   
27,143
 
Income tax expense
  
4,105
   
5,106
 
Net Income
 
$
17,967
  
$
22,037
 
Net Income Per Common Share
        
Basic
 
$
0.85
  
$
1.01
 
Diluted
 
$
0.84
  
$
1.00
 

See notes to interim condensed consolidated financial statements (Unaudited)

4
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income

 
Three months ended
March 31,
 
  
2022
  
2021
 
  
(Unaudited -
In thousands)
 
Net income
 
$
17,967
  
$
22,037
 
Other comprehensive loss
        
Securities available for sale
        
Unrealized losses arising during period
  
(69,442
)
  
(5,781
)
Reclassification adjustments for gains included in earnings
  
(70
)
  
(1,416
)
Unrealized losses recognized in other comprehensive loss on securities available for sale
  
(69,512
)
  
(7,197
)
Income tax benefit
  
(14,597
)
  
(1,511
)
Unrealized losses recognized in other comprehensive loss on securities available for sale, net of tax
  
(54,915
)
  
(5,686
)
Other comprehensive loss
  
(54,915
)
  
(5,686
)
Comprehensive income (loss)
 
$
(36,948
)
 
$
16,351
 

See notes to interim condensed consolidated financial statements (Unaudited)

5
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows

 
Three months ended March 31,
 
  
2022
  
2021
 
  
(Unaudited - In thousands)
 
Net Income
 
$
17,967
  
$
22,037
 
Adjustments to Reconcile Net Income to Net Cash From Operating Activities
        
Proceeds from sales of loans held for sale
  
190,618
   
392,844
 
Disbursements for loans held for sale
  
(164,232
)
  
(365,381
)
Provision for credit losses
  
(1,573
)
  
(474
)
Deferred income tax expense
  
2,174
   
2,067
 
Net deferred loan fees (costs)
  
(1,114
)
  
2,982
 
Net depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans
  
2,868
   
3,158
 
Net gains on mortgage loans
  
(835
)
  
(12,828
)
Net gains on securities available for sale
  
(70
)
  
(1,416
)
Share based compensation
  
511
   
442
 
Increase in accrued income and other assets
  
(6,954
)
  
(8,461
)
Increase in accrued expenses and other liabilities
  
(789
)
  
95
 
Total Adjustments
  
20,604
   
13,028
 
Net Cash From Operating Activities
  
38,571
   
35,065
 
Cash Flow Used in Investing Activities
        
Proceeds from the sale of securities available for sale
  
4,395
   
78,179
 
Proceeds from maturities, prepayments and calls of securities available for sale
  
64,098
   
107,834
 
Purchases of securities available for sale
  
(124,560
)
  
(367,654
)
Proceeds from the redemption of Federal Home Loan Bank stock
  774   - 
Net increase in portfolio loans (loans originated, net of principal payments)
  
(96,682
)
  
(52,939
)
Proceeds from the sale of portfolio loans
  
33,755
   
-
 
Proceeds from bank-owned life insurance
  
433
   
-
 
Proceeds from the sale of other real estate and repossessed assets
  
138
   
733
 
Capital expenditures
  
(2,381
)
  
(1,947
)
Net Cash Used in Investing Activities
  
(120,030
)
  
(235,794
)
Cash Flow From Financing Activities
        
Net increase in total deposits
  
88,408
   
221,220
 
Net decrease in other borrowings
  
(3
)
  
(6
)
Dividends paid
  
(4,667
)
  
(4,592
)
Proceeds from issuance of common stock
  
13
   
19
 
Repurchase of common stock
  
(1,384
)
  
(3,601
)
Share based compensation withholding obligation
  
(560
)
  
(509
)
Net Cash From Financing Activities
  
81,807
   
212,531
 
Net Increase in Cash and Cash Equivalents
  
348
   
11,802
 
Cash and Cash Equivalents at Beginning of Period
  
109,473
   
118,705
 
Cash and Cash Equivalents at End of Period
 
$
109,821
  
$
130,507
 
Cash paid during the period for
        
Interest
 
$
1,104
  
$
1,669
 
Income taxes
  
-
   
-
 
Transfers to other real estate and repossessed assets
  
276
   
133
 
Purchase of securities available for sale not yet settled
  
10,542
   
7,212
 

See notes to interim condensed consolidated financial statements (Unaudited)

6
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders' Equity

 
Common
Stock
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Total
Shareholders’
Equity
 
  
(Dollars in thousands, except per share amounts)
 
Balances at January 1, 2022
 
$
323,401
  
$
74,582
  
$
501
  
$
398,484
 
Net income, three months ended March 31, 2022
  
-
   
17,967
   
-
   
17,967
 
Cash dividends declared, $0.22per share
  
-
   
(4,667
)
  
-
   
(4,667
)
Repurchase of 59,002shares of common stock
  
(1,384
)
  
-
   
-
   
(1,384
)
Issuance of 15,100shares of common stock
  
13
   
-
   
-
   
13
 
Share based compensation (issuance of 65,461 shares of common stock)
  
511
   
-
   
-
   
511
 
Share based compensation withholding obligation (withholding of 24,365 shares of common stock)
  
(560
)
  
-
   
-
   
(560
)
Other comprehensive loss
  
-
   
-
   
(54,915
)
  
(54,915
)
Balances at March 31, 2022
 
$
321,981
  
$
87,882
  
$
(54,414
)
 
$
355,449
 
                 
Balances at January 1, 2021
 
$
339,353
  
$
40,145
  
$
10,024
  
$
389,522
 
Adoption of ASU 2016-13
  -   (10,303)  -   (10,303)
Balances at January 1, 2021, as adjusted
  339,353   29,842   10,024   379,219 
Net income, three months ended March 31, 2021
  
-
   
22,037
   
-
   
22,037
 
Cash dividends declared, $0.21per share
  
-
   
(4,592
)
  
-
   
(4,592
)
Repurchase of 180,667shares of common stock
  
(3,601
)
  
-
   
-
   
(3,601
)
Issuance of 19,050shares of common stock
  
19
   
-
   
-
   
19
 
Share based compensation (issuance of 109,075 shares of common stock)
  
442
   
-
   
-
   
442
 
Share based compensation withholding obligation (withholding of 27,524 shares of common stock)
  
(509
)
  
-
   
-
   
(509
)
Other comprehensive loss
  
-
   
-
   
(5,686
)
  
(5,686
)
Balances at March 31, 2021
 
$
335,704
  
$
47,287
  
$
4,338
  
$
387,329
 

See notes to interim condensed consolidated financial statements (Unaudited)

7
Index

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Preparation of Financial Statements

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2021 included in our Annual Report on Form 10-K.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary to present fairly our consolidated financial condition as of March 31, 2022 and December 31, 2021, and the results of operations for the three-month periods ended March 31, 2022 and 2021.  The results of operations for the three-month periods ended March 31, 2022, are not necessarily indicative of the results to be expected for the full year.  Certain reclassifications have been made in the prior period condensed consolidated financial statements to conform to the current period presentation.  Our critical accounting policies include the determination of the allowance for credit losses (“ACL”) and the valuation of capitalized mortgage loan servicing rights.  Refer to our 2021 Annual Report on Form 10-K for a disclosure of our accounting policies.

2.
New Accounting Standards

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

We have formed a cross-functional project team to lead this transition from LIBOR to a planned adoption of reference rates which could include Secured Overnight Financing Rate (“SOFR”), amongst others. We utilized the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during this transitional period.  We have discontinued the use of new LIBOR-based loans as of December 31, 2021, according to regulatory guidelines. We also discontinued the use of new LIBOR based interest rate derivatives as of December 31, 2021.  The amended guidance under Topic 848 and our ability to elect its temporary optional expedients and exceptions are effective for us through December 31, 2022.  We expect to adopt the LIBOR transition relief allowed under this standard.

8

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
On March 31, 2022, the FASB issued ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures”. This ASU eliminates the troubled debt restructuring (“TDR”) accounting model for creditors that have already adopted Topic 326, which is commonly referred to as the current expected credit loss (“CECL”) model. In lieu of the TDR accounting model, creditors now will apply the general loan modification guidance in Subtopic 310-20 to all loan modifications, including modifications made for borrowers experiencing financial difficulty. Under the general loan modification guidance, a modification is treated as a new loan only if the terms of the new loan are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks, and modifications to the terms of the original loan are more than minor. If either condition is not met, the modification is accounted for as the continuation of the old loan with any effect of the modification treated as a prospective adjustment to the loan’s effective interest rate. In addition, this ASU requires the disclosure of gross charge-offs recorded in the current period for financing receivables by origination year. For entities that have adopted Topic 326, ASU 2022-02 takes effect in reporting periods beginning after Dec. 15, 2022, with early adoption permitted. We are currently assessing the impact of this ASU on our Condensed Consolidated Financial Statements.

3.
Securities

Securities available for sale consist of the following:

 
Amortized
  
Unrealized
    
  
Cost
  
Gains
  
Losses
  
Fair Value
 
  
(In thousands)
 
March 31, 2022
            
U.S. agency
 
$
45,896
  
$
21
  
$
2,329
  
$
43,588
 
U.S. agency residential mortgage-backed
  
292,590
   
574
   
16,161
   
277,003
 
U.S. agency commercial mortgage-backed
  
22,663
   
-
   
1,072
   
21,591
 
Private label mortgage-backed
  
115,928
   
277
   
4,122
   
112,083
 
Other asset backed
  
281,822
   
414
   
3,080
   
279,156
 
Obligations of states and political subdivisions
  
550,439
   
842
   
31,203
   
520,078
 
Corporate
  
149,863
   
521
   
6,133
   
144,251
 
Trust preferred
  
1,976
   
-
   
91
   
1,885
 
Foreign government
  
500
   
2
   
-
   
502
 
Total
 
$
1,461,677
  
$
2,651
  
$
64,191
  
$
1,400,137
 
                 
December 31, 2021
                
U.S. agency
 
$
34,634
  
$
152
  
$
112
  
$
34,674
 
U.S. agency residential mortgage-backed
  
309,907
   
1,952
   
3,874
   
307,985
 
U.S. agency commercial mortgage-backed
  
23,066
   
84
   
224
   
22,926
 
Private label mortgage-backed
  
102,480
   
807
   
672
   
102,615
 
Other asset backed
  
215,235
   
1,204
   
269
   
216,170
 
Obligations of states and political subdivisions
  
568,355
   
9,942
   
2,221
   
576,076
 
Corporate
  
148,707
   
2,446
   
1,194
   
149,959
 
Trust preferred
  
1,975
   
-
   
56
   
1,919
 
Foreign government
  
499
   
7
   
-
   
506
 
Total
 
$
1,404,858
  
$
16,594
  
$
8,622
  
$
1,412,830
 


9

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)
 
                   
March 31, 2022
                  
U.S. agency
 
$
38,843
  
$
2,327
  
$
1,006
  
$
2
  
$
39,849
  
$
2,329
 
U.S. agency residential mortgage-backed
  
125,161
   
8,226
   
84,351
   
7,935
   
209,512
   
16,161
 
U.S. agency commercial mortgage-backed
  
20,971
   
1,028
   
598
   
44
   
21,569
   
1,072
 
Private label mortgage-backed
  
102,999
   
4,058
   
2,055
   
64
   
105,054
   
4,122
 
Other asset backed
  
212,965
   
3,060
   
979
   
20
   
213,944
   
3,080
 
Obligations of states and political subdivisions
  
417,842
   
28,911
   
30,159
   
2,292
   
448,001
   
31,203
 
Corporate
  
110,464
   
5,924
   
1,823
   
209
   
112,287
   
6,133
 
Trust preferred
  
-
   
-
   
1,885
   
91
   
1,885
   
91
 
Total
 
$
1,029,245
  
$
53,534
  
$
122,856
  
$
10,657
  
$
1,152,101
  
$
64,191
 
                         
December 31, 2021
                        
U.S. agency
 
$
11,986
  
$
109
  
$
1,286
  
$
3
  
$
13,272
  
$
112
 
U.S. agency residential mortgage-backed
  
171,398
   
3,555
   
19,024
   
319
   
190,422
   
3,874
 
U.S. agency commercial mortgage-backed
  19,900   224   -   -   19,900   224 
Private label mortgage-backed
  
64,408
   
640
   
2,180
   
32
   
66,588
   
672
 
Other asset backed
  
86,581
   
248
   
978
   
21
   
87,559
   
269
 
Obligations of states and political subdivisions
  
178,484
   
2,151
   
7,093
   
70
   
185,577
   
2,221
 
Corporate
  
75,166
   
1,150
   
1,050
   
44
   
76,216
   
1,194
 
Trust preferred
  
-
   
-
   
1,919
   
56
   
1,919
   
56
 
Total
 
$
607,923
  
$
8,077
  
$
33,530
  
$
545
  
$
641,453
  
$
8,622
 


10

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Securities available for sale in unrealized loss positions are evaluated quarterly for impairment related to credit losses. For securities available for sale in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities available for sale that do not meet this criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, adverse conditions specifically related to the security and the issuer and the impact of changes in market interest rates on the market value of the security, among other factors.  If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes. No ACL for securities available for sale was needed at March 31, 2022.  Accrued interest receivable on securities available for sale totaled $6.1 million and $6.0million at March 31, 2022 and December 31, 2021, respectively, and is excluded from the estimate of credit losses and is included in accrued income and other assets in the Condensed Consolidated Statements of Financial Condition.

U.S. agency, U.S. agency residential mortgage-backed and U.S. agency commercial mortgage-backed securities — at March 31, 2022, we had 41 U.S. agency, 167 U.S. agency residential mortgage-backed and 29 U.S. agency commercial mortgage-backed securities whose fair value is less than amortized cost. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. The unrealized losses are largely attributed to widening spreads to Treasury bonds and/or an increase in interest rates since acquisition.

Private label mortgage backed, other asset backed and corporate securities — at March 31, 2022, we had 90 private label mortgage backed, 121 other asset backed and 90 corporate securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening and/or an increase in interest rates since acquisition.

Obligations of states and political subdivisions — at March 31, 2022, we had 795 municipal securities whose fair value is less than amortized cost. The unrealized losses are primarily due to an increase in interest rates since acquisition.

Trust preferred securities — at March 31, 2022, 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 $1.00 million and total fair value of $0.94 million as of March 31, 2022, continues to have satisfactory credit metrics and make interest payments.

11

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
At March 31, 2022 management does not intend to liquidate any of the securities discussed above and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses.

We recorded no credit related charges in our Condensed Consolidated Statements of Operations related to securities available for sale during the three month periods ended March 31, 2022 and 2021, respectively.

The amortized cost and fair value of securities available for sale at March 31, 2022, by contractual maturity, follow:

 
Amortized
Cost
  
Fair
Value
 
  
(In thousands)
 
Maturing within one year
 
$
13,474
  
$
13,508
 
Maturing after one year but within five years
  
146,741
   
141,769
 
Maturing after five years but within ten years
  
263,941
   
248,638
 
Maturing after ten years
  
324,518
   
306,389
 
   
748,674
   
710,304
 
U.S. agency residential mortgage-backed
  
292,590
   
277,003
 
U.S. agency commercial mortgage-backed
  
22,663
   
21,591
 
Private label mortgage-backed
  
115,928
   
112,083
 
Other asset backed
  
281,822
   
279,156
 
Total
 
$
1,461,677
  
$
1,400,137
 

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

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

    
Realized
 
  
Proceeds
  
Gains
  
Losses
 
  
(In thousands)
 
2022
 
$
4,395
  
$
70
  
$
-
 
2021
  
78,179
   
1,464
   
48
 

On April 1, 2022, we transferred certain available for sale securities with an amortized cost and unrealized loss at the date of transfer of $418.1 million and $26.4 million, respectively to held to maturity. The transfer was made at fair value, with the unrealized loss becoming part of the purchase discount which will be accreted over the remaining life of the securities. The other comprehensive loss component is separated from the remaining available for sale securities and is accreted over the remaining life of the securities transferred. We have the ability and intent to hold these securities until they mature, at which time we will receive full value for these securities.

12

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

4.
Loans

We estimate the ACL based on relevant available information from both internal and external sources, including historical loss trends, current conditions and forecasts, specific analysis of individual loans, and other relevant and appropriate factors. The allowance process is designed to provide for expected future losses based on our reasonable and supportable (“R&S”) forecast as of the reporting date. Our ACL process is administered by our Risk Management group utilizing a third party software solution, with significant input and ultimate approval from our Executive Enterprise Risk Committee. Further, we have established a CECL Forecast Committee, which includes a cross discipline structure with membership from Executive Management, Risk Management, and Accounting, which approves ACL model assumptions each quarter. Our ACL is comprised of three principal elements: (i) specific analysis of individual loans identified during the review of the loan portfolio, (ii) pooled analysis of loans with similar risk characteristics based on historical experience, adjusted for current conditions, R&S forecasts, and expected prepayments, and (iii) 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 portfolio.

The first ACL element (specific allocations) includes loans that do not share similar risk characteristics and are evaluated on an individual basis. We will typically evaluate on an individual basis loans that are on nonaccrual; commercial loans that have been modified resulting in a concession, for which the borrower is experiencing financial difficulties, and which are considered TDR; and severely delinquent mortgage and installment loans. When we determine that foreclosure is probable or when repayment is expected to be provided substantially through the operation or sale of underlying collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for estimated selling costs. For loans evaluated on an individual basis that are not determined to be collateral dependent, a discounted cash flow analysis is performed to determine expected credit losses.

The second ACL element (pooled analysis) includes loans with similar risk characteristics, which are broken down by segment, class, and risk metric. The Bank’s primary segments of commercial, mortgage, and installment loans are further classified by other relevant attributes, such as collateral type, lien position, occupancy status, amortization method, and balance size. Commercial classes are additionally segmented by risk rating, and mortgage and installment loan classes by credit score tier, which are updated at least semi-annually.

We utilize a discounted cash flow (“DCF”) model to estimate expected future losses for pooled loans. Expected future cash flows are developed from payment schedules over the contractual term, adjusted for forecasted default (probability of default), loss, and prepayment assumptions. We are not required to develop forecasts over the full contractual term of the financial asset or group of financial assets. Rather, for periods beyond which the entity is able to make or obtain R&S forecasts of expected credit losses, we revert to the long term average on a straight line or immediate basis, as determined by the CECL Forecast Committee, and which may vary depending on the economic outlook and uncertainty.
13

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The DCF model for the mortgage and installment pooled loan segments includes using probability of default (“PD”) assumptions that are derived through regression analysis with forecasted US unemployment levels by credit score tier. We review a composite forecast of approximately 50 analysts as well as the Federal Open Market Committee (“FOMC”) projections in setting the unemployment forecast for the R&S period. The current ACL utilizes a one year R&S forecast followed by immediate reversion to the 30 year average unemployment rate. PD assumptions for the remaining segments are based primarily on historical rates by risk metric as defaults were not strongly correlated with any economic indicator. Loss given default (“LGD”) assumptions for the mortgage loan segment are based on a two year forecast followed by a two year straight line reversion period to the longer term average, while LGD rates for the remaining segments are the historical average for the entire period. Prepayment assumptions represent average rates per segment for a period determined by our CECL Forecast Committee and as calculated through the Bank’s Asset and Liability Management program.

Pooled reserves for the commercial loan segment are calculated using the DCF model with assumptions generally based on historical averages by class and risk rating. Effective risk rating practices allow for strong predictability of defaults and losses over the portfolio’s expected shorter duration, relative to mortgage and installment loans. Our rating system is similar to those employed by state and federal banking regulators.

The third ACL 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 ACL appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses. We adjust our quantitative model for certain qualitative factors to reflect the extent to which management expects current conditions and R&S forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The qualitative framework reflects changes related to relevant data, such as changes in asset quality trends, portfolio growth and composition, national and local economic factors, credit policy and administration and other factors not considered in the base quantitative model. We utilize a survey completed by business unit management throughout the Bank, as well as discussion with the CECL Forecast Committee to establish reserves under the qualitative framework. The current period’s ACL further recognizes inherent risk related to the ongoing COVID-19 pandemic; specifically to commercial loans in high risk industries, and mortgage and installment borrowers with occupations in those high risk industries. Identified high risk industries include: food service, hospitality, entertainment, retail, investment real estate, assisted living, and non-owner occupied office.

14

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
An analysis of the allowance for credit losses by portfolio segment for the three months ended March 31, follows:


 
Commercial
  
Mortgage
  
Installment
  
Subjective
Allocation
  
Total
 
  
(In thousands)
 
2022
               
Balance at beginning of period
 
$
11,519
  
$
19,221
  
$
3,749
  
$
12,763
  
$
47,252
 
Additions (deductions)
                    
Provision for credit losses
  
(852
)
  
(178
)
  
149
   
(692
)
  
(1,573
)
Recoveries credited to the allowance
  
77
   
171
   
373
   
-
   
621
 
Loans charged against the allowance
  
-
   
(6
)
  
(667
)
  
-
   
(673
)
Balance at end of period
 
$
10,744
  
$
19,208
  
$
3,604
  
$
12,071
  
$
45,627
 
                     
2021
                    
Balance at beginning of period
 
$
7,401
  
$
6,998
  
$
1,112
  
$
19,918
  
$
35,429
 
Additions (deductions)
                    
Impact of adoption of ASC 326
  2,551
   12,000
   3,052
   (6,029
)
  11,574
 
Provision for credit losses
  
(676
)
  
(620
)
  
(87
)
  
909
   
(474
)
Initial allowance on loans purchased with credit deterioration
  95
   18
   21
   -
   134
 
Recoveries credited to the allowance
  
159
   
212
   
177
   
-
   
548
 
Loans charged against the allowance
  
-
   
(160
)
  
(296
)
  
-
   
(456
)
Balance at end of period
 
$
9,530
  
$
18,448
  
$
3,979
  
$
14,798
  
$
46,755
 

15

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:

  
Non- Accrual
  
Non-Accrual
          
  
with no
Allowance for
Credit Loss
  
with an
Allowance for
Credit Loss
  
Total
Non-Accrual
  
90+ and Still
Accruing
  
Total
Non-Performing
Loans
 
March 31, 2022
       
(In thousands)
       
Commercial
               
Commercial and industrial (1)
 
$
-
  
$
15
  
$
15
  
$
-
  
$
15
 
Commercial real estate
  
-
   
-
   
-
   
-
   
-
 
Mortgage
                    
1-4 family owner occupied - jumbo
  
-
   
698
   
698
   
-
   
698
 
1-4 family owner occupied - non-jumbo (2)
  
284
   
1,472
   
1,756
   
-
   
1,756
 
1-4 family non-owner occupied
  
273
   
542
   
815
   
-
   
815
 
1-4 family - 2nd lien
  
-
   
905
   
905
   
-
   
905
 
Resort lending
  
118
   
59
   
177
   
-
   
177
 
Installment
                    
Boat lending
  
-
   
250
   
250
   
-
   
250
 
Recreational vehicle lending
  
-
   
149
   
149
   
-
   
149
 
Other
  
-
   
269
   
269
   
-
   
269
 
Total
 
$
675
  
$
4,359
  
$
5,034
  
$
-
  
$
5,034
 
                     
Accrued interest excluded from total
 
$
-
  
$
-
  
$
-
  
$
-
  
$
-
 
                
December 31, 2021
       

       
Commercial
               
Commercial and industrial (1)
 
$
-
  
$
15
  
$
15
  
$
-
  
$
15
 
Commercial real estate
  
-
   
-
   
-
   
-
   
-
 
Mortgage
                    
1-4 family owner occupied - jumbo
  
607
   
-
   
607
   
-
   
607
 
1-4 family owner occupied - non-jumbo (2)
  
137
   
1,815
   
1,952
   
-
   
1,952
 
1-4 family non-owner occupied
  
275
   
592
   
867
   
-
   
867
 
1-4 family - 2nd lien
  
182
   
681
   
863
   
-
   
863
 
Resort lending
  
118
   
119
   
237
   
-
   
237
 
Installment
                    
Boat lending
  
-
   
210
   
210
   
-
   
210
 
Recreational vehicle lending
  
-
   
177
   
177
   
-
   
177
 
Other
  
-
   
182
   
182
   
-
   
182
 
Total
 
$
1,319
  
$
3,791
  
$
5,110
  
$
-
  
$
5,110
 
                     
Accrued interest excluded from total
 
$
-
  
$
-
  
$
-
  
$
-
  
$
-
 

(1)
Non-performing commercial and industrial loans exclude $0.044 million and $0.047 million of government guaranteed loans at both March 31, 2022 and December 31, 2021, respectively.
(2)
Non-performing 1-4 family owner occupied – non jumbo loans exclude $0.815 million and $0.388 million of government guaranteed loans at March 31, 2022 and December 31, 2021, respectively.

16

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table provides collateral information by class of loan for collateral-dependent loans with a specific reserve. A loan is considered to be collateral dependent when the borrower is experiencing financial difficulty and the repayment is expected to be provided substantially through the operation or sale of collateral.

The amortized cost of collateral-dependent loans by class follows:


 
Collateral Type
    
  
Real
Estate
  
Other
  
Allowance for
Credit Losses
 
  
(In thousands)
    
March 31, 2022
         
Commercial
         
Commercial and industrial
 
$
74
  
$
223
  
$
47
 
Commercial real estate
  
77
   
-
   
18
 
Mortgage
            
1-4 family owner occupied - jumbo
  
-
   
-
   
-
 
1-4 family owner occupied - non-jumbo
  
848
   
-
   
201
 
1-4 family non-owner occupied
  
422
   
-
   
53
 
1-4 family - 2nd lien
  
212
   
-
   
75
 
Resort lending
  
156
   
-
   
14
 
Installment
            
Boat lending
  
-
   
80
   
28
 
Recreational vehicle lending
  
-
   
34
   
12
 
Other
  
-
   
129
   
46
 
Total
 
$
1,789
  
$
466
  
$
494
 
             
Accrued interest excluded from total
 
$
-
  
$
-
     
  

    
December 31, 2021
         
Commercial
         
Commercial and industrial
 
$
80
  
$
245
  
$
51
 
Commercial real estate
  
84
   
-
   
19
 
Mortgage
            
1-4 family owner occupied - jumbo
  
607
   
-
   
-
 
1-4 family owner occupied - non-jumbo
  
940
   
-
   
286
 
1-4 family non-owner occupied
  
477
   
-
   
72
 
1-4 family - 2nd lien
  
370
   
-
   
67
 
Resort lending
  
237
   
-
   
42
 
Installment
            
Boat lending
  
-
   
80
   
29
 
Recreational vehicle lending
  
-
   
121
   
44
 
Other
  
-
   
70
   
25
 
Total
 
$
2,795
  
$
516
  
$
635
 
             
Accrued interest excluded from total
 
$
-
  
$
1
     

17

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
An aging analysis of loans by class follows:


 
Loans Past Due
  
Loans not
  
Total
 
  
30-59 days
  
60-89 days
  
90+ days
  
Total
  
Past Due
  
Loans
 
  
(In thousands)
 
March 31, 2022
                  
Commercial
                  
Commercial and industrial
 
$
-
  
$
-
  
$
59
  
$
59
  
$
637,429
  
$
637,488
 
Commercial real estate
  
-
   
-
   
-
   
-
   
620,113
   
620,113
 
Mortgage
                        
1-4 family owner occupied - jumbo
  
-
   
-
   
-
   
-
   
580,670
   
580,670
 
1-4 family owner occupied - non-jumbo
  
883
   
1,195
   
426
   
2,504
   
278,409
   
280,913
 
1-4 family non-owner occupied
  
49
   
70
   
422
   
541
   
174,802
   
175,343
 
1-4 family - 2nd lien
  
246
   
116
   
212
   
574
   
86,545
   
87,119
 
Resort lending
  
-
   
-
   
156
   
156
   
45,858
   
46,014
 
Installment
                        
Boat lending
  
93
   
-
   
80
   
173
   
232,026
   
232,199
 
Recreational vehicle lending
  
247
   
64
   
34
   
345
   
242,530
   
242,875
 
Other
  
183
   
168
   
115
   
466
   
100,865
   
101,331
 
Total
 
$
1,701
  
$
1,613
  
$
1,504
  
$
4,818
  
$
2,999,247
  
$
3,004,065
 
Accrued interest excluded from total
 
$
14
  
$
19
  
$
-
  
$
33
  
$
6,644
  
$
6,677
 
                         
December 31, 2021
                        
Commercial
                        
Commercial and industrial
 
$
-
  
$
2
  
$
62
  
$
64
  
$
593,048
  
$
593,112
 
Commercial real estate
  
-
   
-
   
-
   
-
   
610,469
   
610,469
 
Mortgage
                        
1-4 family owner occupied - jumbo
  
-
   
-
   
607
   
607
   
540,416
   
541,023
 
1-4 family owner occupied - non-jumbo
  
774
   
408
   
657
   
1,839
   
264,571
   
266,410
 
1-4 family non-owner occupied
  
87
   
26
   
462
   
575
   
194,277
   
194,852
 
1-4 family - 2nd lien
  
422
   
60
   
289
   
771
   
87,958
   
88,729
 
Resort lending
  
-
   
-
   
237
   
237
   
48,408
   
48,645
 
Installment
                        
Boat lending
  
438
   
28
   
52
   
518
   
227,622
   
228,140
 
Recreational vehicle lending
  
377
   
65
   
120
   
562
   
234,183
   
234,745
 
Other
  
252
   
57
   
49
   
358
   
98,562
   
98,920
 
Total recorded investment
 
$
2,350
  
$
646
  
$
2,535
  
$
5,531
  
$
2,899,514
  
$
2,905,045
 
Accrued interest excluded from total
 
$
25
  
$
9
  
$
-
  
$
34
  
$
6,802
  
$
6,836
 

18

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
We have allocated $3.3 million and $3.6 million of reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDR”) at March 31, 2022 and December 31, 2021, respectively.

TDRs follow:


 
March 31, 2022
 
  
Commercial
  
Retail (1)
  
Total
 
  
(In thousands)
 
Performing TDRs
 
$
4,410
  
$
30,622
  
$
35,032
 
Non-performing TDRs (2)
  
-
   
875
(3) 
  
875
 
Total
 
$
4,410
  
$
31,497
  
$
35,907
 


 
December 31, 2021
 
  
Commercial
  
Retail (1)
  
Total
 
  
(In thousands)
 
Performing TDRs
 
$
4,481
  
$
31,589
  
$
36,070
 
Non-performing TDRs (2)
  
-
   
1,016
(3) 
  
1,016
 
Total
 
$
4,481
  
$
32,605
  
$
37,086
 

(1)
Retail loans include mortgage and installment loan portfolio 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.

During the three months ended March 31, 2022, the terms of one loan were modified as a TDR (there were no TDR modifications during the three months ended March 31, 2021). The modification of the terms of this loan included a reduction of the stated interest rate of the loan and a 34 month extension of the maturity date.  The pre- and post-modification outstanding loan balances were both $0.3million at March 31, 2022. This TDR increased the ACL by $0.03 million and resulted in zero charge-offs during the three months ended March 31, 2022.


There were no TDRs that subsequently defaulted within twelve months following the modification during the three month periods ended March 31, 2022 and 2021.

A loan is considered to be in payment default generally once it is 90days 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.

19

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Non-TDR Loan Modifications and Paycheck Protection Program (“PPP”) due to COVID-19 - During 2020 the CARES Act was signed into law and Section 4013 of the CARES Act provided temporary relief from the accounting and reporting requirements for TDRs regarding certain loan modifications for our customers.  Section 4013 specified that COVID-19 related modifications on loans that were current (less than 30 days past due) as of December 31, 2019 were not TDRs.  The provisions of Section 4013 were to expire at the earlier of 60 days after the termination of the national emergency that was previously declared on March 13, 2020 or January 1, 2022.  While the provisions of Section 4013 were in place, we assisted both commercial and retail (mortgage and installment) borrowers with accommodations that included reduced or suspended payments. While these loans were in accommodation plans (prior to the expiration of Section 4013) they were not being reported as past due in keeping with the guidance in Section 4013.  At the expiration of Section 4013 on January 1, 2022, we moved certain delinquent accommodation loans to non-accrual which totaled $0.2 million at March 31, 2022.  Total accommodation loans were $0.5 million and $2.3 million at March 31, 2022 and December 31, 2021, respectively.



The CARES Act also included a loan program administered through the U.S. Small Business Administration (‘‘SBA’’) referred to as the PPP. Under the PPP, small businesses and other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enrolled in the program, subject to numerous limitations and eligibility criteria. We are participating as a lender in the PPP. The PPP opened on April 3, 2020 intending to provide American small businesses with eight weeks of cash-flow assistance through 100% federally guaranteed loans through the SBA.  The PPP initially closed on August 8, 2020 (“Round 1”). On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (‘‘Economic Aid Act’’) was signed into law which allocated additional funding for the PPP (“Round 2”). The Economic Aid Act reopened the PPP through March 31, 2021 with generally the same terms and conditions as originally enacted under the CARES Act while clarifying eligibility and ineligibility for certain entities and expanding the permitted uses of PPP funds. In addition, the Economic Aid Act simplified the loan forgiveness process for PPP loans of $150,000 or less. The Economic Aid Act also established second draw loans for entities that had already used the initial PPP funds, subject to numerous limitations and eligibility criteria. PPP Round 2 loans are eligible for forgiveness similar to Round 1 PPP loans, subject to limitations set forth in the Economic Aid Act.  Round 2 closed on May 31, 2021.

The following table summarizes PPP loans outstanding:

Paycheck Protection Program


 
As of March 31, 2022
  
As of December 31, 2021
 
  
Amount (#)
  
Amount ($)
  
Amount (#)
  
Amount ($)
 
  
(Dollars in thousands)
  
(Dollars in thousands)
 
Closed and outstanding - Round 1 loans
  
3
  
$
51
   
6
  
$
197
 
Closed and outstanding - Round 2 loans
  
55
   
5,882
   
180
   
26,167
 
Total closed and outstanding
  
58
  
$
5,933
   
186
  
$
26,364
 
Unaccreted net fees remaining at period end
     
$
211
      
$
806
 

20

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
PPP loans are included in the commercial and industrial class of the commercial loan portfolio segment. As these loans are 100% guaranteed through the SBA the allowance for credit losses recorded on these loans is zero.  PPP loans funded totaled zero and $128.2 million during the three months ended March 31, 2022 and 2021, respectively.  Interest and fees on loans in our condensed consolidated statement of operations related to the accretion of net loan fees on PPP loans totaled $0.6 million and $2.1 million during the three month periods ended March 31, 2022 and 2021, respectively.

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) 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 the loan 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.

21

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following tables summarize loan ratings by loan class for our commercial portfolio loan segment:


 
Commercial
 
  
Term Loans Amortized Cost Basis by Origination Year
  
Revolving
Loans
Amortized
    
  
2022
  
2021
  
2020
  
2019
  
2018
  
Prior
  
Cost Basis
  
Total
 
  
(In thousands)
 
March 31, 2022
                        
Commercial and industrial
                        
Non-watch (1-6)
 
$
44,807
  
$
114,032
  
$
64,896
  
$
54,830
  
$
42,010
  
$
123,382
  
$
181,325
  
$
625,282
 
Watch (7-8)
  
-
   
115
   
60
   
89
   
1,588
   
5,310
   
-
   
7,162
 
Substandard Accrual (9)
  
-
   
1,549
   
-
   
1,510
   
215
   
1,225
   
486
   
4,985
 
Non-Accrual (10-11)
  
-
   
-
   
-
   
-
   
-
   
59
   
-
   
59
 
Total
 
$
44,807
  
$
115,696
  
$
64,956
  
$
56,429
  
$
43,813
  
$
129,976
  
$
181,811
  
$
637,488
 
Accrued interest excluded from total
 
$
39
  
$
245
  
$
141
  
$
101
  
$
221
  
$
298
  
$
310
  
$
1,355
 
                                 
Commercial real estate
                                
Non-watch (1-6)
 
$
34,073
  
$
119,393
  
$
48,685
  
$
102,088
  
$
71,533
  
$
192,076
  
$
33,846
  
$
601,694
 
Watch (7-8)
  
-
   
-
   
294
   
2,986
   
10,816
   
3,099
   
-
   
17,195
 
Substandard Accrual (9)
  
-
   
140
   
-
   
-
   
-
   
1,084
   
-
   
1,224
 
Non-Accrual (10-11)
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
34,073
  
$
119,533
  
$
48,979
  
$
105,074
  
$
82,349
  
$
196,259
  
$
33,846
  
$
620,113
 
Accrued interest excluded from total
 
$
26
  
$
188
  
$
79
  
$
205
  
$
183
  
$
408
  
$
55
  
$
1,144
 
                                 
Total Commercial
                                
Non-watch (1-6)
 
$
78,880
  
$
233,425
  
$
113,581
  
$
156,918
  
$
113,543
  
$
315,458
  
$
215,171
  
$
1,226,976
 
Watch (7-8)
  
-
   
115
   
354
   
3,075
   
12,404
   
8,409
   
-
   
24,357
 
Substandard Accrual (9)
  
-
   
1,689
   
-
   
1,510
   
215
   
2,309
   
486
   
6,209
 
Non-Accrual (10-11)
  
-
   
-
   
-
   
-
   
-
   
59
   
-
   
59
 
Total
 
$
78,880
  
$
235,229
  
$
113,935
  
$
161,503
  
$
126,162
  
$
326,235
  
$
215,657
  
$
1,257,601
 
Accrued interest excluded from total
 
$
65
  
$
433
  
$
220
  
$
306
  
$
404
  
$
706
  
$
365
  
$
2,499
 

  Term Loans Amortized Cost Basis by Origination Year  
Revolving
Loans
Amortized
    
  
2021
  
2020
  
2019
  
2018
  
2017
  
Prior
  
Cost Basis
   Total 
  
(In thousands)
 
December 31, 2021
                        
Commercial and industrial
                        
Non-watch (1-6)
 
$
121,917
  
$
69,856
  
$
56,984
  
$
44,827
  
$
38,307
  
$
96,261
  
$
144,579
  
$
572,731
 
Watch (7-8)
  
81
   
-
   
532
   
1,294
   
362
   
6,274
   
476
   
9,019
 
Substandard Accrual (9)
  
1,569
   
2
   
1,159
   
247
   
-
   
1,530
   
6,793
   
11,300
 
Non-Accrual (10-11)
  
-
   
-
   
-
   
-
   
-
   
62
   
-
   
62
 
Total
 
$
123,567
  
$
69,858
  
$
58,675
  
$
46,368
  
$
38,669
  
$
104,127
  
$
151,848
  
$
593,112
 
Accrued interest excluded from total
 
$
314
  
$
153
  
$
105
  
$
229
  
$
90
  
$
240
  
$
242
  
$
1,373
 
                
Commercial real estate
                                
Non-watch (1-6)
 
$
123,330
  
$
55,479
  
$
108,056
  
$
75,828
  
$
39,123
  
$
160,199
  
$
31,551
  
$
593,566
 
Watch (7-8)
  
-
   
324
   
3,028
   
7,678
   
1,708
   
1,423
   
-
   
14,161
 
Substandard Accrual (9)
  
441
   
-
   
-
   
1,193
   
1,108
   
-
   
-
   
2,742
 
Non-Accrual (10-11)
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
123,771
  
$
55,803
  
$
111,084
  
$
84,699
  
$
41,939
  
$
161,622
  
$
31,551
  
$
610,469
 
Accrued interest excluded from total
 
$
182
  
$
81
  
$
233
  
$
203
  
$
94
  
$
325
  
$
47
  
$
1,165
 
                                 
Total Commercial
                                
Non-watch (1-6)
 
$
245,247
  
$
125,335
  
$
165,040
  
$
120,655
  
$
77,430
  
$
256,460
  
$
176,130
  
$
1,166,297
 
Watch (7-8)
  
81
   
324
   
3,560
   
8,972
   
2,070
   
7,697
   
476
   
23,180
 
Substandard Accrual (9)
  
2,010
   
2
   
1,159
   
1,440
   
1,108
   
1,530
   
6,793
   
14,042
 
Non-Accrual (10-11)
  
-
   
-
   
-
   
-
   
-
   
62
   
-
   
62
 
Total
 
$
247,338
  
$
125,661
  
$
169,759
  
$
131,067
  
$
80,608
  
$
265,749
  
$
183,399
  
$
1,203,581
 
Accrued interest excluded from total
 
$
496
  
$
234
  
$
338
  
$
432
  
$
184
  
$
565
  
$
289
  
$
2,538
 

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

22

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following tables summarize credit scores by loan class for our mortgage and installment loan portfolio segments at March 31, 2022 and December 31, 2021:


 
Mortgage (1)
 
  
Term Loans Amortized Cost Basis by Origination Year
  
Revolving Loans Amortized
    
  
2022
  
2021
  
2020
  
2019
  
2018
  
Prior
  
Cost Basis
  
Total
 
  
(In thousands)
 
March 31, 2022
                        
1-4 family owner occupied - jumbo
                        
_800 and above
 
$
5,135
  
$
29,275
  
$
17,288
  
$
7,971
  
$
2,561
  
$
7,336
  
$
-
  
$
69,566
 
_750-799
  
15,496
   
181,908
   
75,049
   
22,893
   
3,859
   
15,032
   
1,777
   
316,014
 
_700-749
  
6,852
   
67,815
   
32,528
   
10,683
   
3,832
   
12,508
   
-
   
134,218
 
_650-699
  
4,067
   
18,715
   
9,995
   
5,423
   
4,590
   
6,024
   
-
   
48,814
 
_600-649
  
701
   
2,039
   
2,671
   
503
   
1,008
   
1,799
   
-
   
8,721
 
_550-599
  
-
   
-
   
467
   
-
   
-
   
767
   
-
   
1,234
 
_500-549
  
-
   
-
   
1,405
   
-
   
-
   
-
   
-
   
1,405
 
Under 500
  
-
   
-
   
-
   
-
   
-
   
698
   
-
   
698
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
32,251
  
$
299,752
  
$
139,403
  
$
47,473
  
$
15,850
  
$
44,164
  
$
1,777
  
$
580,670
 
Accrued interest excluded from total
 
$
56
  
$
621
  
$
315
  
$
124
  
$
60
  
$
127
  
$
6
  
$
1,309
 
                                 
1-4 family owner occupied - non-jumbo
                                
_800 and above
 
$
3,360
  
$
8,957
  
$
3,952
  
$
3,712
  
$
2,353
  
$
8,154
  
$
3,261
  
$
33,749
 
_750-799
  
3,111
   
42,338
   
16,291
   
8,658
   
5,630
   
18,683
   
6,791
   
101,502
 
_700-749
  
3,687
   
27,611
   
9,268
   
4,189
   
3,473
   
25,042
   
4,299
   
77,569
 
_650-699
  
3,004
   
10,714
   
4,103
   
3,114
   
1,820
   
14,156
   
1,322
   
38,233
 
_600-649
  
123
   
978
   
1,077
   
1,046
   
1,541
   
9,692
   
90
   
14,547
 
_550-599
  
-
   
-
   
293
   
909
   
753
   
6,745
   
50
   
8,750
 
_500-549
  
-
   
-
   
57
   
419
   
324
   
3,549
   
18
   
4,367
 
Under 500
  
-
   
-
   
613
   
309
   
393
   
881
   
-
   
2,196
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
13,285
  
$
90,598
  
$
35,654
  
$
22,356
  
$
16,287
  
$
86,902
  
$
15,831
  
$
280,913
 
Accrued interest excluded from total
 
$
58
  
$
186
  
$
87
  
$
62
  
$
56
  
$
231
  
$
49
  
$
729
 
                                 
1-4 family non-owner occupied
                                
_800 and above
 
$
3,456
  
$
9,600
  
$
1,443
  
$
2,856
  
$
1,452
  
$
7,537
  
$
1,683
  
$
28,027
 
_750-799
  
5,453
   
39,438
   
20,115
   
8,872
   
2,541
   
15,751
   
4,378
   
96,548
 
_700-749
  
860
   
9,953
   
6,331
   
2,698
   
1,777
   
6,455
   
2,276
   
30,350
 
_650-699
  
-
   
4,861
   
3,073
   
256
   
295
   
5,999
   
846
   
15,330
 
_600-649
  
-
   
-
   
56
   
108
   
280
   
2,119
   
381
   
2,944
 
_550-599
  
-
   
-
   
26
   
-
   
191
   
1,037
   
-
   
1,254
 
_500-549
  
-
   
-
   
-
   
-
   
55
   
625
   
50
   
730
 
Under 500
  
-
   
-
   
-
   
-
   
-
   
160
   
-
   
160
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
9,769
  
$
63,852
  
$
31,044
  
$
14,790
  
$
6,591
  
$
39,683
  
$
9,614
  
$
175,343
 
Accrued interest excluded from total
 
$
14
  
$
152
  
$
83
  
$
46
  
$
22
  
$
113
  
$
33
  
$
463
 
                                 
1-4 family - 2nd lien
                                
_800 and above
 
$
75
  
$
411
  
$
978
  
$
421
  
$
63
  
$
593
  
$
8,088
  
$
10,629
 
_750-799
  
228
   
2,477
   
2,022
   
688
   
762
   
3,891
   
29,442
   
39,510
 
_700-749
  
93
   
1,662
   
889
   
768
   
240
   
3,206
   
16,254
   
23,112
 
_650-699
  
-
   
208
   
387
   
457
   
403
   
1,545
   
6,313
   
9,313
 
_600-649
  
-
   
-
   
176
   
71
   
105
   
1,194
   
1,363
   
2,909
 
_550-599
  
-
   
-
   
-
   
60
   
-
   
425
   
228
   
713
 
_500-549
  
-
   
-
   
-
   
102
   
-
   
277
   
154
   
533
 
Under 500
  
-
   
-
   
-
   
54
   
3
   
275
   
68
   
400
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
396
  
$
4,758
  
$
4,452
  
$
2,621
  
$
1,576
  
$
11,406
  
$
61,910
  
$
87,119
 
Accrued interest excluded from total
 
$
-
  
$
9
  
$
8
  
$
6
  
$
4
  
$
29
  
$
206
  
$
262
 

23

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

 
Mortgage - continued (1)
 
  
Term Loans Amortized Cost Basis by Origination Year
  
Revolving Loans Amortized
    
  
2022
  
2021
  
2020
  
2019
  
2018
  
Prior
  
Cost Basis
  
Total
 
  
(In thousands)
 
March 31, 2022 - continued
                        
Resort lending
                        
_800 and above
 
$
-
  
$
-
  
$
-
  
$
-
  
$
272
  
$
6,645
  
$
-
  
$
6,917
 
_750-799
  
-
   
596
   
1,240
   
243
   
463
   
18,669
   
-
   
21,211
 
_700-749
  
-
   
-
   
172
   
-
   
289
   
8,945
   
-
   
9,406
 
_650-699
  
-
   
931
   
-
   
-
   
-
   
5,800
   
-
   
6,731
 
_600-649
  
-
   
-
   
-
   
-
   
-
   
1,469
   
-
   
1,469
 
_550-599
  
-
   
-
   
-
   
-
   
-
   
79
   
-
   
79
 
_500-549
  
-
   
-
   
-
   
-
   
-
   
201
   
-
   
201
 
Under 500
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
-
  
$
1,527
  
$
1,412
  
$
243
  
$
1,024
  
$
41,808
  
$
-
  
$
46,014
 
Accrued interest excluded from total
 
$
-
  
$
2
  
$
3
  
$
1
  
$
3
  
$
95
  
$
-
  
$
104
 
                                 
Total Mortgage
                                
_800 and above
 
$
12,026
  
$
48,243
  
$
23,661
  
$
14,960
  
$
6,701
  
$
30,265
  
$
13,032
  $
148,888
 
750-799
  
24,288
   
266,757
   
114,717
   
41,354
   
13,255
   
72,026
   
42,388
   
574,785
 
_700-749
  
11,492
   
107,041
   
49,188
   
18,338
   
9,611
   
56,156
   
22,829
   
274,655
 
_650-699
  
7,071
   
35,429
   
17,558
   
9,250
   
7,108
   
33,524
   
8,481
   
118,421
 
_600-649
  
824
   
3,017
   
3,980
   
1,728
   
2,934
   
16,273
   
1,834
   
30,590
 
_550-599
  
-
   
-
   
786
   
969
   
944
   
9,053
   
278
   
12,030
 
_500-549
  
-
   
-
   
1,462
   
521
   
379
   
4,652
   
222
   
7,236
 
Under 500
  
-
   
-
   
613
   
363
   
396
   
2,014
   
68
   
3,454
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
55,701
  
$
460,487
  
$
211,965
  
$
87,483
  
$
41,328
  
$
223,963
  
$
89,132
  
$
1,170,059
 
Accrued interest excluded from total
 
$
128
  
$
970
  
$
496
  
$
239
  
$
145
  
$
595
  
$
294
  
$
2,867
 


 Term Loans Amortized Cost Basis by Origination Year  
Revolving
Loans
Amortized
    
  
2021
  
2020
  
2019
  
2018
  
2017
  Prior  
Cost Basis
   Total 
  
(In thousands)
 
December 31, 2021
                       
1-4 family owner occupied - jumbo
                        
800 and above
 
$
31,137
  
$
17,652
  
$
8,491
  
$
2,565
  
$
7,516
  
$
527
  
$
-
  
$
67,888
 
750-799
  
135,292
   
92,590
   
30,072
   
7,118
   
9,469
   
5,043
   
2,371
   
281,955
 
700-749
  
67,255
   
34,665
   
13,765
   
4,421
   
7,748
   
4,856
   
-
   
132,710
 
650-699
  
19,367
   
10,313
   
5,447
   
5,285
   
6,080
   
690
   
-
   
47,182
 
600-649
  
2,050
   
2,638
   
506
   
1,013
   
837
   
976
   
-
   
8,020
 
550-599
  
-
   
469
   
-
   
-
   
781
   
-
   
-
   
1,250
 
500-549
  
-
   
1,411
   
-
   
-
   
-
   
-
   
-
   
1,411
 
Under 500
  
-
   
-
   
-
   
-
   
607
   
-
   
-
   
607
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
255,101
  
$
159,738
  
$
58,281
  
$
20,402
  
$
33,038
  
$
12,092
  
$
2,371
  
$
541,023
 
Accrued interest excluded from total
 
$
557
  
$
370
  
$
163
  
$
77
  
$
87
  
$
33
  
$
3
  
$
1,290
 
                                 
1-4 family owner occupied - non-jumbo
                                
800 and above
 
$
6,185
  
$
5,534
  
$
3,756
  
$
2,514
  
$
3,566
  
$
4,569
  
$
4,026
  
$
30,150
 
750-799
  
33,227
   
20,300
   
9,688
   
5,664
   
8,887
   
12,498
   
8,341
   
98,605
 
700-749
  
19,317
   
10,572
   
4,813
   
4,035
   
5,008
   
21,806
   
5,637
   
71,188
 
650-699
  
6,593
   
4,233
   
3,217
   
2,010
   
3,135
   
12,423
   
2,812
   
34,423
 
600-649
  
2,119
   
1,082
   
1,051
   
1,549
   
1,660
   
8,663
   
89
   
16,213
 
550-599
  
-
   
295
   
1,076
   
758
   
1,023
   
5,802
   
147
   
9,101
 
500-549
  
-
   
57
   
421
   
327
   
510
   
3,169
   
18
   
4,502
 
Under 500
  
-
   
616
   
284
   
394
   
250
   
684
   
-
   
2,228
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
67,441
  
$
42,689
  
$
24,306
  
$
17,251
  
$
24,039
  
$
69,614
  
$
21,070
  
$
266,410
 
Accrued interest excluded from total
 
$
208
  
$
97
  
$
84
  
$
58
  
$
68
  
$
226
  
$
57
  
$
798
 

24

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Mortgage - continued (1)       
  
Term Loans Amortized Cost Basis by Origination Year
  
Revolving
Loans
Amortized
  

 
  
2021
  
2020
  
2019
  
2018
  
2017
  
Prior
 Cost Basis  Total
  
(In thousands)
 
December 31, 2021 (continued)
                      
1-4 family non-owner occupied
                      
800 and above
 
$
15,406
  
$
1,786
  
$
2,857
  
$
1,459
  
$
2,627
  
$
5,058
  
$
1,639
  
$
30,832
 
750-799
  
44,201
   
21,885
   
10,517
   
3,667
   
6,956
   
10,004
   
5,117
   
102,347
 
700-749
  
16,486
   
7,807
   
2,764
   
1,878
   
966
   
6,095
   
2,756
   
38,752
 
650-699
  
6,617
   
3,095
   
257
   
299
   
248
   
6,019
   
955
   
17,490
 
600-649
  
125
   
57
   
108
   
282
   
174
   
2,051
   
381
   
3,178
 
550-599
  
-
   
25
   
-
   
192
   
-
   
1,121
   
-
   
1,338
 
500-549
  
-
   
-
   
-
   
55
   
-
   
638
   
50
   
743
 
Under 500
  
-
   
-
   
-
   
-
   
-
   
172
   
-
   
172
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
82,835
  
$
34,655
  
$
16,503
  
$
7,832
  
$
10,971
  
$
31,158
  
$
10,898
  
$
194,852
 
Accrued interest excluded from total
 
$
171
  
$
95
  
$
46
  
$
23
  
$
33
  
$
107
  
$
38
  
$
513
 
                                 
1-4 family - 2nd lien
                                
800 and above
 
$
415
  
$
964
  
$
426
  
$
95
  
$
266
  
$
353
  
$
8,465
  
$
10,984
 
750-799
  
2,161
   
2,413
   
714
   
1,332
   
1,859
   
2,415
   
30,106
   
41,000
 
700-749
  
1,307
   
1,049
   
771
   
561
   
1,374
   
2,365
   
16,316
   
23,743
 
650-699
  
122
   
309
   
460
   
405
   
140
   
1,639
   
5,286
   
8,361
 
600-649
  
-
   
177
   
72
   
106
   
92
   
1,143
   
1,370
   
2,960
 
550-599
  
-
   
-
   
61
   
-
   
-
   
476
   
228
   
765
 
500-549
  
-
   
-
   
99
   
-
   
89
   
190
   
155
   
533
 
Under 500
  
-
   
-
   
54
   
3
   
60
   
16
   
250
   
383
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
4,005
  
$
4,912
  
$
2,657
  
$
2,502
  
$
3,880
  
$
8,597
  
$
62,176
  
$
88,729
 
Accrued interest excluded from total
 
$
7
  
$
9
  
$
9
  
$
5
  
$
8
  
$
34
  
$
211
  
$
283
 
                                 
Resort lending
                                
800 and above
 
$
-
  
$
-
  
$
-
  
$
274
  
$
-
  
$
7,347
  
$
-
  
$
7,621
 
750-799
  
600
   
1,246
   
250
   
511
   
63
   
19,630
   
-
   
22,300
 
700-749
  
-
   
174
   
-
   
301
   
67
   
9,052
   
-
   
9,594
 
650-699
  
951
   
-
   
-
   
-
   
-
   
6,057
   
-
   
7,008
 
600-649
  
-
   
-
   
-
   
-
   
-
   
1,841
   
-
   
1,841
 
550-599
  
-
   
-
   
-
   
-
   
-
   
80
   
-
   
80
 
500-549
  
-
   
-
   
-
   
-
   
-
   
201
   
-
   
201
 
Under 500
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
1,551
  
$
1,420
  
$
250
  
$
1,086
  
$
130
  
$
44,208
  
$
-
  
$
48,645
 
Accrued interest excluded from total
 
$
2
  
$
3
  
$
-
  
$
3
  
$
-
  
$
106
  
$
-
  
$
114
 
                                 
Total Mortgage
                                
800 and above
 
$
53,143
  
$
25,936
  
$
15,530
  
$
6,907
  
$
13,975
  
$
17,854
  
$
14,130
  
$
147,475
 
750-799
  
215,481
   
138,434
   
51,241
   
18,292
   
27,234
   
49,590
   
45,935
   
546,207
 
700-749
  
104,365
   
54,267
   
22,113
   
11,196
   
15,163
   
44,174
   
24,709
   
275,987
 
650-699
  
33,650
   
17,950
   
9,381
   
7,999
   
9,603
   
26,828
   
9,053
   
114,464
 
600-649
  
4,294
   
3,954
   
1,737
   
2,950
   
2,763
   
14,674
   
1,840
   
32,212
 
550-599
  
-
   
789
   
1,137
   
950
   
1,804
   
7,479
   
375
   
12,534
 
500-549
  
-
   
1,468
   
520
   
382
   
599
   
4,198
   
223
   
7,390
 
Under 500
  
-
   
616
   
338
   
397
   
917
   
872
   
250
   
3,390
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
410,933
  
$
243,414
  
$
101,997
  
$
49,073
  
$
72,058
  
$
165,669
  
$
96,515
  
$
1,139,659
 
Accrued interest excluded from total
 
$
945
  
$
574
  
$
302
  
$
166
  
$
196
  
$
506
  
$
309
  
$
2,998
 

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

25

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

 
Installment (1)
 
  
Term Loans Amortized Cost Basis by Origination Year
 
  
2022
  
2021
  
2020
  
2019
  
2018
  
Prior
  
Total
 
  
(In thousands)
 
March 31, 2022
                     
Boat lending
                     
_800 and above
 
$
1,853
  
$
6,990
  
$
5,113
  
$
5,556
  
$
4,722
  
$
6,744
  
$
30,978
 
_750-799
  
10,888
   
44,728
   
23,866
   
19,960
   
14,629
   
19,048
   
133,119
 
_700-749
  
4,670
   
18,299
   
8,835
   
7,625
   
5,988
   
7,536
   
52,953
 
_650-699
  
815
   
3,784
   
1,623
   
2,230
   
1,155
   
2,363
   
11,970
 
_600-649
  
-
   
321
   
411
   
205
   
311
   
763
   
2,011
 
_550-599
  
-
   
233
   
79
   
89
   
107
   
290
   
798
 
_500-549
  
-
   
-
   
47
   
-
   
83
   
63
   
193
 
Under 500
  
-
   
-
   
-
   
-
   
10
   
167
   
177
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
18,226
  
$
74,355
  
$
39,974
  
$
35,665
  
$
27,005
  
$
36,974
  
$
232,199
 
Accrued interest excluded from total
 
$
35
  
$
159
  
$
97
  
$
95
  
$
66
  
$
84
  
$
536
 
                             
Recreational vehicle lending
                            
_800 and above
 
$
3,472
  
$
7,591
  
$
4,718
  
$
5,333
  
$
4,376
  
$
5,553
  
$
31,043
 
_750-799
  
13,853
   
63,590
   
20,863
   
16,062
   
10,859
   
10,874
   
136,101
 
_700-749
  
5,236
   
30,955
   
9,059
   
5,820
   
3,629
   
3,685
   
58,384
 
_650-699
  
457
   
7,129
   
2,327
   
1,750
   
900
   
1,409
   
13,972
 
_600-649
  
-
   
977
   
399
   
266
   
321
   
250
   
2,213
 
_550-599
  
-
   
266
   
99
   
133
   
266
   
74
   
838
 
_500-549
  
-
   
38
   
20
   
103
   
61
   
91
   
313
 
Under 500
  
-
   
-
   
-
   
11
   
-
   
-
   
11
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
23,018
  
$
110,546
  
$
37,485
  
$
29,478
  
$
20,412
  
$
21,936
  
$
242,875
 
Accrued interest excluded from total
 
$
51
  
$
257
  
$
86
  
$
72
  
$
52
  
$
47
  
$
565
 
                             
Other
                            
_800 and above
 
$
1,106
  
$
2,119
  
$
1,257
  
$
1,286
  
$
708
  
$
884
  
$
7,360
 
_750-799
  
4,952
   
12,747
   
8,201
   
5,295
   
2,766
   
4,494
   
38,455
 
_700-749
  
2,437
   
10,035
   
4,852
   
2,805
   
1,629
   
3,049
   
24,807
 
_650-699
  
17,649
   
4,090
   
1,563
   
1,081
   
571
   
1,825
   
26,779
 
_600-649
  
155
   
689
   
313
   
227
   
164
   
595
   
2,143
 
_550-599
  
16
   
136
   
35
   
109
   
144
   
188
   
628
 
_500-549
  
-
   
8
   
49
   
42
   
43
   
125
   
267
 
Under 500
  
-
   
1
   
62
   
40
   
12
   
27
   
142
 
Unknown
  
750
   
-
   
-
   
-
   
-
   
-
   
750
 
Total
 
$
27,065
  
$
29,825
  
$
16,332
  
$
10,885
  
$
6,037
  
$
11,187
  
$
101,331
 
Accrued interest excluded from total
 
$
23
  
$
62
  
$
36
  
$
30
  
$
17
  
$
42
  
$
210
 
                             
Total installment
                            
_800 and above
 
$
6,431
  
$
16,700
  
$
11,088
  
$
12,175
  
$
9,806
  
$
13,181
  
$
69,381
 
_750-799
  
29,693
   
121,065
   
52,930
   
41,317
   
28,254
   
34,416
   
307,675
 
_700-749
  
12,343
   
59,289
   
22,746
   
16,250
   
11,246
   
14,270
   
136,144
 
_650-699
  
18,921
   
15,003
   
5,513
   
5,061
   
2,626
   
5,597
   
52,721
 
_600-649
  
155
   
1,987
   
1,123
   
698
   
796
   
1,608
   
6,367
 
_550-599
  
16
   
635
   
213
   
331
   
517
   
552
   
2,264
 
_500-549
  
-
   
46
   
116
   
145
   
187
   
279
   
773
 
Under 500
  
-
   
1
   
62
   
51
   
22
   
194
   
330
 
Unknown
  
750
   
-
   
-
   
-
   
-
   
-
   
750
 
Total
 
$
68,309
  
$
214,726
  
$
93,791
  
$
76,028
  
$
53,454
  
$
70,097
  
$
576,405
 
Accrued interest excluded from total
 
$
109
  
$
478
  
$
219
  
$
197
  
$
135
  
$
173
  
$
1,311
 

26

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Installment - continued (1) 
  
Term Loans Amortized Cost Basis by Origination Year
 
  
2021
  
2020
  
2019
  
2018
  
2017
  
Prior
  
Total
 
  
(In thousands)
 
December 31, 2021
                     
Boat lending
                     
800 and above
 
$
7,513
  
$
5,786
  
$
6,015
  
$
4,906
  
$
2,968
  
$
4,433
  
$
31,621
 
750-799
  
47,434
   
24,968
   
21,052
   
15,681
   
9,797
   
10,971
   
129,903
 
700-749
  
19,180
   
9,724
   
8,263
   
6,467
   
3,109
   
4,953
   
51,696
 
650-699
  
3,845
   
1,679
   
2,301
   
1,223
   
1,166
   
1,378
   
11,592
 
600-649
  
373
   
419
   
209
   
327
   
185
   
604
   
2,117
 
550-599
  
237
   
81
   
91
   
113
   
115
   
191
   
828
 
500-549
  
-
   
49
   
-
   
85
   
-
   
67
   
201
 
Under 500
  
-
   
-
   
-
   
10
   
168
   
4
   
182
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
78,582
  
$
42,706
  
$
37,931
  
$
28,812
  
$
17,508
  
$
22,601
  
$
228,140
 
Accrued interest excluded from total
 
$
169
  
$
102
  
$
106
  
$
69
  
$
44
  
$
47
  
$
537
 
                             
Recreational vehicle lending
                         
800 and above
 
$
8,475
  
$
5,121
  
$
5,837
  
$
4,627
  
$
2,456
  
$
3,594
  
$
30,110
 
750-799
  
66,834
   
22,707
   
17,173
   
11,973
   
5,281
   
6,794
   
130,762
 
700-749
  
32,702
   
9,500
   
6,169
   
3,768
   
1,657
   
2,343
   
56,139
 
650-699
  
7,390
   
2,423
   
1,842
   
948
   
649
   
905
   
14,157
 
600-649
  
990
   
408
   
291
   
333
   
152
   
111
   
2,285
 
550-599
  
271
   
100
   
163
   
318
   
6
   
72
   
930
 
500-549
  
39
   
21
   
105
   
62
   
26
   
91
   
344
 
Under 500
  
-
   
-
   
11
   
-
   
-
   
7
   
18
 
Unknown
  
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total
 
$
116,701
  
$
40,280
  
$
31,591
  
$
22,029
  
$
10,227
  
$
13,917
  
$
234,745
 
Accrued interest excluded from total
 
$
265
  
$
93
  
$
78
  
$
56
  
$
26
  
$
28
  
$
546
 
                             
Other
                            
800 and above
 
$
2,328
  
$
1,424
  
$
1,493
  
$
882
  
$
357
  
$
695
  
$
7,179
 
750-799
  
13,923
   
9,093
   
6,074
   
3,175
   
2,183
   
2,731
   
37,179
 
700-749
  
10,791
   
5,426
   
3,301
   
1,899
   
906
   
2,194
   
24,517
 
650-699
  
20,167
   
1,715
   
1,249
   
657
   
561
   
1,332
   
25,681
 
600-649
  
761
   
368
   
272
   
190
   
284
   
357
   
2,232
 
550-599
  
159
   
42
   
127
   
167
   
46
   
154
   
695
 
500-549
  
8
   
53
   
56
   
55
   
38
   
98
   
308
 
Under 500
  
6
   
62
   
42
   
14
   
12
   
18
   
154
 
Unknown
  
975
   
-
   
-
   
-
   
-
   
-
   
975
 
Total
 
$
49,118
  
$
18,183
  
$
12,614
  
$
7,039
  
$
4,387
  
$
7,579
  
$
98,920
 
Accrued interest excluded from total
 
$
73
  
$
40
  
$
36
  
$
19
  
$
11
  
$
38
  
$
217
 
                             
Total installment
                            
800 and above
 
$
18,316
  
$
12,331
  
$
13,345
  
$
10,415
  
$
5,781
  
$
8,722
  
$
68,910
 
750-799
  
128,191
   
56,768
   
44,299
   
30,829
   
17,261
   
20,496
   
297,844
 
700-749
  
62,673
   
24,650
   
17,733
   
12,134
   
5,672
   
9,490
   
132,352
 
650-699
  
31,402
   
5,817
   
5,392
   
2,828
   
2,376
   
3,615
   
51,430
 
600-649
  
2,124
   
1,195
   
772
   
850
   
621
   
1,072
   
6,634
 
550-599
  
667
   
223
   
381
   
598
   
167
   
417
   
2,453
 
500-549
  
47
   
123
   
161
   
202
   
64
   
256
   
853
 
Under 500
  
6
   
62
   
53
   
24
   
180
   
29
   
354
 
Unknown
  
975
   
-
   
-
   
-
   
-
   
-
   
975
 
Total
 
$
244,401
  
$
101,169
  
$
82,136
  
$
57,880
  
$
32,122
  
$
44,097
  
$
561,805
 
Accrued interest excluded from total
 
$
507
  
$
235
  
$
220
  
$
144
  
$
81
  
$
113
  
$
1,300
 

(1)
Credit scores have been updated within the last twelve months.
27

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

Foreclosed residential real estate properties included in other real estate and repossessed assets on our Condensed Consolidated Statements of Financial Condition totaled $0.4 million and $0.2 million at March 31, 2022 and December 31, 2021, respectively.  Retail mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements totaled $0.7 million and $0.6 million at March 31, 2022 and December 31, 2021, respectively.

During the first quarter of 2022, we sold $33.4million of portfolio residential fixed rate mortgage loans servicing retained to private investors and recognized a gain on sale of $0.41million.  This transaction was done primarily for asset/liability management purposes.

5.
Shareholders’ Equity and Earnings Per Common Share

On December 17, 2021, our Board of Directors authorized a share repurchase plan (the “Repurchase Plan”) to buy back up to 1,100,000 shares of our outstanding common stock through December 31, 2022.  Shares would be repurchased 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. During the three month periods ended March 31, 2022 and 2021 repurchases were made totaling 59,002 shares and 180,667 shares of common stock, respectively, for an aggregate purchase price of $1.4 million and $3.6 million, respectively.

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

 
Three Months Ended
March 31,
 
  
2022
  
2021
 
  
(In thousands, except
per share data)
 
Net income
 
$
17,967
  
$
22,037
 
         
Weighted average shares outstanding (1)
  
21,192
   
21,826
 
Stock units for deferred compensation plan for non-employee directors
  
128
   
120
 
Effect of stock options
  
56
   
83
 
Performance share units
  
22
   
30
 
Weighted average shares outstanding for calculation of diluted earnings per share
  
21,398
   
22,059
 
         
Net income per common share
        
Basic (1)
 
$
0.85
  
$
1.01
 
Diluted
 
$
0.84
  
$
1.00
 

(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 month periods ended March 31, 2022 and 2021.

28

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 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.

29

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:

 
March 31, 2022
 
  
Notional
Amount
  
Average
Maturity
(years)
  
Fair
Value
 
  
(Dollars in thousands)
 
Fair value hedge designation
         
Pay-fixed interest rate swap agreements - commercial
 
$
6,666
   
7.1
  
$
(7
)
Pay-fixed interest rate swap agreements - securities available for sale
  
148,895
   
5.6
   
11,959
 
Total
 
$
155,561
   
5.7
  
$
11,952
 
             
No hedge designation
            
Rate-lock mortgage loan commitments
 
$
140,135
   
0.1
  
$
(3,230
)
Mandatory commitments to sell mortgage loans
  
111,010
   
0.1
   
1,906
 
Pay-fixed interest rate swap agreements - mortgage
  22,000   7.5   627 
Pay-fixed interest rate swap agreements - commercial
  
216,001
   
5.5
   
4,398
 
Pay-variable interest rate swap agreements - commercial
  
216,001
   
5.5
   
(4,398
)
Interest rate cap agreements
  
90,000
   
1.0
   
257
 
Total
 
$
795,147
   
3.3
  
$
(440
)

 
December 31, 2021
 
  
Notional
Amount
  
Average
Maturity
(years)
  
Fair
Value
 
  
(Dollars in thousands)
 
Fair value hedge designation
         
Pay-fixed interest rate swap agreements - commercial
 
$
6,753
   
7.4
  
$
(384
)
Pay-fixed interest rate swap agreements - securities available for sale
  
148,895
   
5.8
   
4,413
 
Total
 
$
155,648
   
5.9
  
$
4,029
 
             
No hedge designation
            
Rate-lock mortgage loan commitments
 
$
129,846
   
0.1
  
$
2,140
 
Mandatory commitments to sell mortgage loans
  
97,737
   
0.1
   
(68
)
Interest rate swaption agreement
  10,000   0.2   186 
Pay-fixed interest rate swap agreements - commercial
  
207,080
   
5.7
   
(5,179
)
Pay-variable interest rate swap agreements - commercial
  
207,080
   
5.7
   
5,179
 
Interest rate cap agreements
  
90,000
   
1.3
   
35
 
Total
 
$
741,743
   
3.4
  
$
2,293
 

30

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
We have used 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 exposed 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 had included certain interest rate cap agreements under which, 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 paid an upfront premium on interest rate caps which was recognized in earnings in the same period in which the hedged item affected earnings. During 2020 we transferred all of our Cash Flow Hedge interest rate cap agreements to a no hedge designation. The unrealized losses on our Cash Flow Hedge interest rate cap agreements, which were included as a component of accumulated other comprehensive income at the time of the transfers, were being reclassified into earnings over the remaining life of the interest rate cap agreements. Also in 2020 it became probable that the forecasted transactions being hedged by these interest rate cap agreements would not occur by the end of the originally specified time period. As a result, all remaining unrealized losses included as a component of accumulated other comprehensive income were reclassified into earnings at that time. The no hedge designation interest rate cap agreements in the table above were classified as a no hedge designation during 2020 and any changes in fair value since the transfers to the no hedge designation are recorded in earnings.

We have 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 – Commercial Loan’’). 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 Hedge – Commercial Loan 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 – Commercial Loan. 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 – Commercial Loan 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.

We have entered into pay-fixed interest rate swaps to protect a portion of the fair value of certain securities available for sale (‘‘Fair Value Hedge – AFS Securities’’). As a result, the change in the fair value of the pay-fixed interest rate swaps is expected to offset a portion of the change in the fair value of the fixed rate securities available for sale due to fluctuations in interest rates. We record the fair value of Fair Value Hedge – AFS Securities in accrued income and other assets and accrued expenses and other liabilities on our Condensed Consolidated Statements of Financial Condition. The hedged items (fixed rate securities available for sale) are also recorded at fair value which offsets the adjustment to the Fair Value Hedge – AFS Securities. 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 – AFS Securities and the hedged item. The related gains or losses are reported in interest income – interest on securities available for sale – tax-exempt in our Condensed Consolidated Statements of Operations.

31

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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.

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.

We have purchased swaption and pay-fixed interest rate swap agreements in an attempt to reduce the impact of price fluctuations of certain mortgage construction loans held for sale. The pay-fixed interest rate swap agreements are presented as “Interest rate swap agreements – mortgage” in the table above. The swaption agreement terminated during the first quarter of 2022. The changes in the fair value of the swaption and pay fixed interest rate swap agreements are recognized currently as part of net gains on mortgage loans in our Condensed Consolidated Statements of Operations.

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.
32

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
 
  
March 31,
2022
  
December 31,
2021
  
March 31,
2022
  
December 31,
2021
 
  
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
  
$
11,959
  
Other assets
  
$
4,413
  
Other liabilities
  
$
7
  
Other liabilities
  
$
384
 
Derivatives not designated as hedging instruments
                                
Rate-lock mortgage loan commitments
 
Other assets
   
-
  
Other assets
  
$
2,140
  
Other liabilities
   
3,230
  
Other liabilities
  
$
-
 
Mandatory commitments to sell mortgage loans
 
Other assets
   
1,906
  
Other assets
   
-
  
Other liabilities
   
-
  
Other liabilities
   
68
 
Pay-fixed interest rate swap agreements - mortgage
  
Other assets
   627   
Other assets
   -   
Other liabilities
   -   
Other liabilities
   - 
Interest rate swaption agreement
  
Other assets
   -   
Other assets
   186  
Other liabilities
   -  
Other liabilities
   - 
Pay-fixed interest rate swap agreements - commercial
 
Other assets
   
5,103
  
Other assets
   
165
  
Other liabilities
   
705
  
Other liabilities
   
5,344
 
Pay-variable interest rate swap agreements - commercial
 
Other assets
   
705
  
Other assets
   
5,344
  
Other liabilities
   
5,103
  
Other liabilities
   
165
 
Interest rate cap agreements
 
Other assets
   
257
  
Other assets
   
35
  
Other liabilities
   
-
  
Other liabilities
   
-
 
       
8,598
       
7,870
       
9,038
       
5,577
 
Total derivatives
     
$
20,557
      
$
12,283
      
$
9,045
      
$
5,961
 

33

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The effect of derivative financial instruments on the Condensed Consolidated Statements of Operations follows:


 
 
Gain (Loss)
Recognized
in Income
 
  
 		 
 Location of
 Gain (Loss)
 Recognized
 in Income
 
Three Month
Periods Ended
March 31,
 
  2022
   2021
 
       
(In thousands)
 
 Fair Value Hedges
        
Pay-fixed interest rate swap ageement - commercial
 
Interest and fees on loans
 
$
376
  
$
352
 
Pay-fixed interest rate swap ageement - securities available for sale
 
Interest on securities available for sale - tax- exempt
  
7,547
   
4,873
 
Total
   
$
7,923
  
$
5,225
 
           
  No hedge designation          
Rate-lock mortgage loan commitments
 
Net gains on  mortgage loans
 
$
(5,370
)
 
$
(3,822
)
Mandatory commitments to sell mortgage loans
 
Net gains on  mortgage loans
  
1,974
   
1,837
 
Pay-fixed interest rate swap agreements -  mortgage
 
Net gains on mortgage loans
  
627
   
-
 
Interest rate swaption agreement
 
Net gains on mortgage loans
  
(186
)
  
-
 
Pay-fixed interest rate  swap agreements - commercial
 
Interest income
  
9,577
   
3,275
 
Pay-variable interest rate swap agreements - commercial
 
Interest income
  
(9,577
)
  
(3,275
)
Pay-fixed interest rate swap agreements
 
Interest expense
  
-
   
118
 
Interest rate cap agreements
 
Interest expense
  
222
   
15
 

  
        
     Purchased options
 
Interest expense
  -
   18
 

  
        
     Written options
 
Interest expense
  
-
   
(18
)
        Total
   
$
(2,733
)
 
$
(1,852
)

34

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7.
Goodwill and Other Intangibles

The following table summarizes intangible assets, net of amortization:

 
March 31, 2022
  
December 31, 2021
 
  
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Gross
Carrying
Amount
  
Accumulated
Amortization
 
  
(In thousands)
 
             
Amortized intangible assets - core deposits
 
$
11,916
  
$
8,812
  
$
11,916
  
$
8,580
 
Unamortized intangible assets - goodwill
 
$
28,300
      
$
28,300
     

A summary of estimated core deposits intangible amortization at March 31, 2022 follows:

 
(In thousands)
 
    
Nine months ending December 31, 2022
 

553
 
2023
  
547
 
2024
  
516
 
2025
  
487
 
2026
  
460
 
2027 and thereafter
  
541
 
Total
 
$
3,104
 

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 0.6 million shares of common stock as of March 31, 2022.  The non-employee director stock purchase plan permits the issuance of additional share based payments for up to 0.1 million shares of common stock as of March 31, 2022. 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.

A summary of restricted stock and performance stock units (“PSU”) granted pursuant to our long-term incentive plan follows:

 
Three Months Ended
March 31,
 
  
2022
  
2021
 
       
Restricted stock
  
56,287
   
75,584
 
PSU
  
19,748
   
23,981
 

35

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The shares of restricted stock and PSUs shown in the above table cliff vest after a period of three years.  The performance feature of the PSUs is split evenly between a comparison of (i) our total shareholder return and (ii) our return on average assets over the three year period starting on the grant date to these same factors over that period for an index of our banking peers.

Our directors may elect to receive all or a portion of their 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 on a current basis are issued each quarter and vest immediately. Shares issued on a deferred basis are credited at the rate of 90% of the current fair value of our common stock and vest immediately.  During the three month periods ended March 31, 2022 and 2021 we issued 0.004 million and 0.005 million shares, respectively and expensed their value during those same periods.

Total compensation expense recognized for grants pursuant to our long-term incentive plan was $0.4 million and $0.3 million during the three month periods ended March 31, 2022 and 2021, respectively.  The corresponding tax benefit relating to this expense was $0.1 million during both three month periods ended March 31, 2022 and 2021, respectively. Total expense recognized for non-employee director share based payments was $0.09 million during both three month periods ended March 31, 2022 and 2021, respectively. The corresponding tax benefit relating to this expense was $0.02million during both three month periods ended March 31, 2022 and 2021, respectively.

At March 31, 2022, the total expected compensation cost related to non-vested restricted stock and PSUs not yet recognized was $3.7 million.  The weighted-average period over which this amount will be recognized is 2.3 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, 2022
  
80,839
  
$
5.76
       
Granted
  
-
           
Exercised
  
(15,100
)
  
3.32
       
Forfeited
  
-
           
Expired
  
-
           
Outstanding at March 31,2022
  
65,739
  
$
6.32
   
1.5
  
$
1,031
 
                 
Vested and expected to vest at March 31, 2022
  
65,739
  
$
6.32
   
1.5
  
$
1,031
 
Exercisable at March 31,2022
  
65,739
  
$
6.32
   
1.5
  
$
1,031
 

36

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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, 2022
  
234,226
  
$
21.64
 
Granted
  
76,035
   
26.57
 
Vested
  
(51,771
)
  
23.06
 
Forfeited
  
(7,760
)
  
22.12
 
Outstanding at March 31,2022
  
250,730
  
$
22.82
 

Certain information regarding options exercised during the periods follows:

 
Three Months Ended
March 31,
 
  
2022
  
2021
 
  
(In thousands)
 
Intrinsic value
 
$
313
  
$
313
 
Cash proceeds received
 
$
50
  
$
60
 
Tax benefit realized
 
$
66
  
$
66
 

9.
Income Tax

Income tax expense was $4.1 million and $5.1 million during the three month periods ended March 31, 2022 and 2021, 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 month periods ending March 31, 2022 and 2021 each include reductions of $0.1 million 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.

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 March 31, 2022, March 31, 2021 and December 31, 2021 that the realization of substantially all of our deferred tax assets continues to be more likely than not.

At both March 31, 2022 and December 31, 2021, we had approximately $0.2 million, respectively, of gross unrecognized tax benefits.  We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease during the remainder of 2022.

37

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 March 31, 2022, the Bank had positive undivided profits of $110.6 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 or that would not be 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. In addition, capital adequacy rules include a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. To avoid limits on capital distributions and certain discretionary bonus payments we must meet the minimum ratio for adequately capitalized institutions plus the buffer. 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 March 31, 2022 and December 31, 2021, 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.

38

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)
 
March 31,2022
                  
Total capital to risk-weighted assets
                  
Consolidated
 
$
499,363
   
14.18
%
 
$
281,788
   
8.00
%
 
NA
  
NA
 
Independent Bank
  
447,698
   
12.71
   
281,707
   
8.00
  
$
352,133
   
10.00
%
                         
Tier 1 capital to risk-weighted assets
                        
Consolidated
 
$
416,199
   
11.82
%
 
$
211,341
   
6.00
%
 
NA
  
NA
 
Independent Bank
  
404,534
   
11.49
   
211,280
   
6.00
  
$
281,707
   
8.00
%
                         
Common equity tier 1 capital to risk-weighted assets
                        
Consolidated
 
$
377,814
   
10.73
%
 
$
158,506
   
4.50
%
 
NA
  
NA
 
Independent Bank
  
404,534
   
11.49
   
158,460
   
4.50
  
$
228,887
   
6.50
%
                         
Tier 1 capital to average assets
                        
Consolidated
 
$
416,199
   
8.81
%
 
$
188,867
   
4.00
%
 
NA
  
NA
 
Independent Bank
  
404,534
   
8.56
   
188,953
   
4.00
  
$
236,191
   
5.00
%
                         
December 31, 2021
                        
Total capital to risk-weighted assets
                        
Consolidated
 
$
488,495
   
14.53
%
 
$
268,991
   
8.00
%
 
NA
  
NA
 
Independent Bank
  
438,352
   
13.05
   
268,808
   
8.00
  
$
336,011
   
10.00
%
                         
Tier 1 capital to risk-weighted assets
                        
Consolidated
 
$
406,645
   
12.09
%
 
$
201,743
   
6.00
%
 
NA
  
NA
 
Independent Bank
  
396,351
   
11.80
   
201,606
   
6.00
  
$
268,808
   
8.00
%
                         
Common equity tier 1 capital to risk-weighted assets
                        
Consolidated
 
$
368,277
   
10.95
%
 
$
151,307
   
4.50
%
 
NA
  
NA
 
Independent Bank
  
396,351
   
11.80
   
151,205
   
4.50
  
$
218,407
   
6.50
%
                         
Tier 1 capital to average assets
                        
Consolidated
 
$
406,645
   
8.79
%
 
$
185,034
   
4.00
%
 
NA
  
NA
 
Independent Bank
  
396,351
   
8.57
   
185,077
   
4.00
  
$
231,347
   
5.00
%

(1)
These ratios do not reflect a capital conservation buffer of 2.50% at March 31, 2022 and December 31, 2021.

NA - Not applicable

39

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

The components of our regulatory capital are as follows:

 
Consolidated
  
Independent Bank
 
  
March 31,
2022
  
December 31,
2021
  
March 31,
2022
  
December 31,
2021
 
  
(In thousands)
 
Total shareholders' equity
 
$
355,449
  
$
398,484
  
$
382,169
  
$
426,558
 
Add (deduct)
                
Accumulated other comprehensive income for regulatory purposes
  
48,617
  
(6,298
)
  
48,617
  
(6,298
)
Goodwill and other intangibles
  
(31,404
)
  
(31,636
)
  
(31,404
)
  
(31,636
)
CECL (1)
  
5,152
   
7,727
   
5,152
   
7,727
 
Common equity tier 1 capital
  
377,814
   
368,277
   
404,534
   
396,351
 
Qualifying trust preferred securities
  
38,385
   
38,368
   
-
   
-
 
Tier 1 capital
  
416,199
   
406,645
   
404,534
   
396,351
 
Subordinated debt
  
40,000
   
40,000
   
-
   
-
 
Allowance for credit losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets
  
43,164
   
41,850
   
43,164
   
42,001
 
Total risk-based capital
 
$
499,363
  
$
488,495
  
$
447,698
  
$
438,352
 

(1)
We elected the three year CECL transition method for regulatory purposes.

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.

40

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 available for sale are classified as Level 1 of the valuation hierarchy.  We currently do not have any Level 1 securities. 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).

Collateral dependent loans with specific loss allocations based on collateral value:  From time to time, certain collateral dependent loans will have an ACL established. When the fair value of the collateral is based on an appraised value or when an appraised value is not available we record the collateral dependent 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.

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 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.

41

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Appraisals for both collateral-dependent 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, interest rate cap and swaption 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).

42

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)
 
March 31, 2022:
            
Measured at Fair Value on a Recurring Basis
            
Assets
            
Securities available for sale
            
U.S. agency
 
$
43,588
  
$
-
  
$
43,588
  
$
-
 
U.S. agency residential mortgage-backed
  
277,003
   
-
   
277,003
   
-
 
U.S. agency commercial mortgage-backed
  
21,591
   
-
   
21,591
   
-
 
Private label mortgage-backed
  
112,083
   
-
   
112,083
   
-
 
Other asset backed
  
279,156
   
-
   
279,156
   
-
 
Obligations of states and political subdivisions
  
520,078
   
-
   
520,078
   
-
 
Corporate
  
144,251
   
-
   
144,251
   
-
 
Trust preferred
  
1,885
   
-
   
1,885
   
-
 
Foreign government
  
502
   
-
   
502
   
-
 
Loans held for sale, carried at fair value
  
29,514
   
-
   
29,514
   
-
 
Capitalized mortgage loan servicing rights
  
35,933
   
-
   
-
   
35,933
 
Derivatives (1)
  
20,557
   
-
   
20,557
   
-
 
Liabilities
                
Derivatives (2)
  
9,045
   
-
   
9,045
   
-
 
                 
Measured at Fair Value on a Non-recurring Basis:
                
Assets
                
Collateral dependent loans (3)
                
Commercial
                
Commercial and industrial
  
250
   
-
   
-
   
250
 
Commercial real estate
  
59
   
-
   
-
   
59
 
Mortgage
                
1-4 family owner occupied - non-jumbo
  
362
   
-
   
-
   
362
 
1-4 family non-owner occupied
  
96
   
-
   
-
   
96
 
1-4 family - 2nd lien
  
137
   
-
   
-
   
137
 
Resort lending
  
25
   
-
   
-
   
25
 
Installment
                
Boat lending
  
52
   
-
   
-
   
52
 
Recreational vehicle lending
  
22
   
-
   
-
   
22
 
Other
  
83
   
-
   
-
   
83
 
(1)
Included in accrued income and other assets
(2)
Included in accrued expenses and other liabilities
(3)
Only includes individually evaluated loans with specific loss allocations based on collateral value.

43

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, 2021:
            
Measured at Fair Value on a Recurring Basis
            
Assets
            
Securities available for sale
            
U.S. agency
 
$
34,674
  
$
-
  
$
34,674
  
$
-
 
U.S. agency residential mortgage-backed
  
307,985
   
-
   
307,985
   
-
 
U.S. agency commercial mortgage-backed
  
22,926
   
-
   
22,926
   
-
 
Private label mortgage-backed
  
102,615
   
-
   
102,615
   
-
 
Other asset backed
  
216,170
   
-
   
216,170
   
-
 
Obligations of states and political subdivisions
  
576,076
   
-
   
576,076
   
-
 
Corporate
  
149,959
   
-
   
149,959
   
-
 
Trust preferred
  
1,919
   
-
   
1,919
   
-
 
Foreign government
  
506
   
-
   
506
   
-
 
Loans held for sale, carried at fair value
  
55,470
   
-
   
55,470
   
-
 
Capitalized mortgage loan servicing rights
  
26,232
   
-
   
-
   
26,232
 
Derivatives (1)
  
12,283
   
-
   
12,283
   
-
 
Liabilities
                
Derivatives (2)
  
5,961
   
-
   
5,961
   
-
 
                 
Measured at Fair Value on a Non-recurring Basis:
                
Assets
                
Collateral dependent loans (3)
                
Commercial
                
Commercial and industrial
  
274
   
-
   
-
   
274
 
Commercial real estate
  
65
   
-
   
-
   
65
 
Mortgage
                
1-4 family owner occupied - non-jumbo
  
516
   
-
   
-
   
516
 
1-4 family non-owner occupied
  
130
   
-
   
-
   
130
 
1-4 family - 2nd lien
  
121
   
-
   
-
   
121
 
Resort lending
  
77
   
-
   
-
   
77
 
Installment
                
Boat lending
  
51
   
-
   
-
   
51
 
Recreational vehicle lending
  
77
   
-
   
-
   
77
 
Other
  
45
   
-
   
-
   
45
 
(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.

44

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 Three-Month Periods
Ended March 31 for items Measured at Fair Value
Pursuant to Election of the Fair Value Option
 
  
Net Gains
on Assets
  
Mortgage
  
Total
Change
in Fair
Values
Included
in Current
 
  
Mortgage
Loans
  
Loan
Servicing, net
  
Period
Earnings
 
  
(In thousands)
 
2022
         
Loans held for sale
 
$
(1,816
)
 
$
-
  
$
(1,816
)
Capitalized mortgage loan servicing rights
  
-
   
7,558
  
7,558
             
2021
            
Loans held for sale
  
(2,598)
   
-
   
(2,598)
 
Capitalized mortgage loan servicing rights
  
-
   
3,257
  
3,257

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 month periods ended March 31, 2022 and 2021 relating to assets measured at fair value on a non-recurring basis:

•
Loans that are individually evaluated using the fair value of collateral for collateral dependent loans had a carrying amount of $1.1 million, which is net of a valuation allowance of $0.5million at March 31, 2022, and had a carrying amount of $1.4 million, which is net of a valuation allowance of $0.6 million at December 31, 2021.  The provision for credit losses included in our results of operations relating to collateral dependent loans was a net expense of $0.1 million and $0.2million for the three month periods ending March 31, 2022 and 2021, respectively.
•
Other real estate, which is measured using the fair value of the property, had a carrying amount of zero which is net of a valuation allowance of $0.03 million at March 31, 2022, and a carrying amount of zero which is net of a valuation allowance of $0.03 million, at December 31, 2021. Charges included in our results of operations relating to other real estate measured at fair value were zero during both three month periods ended March 31, 2022 and 2021.

45

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
A reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) follows:

 
Capitalized Mortgage Loan
Servicing Rights
 
  
Three Months Ended
March 31,
 
  
2022
  
2021
 
  
(In thousands)
 
Beginning balance
 
$
26,232
  
$
16,904
 
Total losses realized and unrealized:
        
Included in results of operations
  
7,558
  
3,257
Included in other comprehensive loss
  
-
   
-
 
Purchases, issuances, settlements, maturities and calls
  
2,143
   
3,369
 
Transfers in and/or out of Level 3
  
-
   
-
 
Ending balance
 
$
35,933
  
$
23,530
 
         
Amount of total losses for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at March 31
 
$
7,558
 
$
3,257

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, float rate and prepayment rate.  Significant changes in all five 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)
   
-
   
-
   
-
    
March 31, 2022
                  
Capitalized mortgage loan servicing rights
 
$
35,933
  
Present value of net servicing revenue
  
Discount rate
  
10.00% to 13.71%
   
10.10
%
      

  
Cost to service
  
$
67 to $243
  
$
76
 
          
Ancillary income
  
20 to 30
   
21
 
          
Float rate
   
2.52
%
  
2.52
%
          
Prepayment rate
  
7.02% to 39.80%
   
9.00
%
December 31, 2021
                    
Capitalized mortgage loan servicing rights
 
$
26,232
  
Present value of net servicing revenue
  
Discount rate
  
10.00% to 13.00%
   
10.07
%
      
 
  
Cost to service
  
$
67 to $281
  
$
78
 
          
Ancillary income
  
20 to 30
   
21
 
          
Float rate
   
1.36
%
  
1.36
%
          
Prepayment rate
  
7.02% to 44.21%
   
13.92
%

46

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)
   
-
   
-
       
March 31, 2022
                 
Collateral dependent loans
             
-
    
Commercial
 
$
309
  
Sales comparison approach
  
Adjustment for differences between comparable sales
  
(12.5)% to 12.0%
   
(1.7
)%
Mortgage and Installment(1)
  
777
  
Sales comparison approach
  
Adjustment for differences between comparable sales
  
(20.4) to 29.3
   
1.2
 
                     
December 31, 2021
                    
Collateral dependent loans
                    
Commercial
 
$
339
  
Sales comparison approach
  
Adjustment for differences between comparable sales
  
(12.5)% to 12.0%
   
1.5
%
Mortgage and Installment(1)
  
1,017
  
Sales comparison approach
  
Adjustment for differences between comparable sales
  
(30.1) to 29.3
   
0.2

(1)
In addition to the valuation techniques and unobservable inputs discussed above, at March 31, 2022 and December 31, 2021 certain collateral dependent installment loans totaling approximately $0.16 million and $0.17 million, respectively 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
         
March 31, 2022
 
$
29,514
  
$
(765
)
 
$
30,279
 
December 31, 2021
  
55,470
   
1,051
   
54,419
 

47

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.

48

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)
 
March 31,2022
               
Assets
               
Cash and due from banks
 
$
46,600
  
$
46,600
  
$
46,600
  
$
-
  
$
-
 
Interest bearing deposits
  
63,221
   
63,221
   
63,221
   
-
   
-
 
Securities available for sale
  
1,400,137
   
1,400,137
   
-
   
1,400,137
   
-
 
Federal Home Loan Bank and Federal
                    
Reserve Bank Stock
  
17,653
  
NA
  
NA
  
NA
  
NA
 
Net loans and loans held for sale
  
2,987,952
   
2,858,273
   
-
   
29,514
   
2,828,759
 
Accrued interest receivable
  
12,815
   
12,815
   
2
   
6,136
   
6,677
 
Derivative financial instruments
  
20,557
   
20,557
   
-
   
20,557
   
-
 
                     
Liabilities
                    
Deposits with no stated maturity (1)
 
$
3,867,260
  
$
3,867,260
  
$
3,867,260
  
$
-
  
$
-
 
Deposits with stated maturity (1)
  
338,238
   
351,269
   
-
   
351,269
   
-
 
Other borrowings
  
30,006
   
30,003
   
-
   
30,003
   
-
 
Subordinated debt
  
39,376
   
44,292
   
-
   
44,292
   
-
 
Subordinated debentures
  
39,609
   
35,651
   
-
   
35,651
   
-
 
Accrued interest payable
  
1,133
   
1,133
   
68
   
1,065
   
-
 
Derivative financial instruments
  
9,045
   
9,045
   
-
   
9,045
   
-
 
                     
December 31, 2021
                    
Assets
                    
Cash and due from banks
 
$
51,069
  
$
51,069
  
$
51,069
  
$
-
  
$
-
 
Interest bearing deposits
  
58,404
   
58,404
   
58,404
   
-
   
-
 
Securities available for sale
  
1,412,830
   
1,412,830
   
-
   
1,412,830
   
-
 
Federal Home Loan Bank and Federal
                    
Reserve Bank Stock
  
18,427
  
NA
  
NA
  
NA
  
NA
 
Net loans and loans held for sale
  
2,948,074
   
2,931,079
   
35,233
   
55,470
   
2,840,376
 
Accrued interest receivable
  
12,865
   
12,865
   
1
   
6,028
   
6,836
 
Derivative financial instruments
  
12,283
   
12,283
   
-
   
12,283
   
-
 
                     
Liabilities
                    
Deposits with no stated maturity (1)
 
$
3,781,298
  
$
3,781,298
  
$
3,781,298
  
$
-
  
$
-
 
Deposits with stated maturity (1)
  
335,792
   
336,006
   
-
   
336,006
   
-
 
Other borrowings
  
30,009
   
30,155
   
-
   
30,155
   
-
 
Subordinated debt
  
39,357
   
44,999
   
-
   
44,999
   
-
 
Subordinated debentures
  
39,592
   
33,866
   
-
   
33,866
   
-
 
Accrued interest payable
  
497
   
497
   
67
   
430
   
-
 
Derivative financial instruments
  
5,961
   
5,961
   
-
   
5,961
   
-
 

(1)
Deposits with no stated maturity include reciprocal deposits with a recorded book balance of $576.421 million and $562.210 million at March 31, 2022 and December 31, 2021, respectively. Deposits with a stated maturity include reciprocal deposits with a recorded book balance of $28.911 million and $24.416 million at March 31, 2022 and December 31, 2021, respectively.

49

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

Pandemic

The COVID-19 pandemic and the related government mandates, restrictions, and guidance have created and may continue to create and contribute to significant economic uncertainty and market disruptions. Throughout 2020 and 2021, the volatility created by the pandemic and responses to the pandemic impacted our performance, customers, and the markets we serve. These effects continued to decline into the first quarter of 2022, but there remains a great deal of uncertainty with respect to whether and the degree to which they will have an impact on future conditions and performance.

Based on this uncertainty, it is difficult to predict the extent to which the pandemic may continue to adversely impact our business, results of operations, financial condition, and customers. The potential impacts may include, but are not limited to:

•
difficulties encountered by our business customers in addressing the effects of the pandemic may cause increases in loan delinquencies, foreclosures and defaults;
•
increases in our allowance for credit losses may be necessary; 
•
declines in collateral values may occur;
•
third party disruptions may occur, including outages at network providers, on-line banking vendors and other suppliers;
•
there is increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity;
•
we may experience operational failures due to changes in our normal business practices necessitated by the pandemic and related governmental actions; and/or
•
our production and efficiency may suffer due to employee illnesses and/or employees having to work remotely.

50

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Given the ongoing uncertainty with respect to the pandemic and potential government responses, these risk factors may continue to some degree for a significant period of time.

The extent to which the COVID-19 pandemic may impact our business, results of operations, asset valuations, financial condition, and customers will depend on future developments, which continue to be highly uncertain and difficult to predict. Those developments and factors are expected to largely depend on how quickly and to what extent normal economic and operating conditions stabilize. Potential developments also include market factors, such as interest rates, supply chain disruptions, inflation, consumer-welfare, and employment rates. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, securities available for sale, loans, capitalized mortgage loan servicing rights or deferred tax assets.

Certain consumer-driven industries (including restaurants, hotels, retail, fitness, and other industries) have experienced increased stress and have been more adversely impacted by the COVID-19 pandemic and related consumer trends, labor shortages and supply chain disruptions. We believe that the following concentrations within our commercial loan portfolio represent greater potential risk in the current economic environment. The balances below are as of March 31, 2022.

  
Amount
  
% of
Total
Loans
 
  
(Dollars in millions)
 
Commercial and industrial portfolio segment:
      
Retail
 
$
71
   
2.4
%
Food service
  
43
   
1.4
 
Hotel
  
39
   
1.3
 
   
153
   
5.1
 

        
Commercial real estate portfolio segment:
        
Retail
  
133
   
4.4
 
Office
  
71
   
2.4
 
Multifamily
  
55
   
1.8
 
   
259
   
8.6
 
         
Total
 
$
412
   
13.7
%

At March 31, 2022, we had no commercial loans in forbearance. However, we continue to closely monitor these industry concentrations and at present do not foresee any significant losses relative to this portion of our loan portfolio given the current economic conditions in Michigan and the fact that many businesses continue to report increased spending. However, a high degree of uncertainty still exists with respect to the impact of the COVID-19 pandemic and the related economic disruptions on the future performance of our loan portfolio, including these concentrations.

51

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Litigation

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 interim condensed 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.

Visa Stock

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 activity in 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 continue to carry these shares at zero, representing cost basis less impairment. However, given the current conversion ratio of 1.6181 Class A shares for every 1 Class B share and the closing price of VISA Class A shares on April 19, 2022 of $215.70 per share, our 12,566 Class B shares would have a current “value” of approximately $4.4 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, which would not have any trading restrictions.
52

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
14.
Accumulated Other Comprehensive Income (Loss) (“AOCIL”)

A summary of changes in AOCIL follows:

 
Unrealized
Gains (losses) on
Securities
Available
for Sale
  
Dispropor-
tionate
Tax Effects
from
Securities
Available
for Sale
  
Total
 
  
(In thousands)
 
          
For the three months ended March 31, 2022
         
Balances at beginning of period
 
$
6,299
  
$
(5,798
)
 
$
501
 
Other comprehensive loss before reclassifications
  
(54,970
)
  
-
   
(54,970
)
Amounts reclassified from AOCIL
  
55
   
-
   
55
 
Net current period other comprehensive loss
  
(54,915
)
  
-
   
(54,915
)
Balances at end of period
 
$
(48,616
)
 
$
(5,798
)
 
$
(54,414
)
             
2021
            
Balances at beginning of period
 
$
15,822
  
$
(5,798
)
 
$
10,024
 
Other comprehensive loss before reclassifications
  
(6,805
)
  
-
   
(6,805
)
Amounts reclassified from AOCIL
  
1,119
   
-
   
1,119
 
Net current period other comprehensive loss
  
(5,686
)
  
-
   
(5,686
)
Balances at end of period
 
$
10,136
  
$
(5,798
)
 
$
4,338
 

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 AOCIL as long as we carry a more than inconsequential portfolio of securities available for sale.

53

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
A summary of reclassifications out of each component of AOCIL for the three months ended March 31 follows:

AOCIL Component
 
Amount
Reclassified
From
AOCIL
 
 Affected Line Item in Condensed
 Consolidated Statements of Operations
 
 
(In thousands)
 
 
2022
     
Unrealized gains (losses) on securities available for sale
   
   
 
 
$
70
 
 Net gains on securities available for sale
 
  
15
 
 Income tax expense
 
 
$
55
 
 Reclassifications, net of tax
 
    
     
2021
      
Unrealized gains (losses) on securities available for sale
    
   
 
 
$
1,416
 
 Net gains on securities available for sale
 
  
297
 
 Income tax expense
 
 
$
1,119
 
 Reclassifications, 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 on securities available for sale, mortgage loan servicing, net and bank owned life insurance and were approximately 84.6% and 88.4% of total revenues for the three month periods ending March 31, 2022 and 2021, respectively.

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 March 31, 2022 and December 31, 2021.

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, NYCE (during 2021) and Accel. 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.

54

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 is 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 month periods ending March 31, 2022 and 2021 that were financed by us.

Disaggregation of our revenue sources by attribute follows:

Three months ending March 31, 2022

 
Service
Charges
on Deposit
Accounts
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  
Total
 
  
(In thousands)
 
Retail
               
Overdraft fees
 
$
2,506
  
$
-
  
$
-
  
$
-
  
$
2,506
 
Account service charges
  
321
   
-
   
-
   
-
   
321
 
ATM fees
  
-
   
277
   
-
   
-
   
277
 
Other
  
-
   
251
   
-
   
-
   
251
 
Business
                    
Overdraft fees
  
130
   
-
   
-
   
-
   
130
 
ATM fees
  
-
   
7
   
-
   
-
   
7
 
Other
  
-
   
87
   
-
   
-
   
87
 
Interchange income
  
-
   
-
   
3,082
   
-
   
3,082
 
Asset management revenue
  
-
   
-
   
-
   
469
   
469
 
Transaction based revenue
  
-
   
-
   
-
   
269
   
269
 
                     
Total
 
$
2,957
  
$
622
  
$
3,082
  
$
738
  
$
7,399
 
                     
Reconciliation to Condensed Consolidated Statement of Operations:
         
Non-interest income - other:
                    
Other deposit related income
                 
$
622
 
Investment and insurance commissions
               
738
 
Bank owned life insurance (1)
                  
138
 
Other (1)
                  
865
 
Total
                 
$
2,363
 

(1)
Excluded from the scope of ASC Topic 606.
55

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

Three months ending March 31, 2021

 
Service
Charges
on Deposit
Accounts
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  
Total
 
  
(In thousands)
 
Retail
               
Overdraft fees
 
$
1,212
  
$
-
  
$
-
  
$
-
  
$
1,212
 
Account service charges
  
512
   
-
   
-
   
-
   
512
 
ATM fees
  
-
   
268
   
-
   
-
   
268
 
Other
  
-
   
198
   
-
   
-
   
198
 
Business
                    
Overdraft fees
  
192
   
-
   
-
   
-
   
192
 
ATM fees
  
-
   
6
   
-
   
-
   
6
 
Other
  
-
   
89
   
-
   
-
   
89
 
Interchange income
  
-
   
-
   
3,049
   
-
   
3,049
 
Asset management revenue
  
-
   
-
   
-
   
383
   
383
 
Transaction based revenue
  
-
   
-
   
-
   
201
   
201
 
                     
Total
 
$
1,916
  
$
561
  
$
3,049
  
$
584
  
$
6,110
 
                     
Reconciliation to Condensed Consolidated Statement of Operations:
         
Non-interest income - other:
                    
Other deposit related income
                 
$
561
 
Investment and insurance commissions
               
584
 
Bank owned life insurance (1)
                  
139
 
Other (1)
                  
746
 
Total
                 
$
2,030
 

(1)
Excluded from the scope of ASC Topic 606.

16.
Leases

We have entered into leases in the normal course of business primarily for 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 together for all leases.  We have also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on our Condensed Consolidated Statements of Financial Condition.  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 right of use (“ROU”) assets and lease liabilities if they are reasonably certain of exercise.

Leases are classified as operating or finance leases at the lease commencement date (we did not have any finance leases as of March 31, 2022).  Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term.  The ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payment over the lease term.

56

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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
March 31,
 
  
2022
  
2021
 
  
(In thousands)
 
Operating lease cost
 
$
415
  
$
423
 
Variable lease cost
  
16
   
16
 
Short-term lease cost
  
18
   
14
 
Total
 
$
449
  
$
453
 

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:

 
March 31,
2022
  
December 31,
2021
 
  
(Dollars in thousands)
 
Lease right of use asset (1)
 
$
6,069
  
$
6,481
 
Lease liabilities (2)
 
$
6,181
  
$
6,602
 
         
Weighted average remaining lease term (years)
  
6.45
   
6.50
 
Weighted average discount rate
  
2.3
%
  
2.3
%

(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 March 31, 2022 based on required contractual payments follows:

 
(In thousands)
 
    
Nine months ending December 31, 2022
 
$
1,190
 
2023
  
1,324
 
2024
  
816
 
2025
  
809
 
2026
  
744
 
2027 and thereafter
  
1,807
 
Total lease payments
  
6,690
 
Less imputed interest
  
(509
)
Total
 
$
6,181
 

57
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 2021 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. The COVID-19 pandemic and the related government mandates, restrictions, and guidance have created and may continue to create and contribute to significant economic uncertainty and market disruptions. Throughout 2021 and 2022, the volatility created by the pandemic and responses to the pandemic impacted our performance, customers, and the markets we serve. These effects continued to decline into the first quarter of 2022, but there remains a great deal of uncertainty with respect to whether and the degree to which they will have an impact on future conditions and performance.

Based on this uncertainty, it is difficult to predict the extent to which the pandemic may continue to adversely impact our business, results of operations, financial condition, and customers. The potential impacts may include, but are not limited to:


∙
difficulties encountered by our business customers in addressing the effects of the pandemic may cause increases in loan delinquencies, foreclosures and defaults;

∙
increases in our allowance for credit losses may be necessary;

∙
declines in collateral values may occur;

∙
third party disruptions may occur, including outages at network providers, on-line banking vendors and other suppliers;

∙
there is increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity;

∙
we may experience operational failures due to changes in our normal business practices necessitated by the pandemic and related governmental actions; and/or

∙
our production and efficiency may suffer due to employee illnesses and/or employees having to work remotely.

Given the ongoing uncertainty with respect to the pandemic and potential governmental responses, these risk factors may continue to some degree for a significant period of time.

The extent to which the COVID-19 pandemic may impact our business, results of operations, asset valuations, financial condition, and customers will depend on future developments, which continue to be highly uncertain and difficult to predict. Those developments and factors are expected to largely depend on how quickly and to what extent normal economic and operating conditions stabilize. Potential developments also include market factors, such as interest rates, supply chain disruptions, inflation, consumer-welfare, and employment rates. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, securities available for sale, loans, capitalized mortgage loan servicing rights or deferred tax assets.

58
It is against this backdrop that we discuss our results of operations and financial condition in the first quarter of 2022 as compared to earlier periods.

Results of Operations

Summary.  We recorded net income of $18.0 million and $22.0 million during the three months ended March 31, 2022 and 2021, respectively. The decrease in 2022 first quarter results as compared to 2021 is primarily due to a decline in non-interest income and an increase in non-interest expense that were partially offset by an increase in net interest income and decreases in the provision for credit losses and income tax expense.

Key performance ratios

  
Three months ended
March 31,
 
  
2022
  
2021
 
Net income (annualized) to
      
Average assets
  
1.54
%
  
2.10
%
Average shareholders’ equity
  
19.38
%
  
23.51
%
   

     
Net income per common share
        
Basic
 
$
0.85
  
$
1.01
 
Diluted
  
0.84
   
1.00
 

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 $33.0 million during the first quarter of 2022, an increase of $2.7 million, or 9.0% from the year-ago period. This increase primarily reflects a $444.8 million increase in average interest-earning assets that was partially offset by a five basis point decrease in our tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”).

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Due principally to the economic impact of COVID-19, the Federal Reserve took a variety of actions, during the later portion of 2020 and most of 2021, to stimulate the economy, including significantly lowering short-term interest rates. These lower interest rates combined with a higher allocation to lower yielding securities available for sale has placed continued pressure on our net interest margin.

The increase in average interest-earning assets in 2022 as compared to 2021 primarily reflects growth in securities available for sale and mortgage and installment loans funded from an increase in deposits.

Interest and fees on loans include $0.6 million of accretion of net loan fees on PPP loans in the first quarter  of 2022 compared to $2.1 million for the first quarter of 2021. Interest and fees on loans also include $0.1 million and $0.4 million for the first quarter of 2022 and 2021, respectively of accretion of the discount recorded on loans acquired in the April 2018 acquisition of Traverse City State Bank (“TCSB”).

Our net interest income is also impacted by our level of non-accrual loans. In the first quarter of 2022, non-accrual loans averaged $5.0 million compared to $7.6 million in the first quarter of 2021. In addition, in the first quarter of 2022, we had net recoveries of $0.14 million of unpaid interest on loans placed on or taken off non-accrual or on loans previously charged-off compared to net recoveries of $0.17 million during the same period in 2021.

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Average Balances and Tax Equivalent Rates

   
Three Months Ended
March 31,
 
  
     
2022
        
2021
    
   
Average
Balance
  
 
Interest
  
 
Rate (2)
  
Average
Balance
  
 
Interest
  
Rate (2)
 
  
(Dollars in thousands)
 
Assets
                  
Taxable loans
 
$
2,971,566
  
$
28,340
   
3.85
%
 
$
2,827,335
  
$
28,039
   
4.00
%
Tax-exempt loans (1)
  
8,532
   
99
   
4.71
   
6,677
   
84
   
5.10
 
Taxable securities available for sale
  
1,080,252
   
4,552
   
1.69
   
782,471
   
2,796
   
1.43
 
Tax-exempt securities available for sale(1)
  
326,973
   
2,015
   
2.47
   
311,147
   
1,770
   
2.28
 
Interest bearing cash
  
87,317
   
37
   
0.17
   
101,895
   
29
   
0.12
 
Other investments
  
18,117
   
180
   
4.03
   
18,427
   
188
   
4.14
 
Interest Earning Assets
  
4,492,757
   
35,223
   
3.16
   
4,047,952
   
32,906
   
3.27
 
Cash and due from banks
  
58,676
           
56,371
         
Other assets, net
  
169,772
           
149,971
         
Total Assets
 
$
4,721,205
          
$
4,254,294
         
                         
Liabilities
                        
Savings and interest-bearing checking
 
$
2,503,014
   
641
   
0.10
  
$
2,140,405
   
675
   
0.13
 
Time deposits
  
338,354
   
126
   
0.15
   
339,872
   
581
   
0.69
 
Other borrowings
  
108,969
   
973
   
3.62
   
108,825
   
962
   
3.59
 
Interest Bearing Liabilities
  
2,950,337
   
1,740
   
0.24
   
2,589,102
   
2,218
   
0.35
 
Non-interest bearing deposits
  
1,317,160
           
1,218,534
         
Other liabilities
  
77,698
           
66,547
         
Shareholders’ equity
  
376,010
           
380,111
         
Total liabilities and shareholders’ equity
 
$
4,721,205
          
$
4,254,294
         
                         
Net Interest Income
     
$
33,483
          
$
30,688
     
                         
Net Interest Income as a Percent of Average Interest Earning Assets
          
3.00
%
          
3.05
%


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

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Reconciliation of Non-GAAP Financial Measures

  
Three Months Ended
March 31,
 
  
2022
  
2021
 
  
(Dollars in thousands)
 
Net Interest Margin, Fully Taxable Equivalent ("FTE")
      
       
Net interest income
 
$
33,001
  
$
30,284
 
Add:  taxable equivalent adjustment
  
482
   
404
 
Net interest income - taxable equivalent
 
$
33,483
  
$
30,688
 
Net interest margin (GAAP) (1)
  
2.96
%
  
3.01
%
Net interest margin (FTE) (1)
  
3.00
%
  
3.05
%

(1) Annualized.

Provision for credit losses.  The provision for credit losses was a credit of $1.6 million and a credit of $0.5 million for the three months ended March 31, 2022 and 2021, respectively. The provision reflects our assessment of the allowance for credit losses (the “ACL”) taking into consideration factors such as loan growth, loan mix, levels of non-performing and classified loans, economic conditions 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 ACL and their impact on the provision for credit losses in 2022. See note #13 to the Condensed Consolidated Financial Statements included within this report for a discussion on industry concentrations. The increase in the amount of the credit from the prior year period is primarily due to a decrease in net newly identified losses in the commercial loan portfolio as well as a decrease in the adjustment to allocations based on subjective factors related to risk associated with COVID-19.

Non-interest income.  Non-interest income is a significant element in assessing our results of operations. Non-interest income totaled $18.9 million during the first quarter of 2022 compared to $26.4 million in the first quarter of 2021.

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The components of non-interest income are as follows:

Non-Interest Income

  
Three months ended
March 31,
 
  
2022
  
2021
 
  
(In thousands)
 
Interchange income
 
$
3,082
  
$
3,049
 
Service charges on deposit accounts
  
2,957
   
1,916
 
Net gains on assets
        
Mortgage loans
  
835
   
12,828
 
Securities
  
70
   
1,416
 
Mortgage loan servicing, net
  
9,641
   
5,167
 
Investment and insurance commissions
  
738
   
583
 
Bank owned life insurance
  
138
   
139
 
Other
  
1,487
   
1,308
 
Total non-interest income
 
$
18,948
  
$
26,406
 

Interchange income increased in 2022 as compared to 2021, primarily due to growth in debit card transaction volume.

Service charges on deposit accounts increased on a comparative quarterly basis in 2022 as compared to 2021. The quarterly increase was principally due to an increase in non-sufficient funds occurrences (and related fees).

As reflected in the table below, net gains on the sale of mortgage loans dropped significantly from the first quarter of last year:

Mortgage Loan Activity

  
Three months ended
March 31,
 
  
2022
  
2021
 
  
(Dollars in thousands)
 
Mortgage loans originated
 
$
270,194
  
$
509,003
 
Mortgage loans sold
  
221,725
   
377,418
 
Net gains on mortgage loans
  
835
   
12,828
 
Net gains as a percent of mortgage
        
loans sold  ("Loan Sales Margin")
  
0.38
%
  
3.40
%
Fair value adjustments included in the
        
Loan Sales Margin
  
(1.87
)
  
(0.98
)

Mortgage loans originated decreased in 2022 as compared to 2021 due primarily to a decrease in mortgage loan refinance volumes. Mortgage loan refinance volumes declined by 75.0% in the first quarter of 2022 as compared to 2021 as higher mortgage loan interest rates in 2022 reduced this activity. Mortgage loans sold decreased in the first quarter of 2022 as compared to 2021 due primarily to lower loan origination volume. Net gains on mortgage loans decreased in 2022 as compared to 2021 due to the decline in loan sale volume, a decrease in the Loan Sales Margin and fair value adjustments as discussed below.

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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 2.25% and 4.38% in the first quarters of 2022 and 2021, respectively. The decline in the Loan Sales Margin (excluding fair value adjustments) in the first quarter of 2022 was generally due to lower primary-to-secondary market pricing spreads as market interest rates rose in 2022 (relative to 2021) which were impacted by the decrease in mortgage loan refinance volumes.

We recorded $0.1 million and $1.4 million net gains on securities available for sale in the comparative quarterly periods, respectively. We recorded no credit related charges in either 2022 or 2021 on securities available for sale. See “Securities” below and note #3 to the Condensed Consolidated Financial Statements.

Mortgage loan servicing, net, generated income of $9.6 million and $5.2 million in the first quarters of 2022 and 2021, respectively. 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 and expected future prepayment levels.

Mortgage loan servicing, net activity is summarized in the following table:

Mortgage Servicing Revenue

  
Three months ended
March 31,
 
  
2022
  
2021
 
Mortgage loan servicing
 
(In thousands)
 
Revenue, net
 
$
2,083
  
$
1,910
 
Fair value change due to price
  
8,452
   
4,640
 
Fair value change due to pay-downs
  
(894
)
  
(1,383
)
Total
 
$
9,641
  
$
5,167
 
 
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Activity related to capitalized mortgage loan servicing rights is as follows:

Capitalized Mortgage Loan Servicing Rights

   
Three months ended
March 31,
 
  
2022
  
2021
 
  
(In thousands)
 
Balance at beginning of period
 
$
26,232
  
$
16,904
 
Originated servicing rights capitalized
  
2,143
   
3,369
 
Change in fair value
  
7,558
   
3,257
 
Balance at end of period
 
$
35,933
  
$
23,530
 
 
At March 31, 2022 we were servicing approximately $3.41 billion in mortgage loans for others on which servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 3.44% and a weighted average service fee of approximately 25.6 basis points. Capitalized mortgage loan servicing rights at March 31, 2022 totaled $35.9 million, representing approximately 105.3 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 increased in the first quarter of 2022 as compared to the first quarter of 2021, primarily due to growth in assets under management and in annuity sales (reflecting customers seeking alternatives to traditional fixed income products such as time deposits given the prolonged low interest rate environment).

Other non-interest income increased in 2022 as compared to 2021 due primarily to increases in credit card and merchant processing revenue and higher commercial loan swap fee income. These revenues and fees were adversely impacted during the first quarter of 2021 by COVID-19 pandemic related business shut-downs and stay at home mandates.

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 increased by $1.4 million to $31.5 million in the first quarter of 2022 compared to the first quarter of 2021.

65
The components of non-interest expense are as follows:

Non-Interest Expense

  
Three months ended
March 31,
 
  
2022
  
2021
 
  
(In thousands)
 
Compensation
 
$
12,435
  
$
10,121
 
Performance-based compensation
  
3,662
   
4,292
 
Payroll taxes and employee benefits
  
4,033
   
4,109
 
Compensation and employee benefits
  
20,130
   
18,522
 
Occupancy, net
  
2,543
   
2,343
 
Data processing
  
2,216
   
2,374
 
Furniture, fixtures and equipment
  
1,045
   
1,003
 
Interchange expense
  
1,011
   
948
 
Communications
  
757
   
881
 
Advertising
  
680
   
489
 
Loan and collection
  
559
   
759
 
FDIC deposit insurance
  
522
   
330
 
Legal and professional
  
493
   
499
 
Amortization of intangible assets
  
232
   
242
 
Supplies
  
123
   
174
 
Correspondent bank service fees
  
77
   
100
 
Conversion related expenses
  
44
   
218
 
Provision for loss reimbursement on sold loans
  
33
   
34
 
Net gains on other real estate and repossessed assets
  
(55
)
  
(180
)
Recoveries related to unfunded lending commitments
  
(355
)
  
(32
)
Other
  
1,395
   
1,317
 
Total non-interest expense
 
$
31,450
  
$
30,021
 

Compensation and employee benefits expenses, in total, increased $1.6 million in the first quarter of 2022 compared to the same period in 2021.

Compensation expense increased by $2.3 million in the first quarter of 2022, compared to the same period in 2021. The comparative increase in 2022 was primarily due to (a) salary increases that were predominantly effective on January 1, 2022, (b) a decreased level of compensation that was deferred as direct origination costs  due to lower mortgage loan origination volume, and (c) an increase in lending personnel.

Performance-based compensation decreased by $0.6 million compared to the same period in 2021 due primarily due to a decrease in mortgage lending volume.

Payroll taxes and employee benefits decreased by $0.1 million in the first quarter of 2022 compared to the same period in 2021, due primarily to decreases in payroll taxes (reflecting lower performance-based compensation costs) and in our 401(k) plan match that was partially offset by higher health care costs (due to increased claims in 2022).

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Occupancy, net increased $0.2 million in the first quarter of 2022 compared to the first quarter of 2021 due primarily to an increase in snow removal costs, general branch related costs and depreciation expense related to building improvements.

Data processing expense decreased by $0.2 million in first quarter of 2022, compared to the same period in 2021. The decrease is primarily attributed to a onetime credit from our core data service provider for a billing reduction related to the prior year.

Furniture, fixtures and equipment, communications, legal and professional, supplies, correspondent bank service fees and provision for loss reimbursement on sold loans were each substantially the same in the first quarter of 2022 as compared to 2021.

Interchange expense primarily represents our third-party cost to process debit card transactions. The increase in this expense in 2022 as compared to 2021 is due principally to changes in transaction volume and transaction channel mix.

Advertising expense increased by approximately $0.2 million in the first quarter of 2022 as compared to the first quarter in 2021 due primarily to an increase in donations and promotional expenses.

Loan and collection expense decreased $0.2 million in the first quarter of 2022 compared to the first quarter of 2021 due primarily to a recovery of previously expensed costs.

FDIC deposit insurance expense increased in the first quarter of 2022 as compared to 2021 due primarily to an increases in the assessment rate as well as the assessment base.

The amortization of intangible assets relates to the TCSB acquisition 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 $3.1 million and $3.3 million at March 31, 2022 and December 31, 2021, respectively. See note #7 to the Condensed Consolidated Financial Statements for a schedule of future amortization of intangible assets.

Conversion related expenses in the first quarter of 2022 were primarily related to audit fees associated with post conversion work.

Net gains on other real estate and repossessed assets primarily represent the net gain 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 credit losses.

Recoveries related to unfunded lending commitments increased $0.3 million in the first quarter of 2022 compared to the prior year quarter due primarily to 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.

Income tax expense. We recorded an income tax expense of $4.1 million in the first quarter of 2022 compared to an income tax expense of $5.1 million in the first quarter of 2021.  The decrease in expense is primarily due to a decrease in pretax income.

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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 March 31, 2022 and 2021 and at December 31, 2021 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 $57.2 million during the first three months of 2022. Loans, excluding loans held for sale, were $3.00 billion at March 31, 2022, compared to $2.91 billion at December 31, 2021. Commercial loans, mortgage loans and installment loans each increased during the first three months of 2022. (See “Portfolio Loans and asset quality.”)

Deposits totaled $4.21 billion at March 31, 2022, an increase of $88.4 million from December 31, 2021. The increase in deposits is primarily due to growth in interest bearing checking deposits  and reciprocal deposits that were partially offset by a decline in non-interest bearing deposits and time deposits.

The increase in deposits from December 31, 2022 is due in part to the seasonal cash management needs of our business and municipal customers. Overall deposit balances remain elevated, relative to historical levels, due the significant liquidity that has been injected into the economy through government programs, such as the PPP, as well as by monetary actions by the Federal Reserve Bank, all in response to the COVID-19 pandemic

As the various government stimulus programs in response to the COVID-19 pandemic end or taper, it is unclear what the impact will be on our levels of Portfolio Loans and deposits. However, our liquidity and funding contingency plans take into account the possibility of reductions in commercial loans and deposits during 2022.

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. 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.”)

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Securities

  
Amortized
Cost
  
Unrealized
  
Fair
Value
 
   
Gains
  
Losses
   
Securities available for sale
 
(In thousands)
 
March 31, 2022
 
$
1,461,677
  
$
2,651
  
$
64,191
  
$
1,400,137
 
December 31, 2021
  
1,404,858
   
16,594
   
8,622
   
1,412,830
 

Securities available for sale in unrealized loss positions are evaluated quarterly for impairment related to credit losses. For securities available for sale in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities available for sale that do not meet this criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, adverse conditions specifically related to the security and the issuer and the impact of changes in market interest rates on the market value of the security, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes. No ACL for securities available for sale was needed at March 31, 2022.  The increase in unrealized losses during the first quarter of 2022 is primarily attributed to an increase in interest rates during the first quarter.  See note #3 to the Condensed Consolidated Financial Statements included within this report for further discussion.

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

Sales of Securities

  
Three months ended
March 31,
 
  
2022
  
2021
 
  
(In thousands)
 
Proceeds
 
$
4,395
  
$
78,179
 
         
Gross gains
  
70
   
1,464
 
Gross losses
  
-
   
48
 
Net gains
 
$
70
  
$
1,416
 

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.

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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 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. (See “Asset/liability management.”).

The PPP, is a short-term, forgivable loan program primarily intended to help businesses impacted by COVID-19 to continue paying their employees. See note #4 to the Condensed Consolidated Financial Statements included within this report for further discussion of the PPP.

A summary of our participation in the PPP (which ended on May 31, 2021 for new loans) follows:

Paycheck Protection Program Activity

  
March 31, 2022
  
March 31, 2021
 
  
Amount (#)
  
Amount
  
Amount (#)
  
Amount
 
  
(Dollars in thousands)
 
Closed and outstanding at quarter end
  
58
  
$
5,933
   
1,948
  
$
234,174
 
Net fees accreted into interest income for the quarter
  
n/a
   
613
   
n/a
   
2,072
 
Unaccreted net fees remaining at quarter end
  
n/a
   
211
   
n/a
   
6,816
 

During 2020, Section 4013 of the CARES Act provided temporary relief from the accounting and reporting requirements for TDRs regarding certain loan modifications for our customers. Section 4013 specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. The provisions of Section 4013 were to expire at the earlier of 60 days after the termination of the national emergency that was previously declared on March 13, 2020 or January 1, 2022.  While the provisions of Section 4013 were in place, we assisted both our retail (mortgage and installment loans) and our commercial borrowers with accommodations that included reduced or suspended payments. Section 4013 expired on January 1, 2022 and our total remaining accommodation loans were $0.5 million and $2.3 million at March 31, 2022 and December 31, 2021, respectively. See note #4 to the Condensed Consolidated Financial Statements included within this report.

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A summary of our Portfolio Loans follows:

  
March 31,
2022
  
December 31,
2021
 
  
(In thousands)
 
Real estate(1)
      
Residential first mortgages
 
$
890,376
  
$
870,169
 
Residential home equity and other junior mortgages
  
125,744
   
128,801
 
Construction and land development
  
265,671
   
278,992
 
Other(2)
  
791,241
   
726,224
 
Consumer
  
570,702
   
555,696
 
Commercial
  
355,730
   
339,785
 
Agricultural
  
4,601
   
5,378
 
Total loans
 
$
3,004,065
  
$
2,905,045
 


(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)

  
March 31,
2022
  
December 31,
2021
 
  
(Dollars in thousands)
 
Non-accrual loans
 
$
5,893
  
$
5,545
 
Loans 90 days or more past due and still accruing interest
  
-
   
-
 
Subtotal
  
5,893
   
5,545
 
Less:  Government guaranteed loans
  
859
   
435
 
Total non-performing loans
  
5,034
   
5,110
 
Other real estate and repossessed assets
  
438
   
245
 
Total non-performing assets
 
$
5,472
  
$
5,355
 
         
As a percent of Portfolio Loans
        
Non-performing loans
  
0.17
%
  
0.18
%
Allowance for credit losses
  
1.52
   
1.63
 
Non-performing assets to total assets
  
0.11
   
0.11
 
Allowance for credit losses as a percent of non-performing loans
  
906.38
   
924.70
 

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

71
Troubled debt restructurings ("TDR")

  
March 31, 2022
 
  
Commercial
  
Retail (1)
  
Total
 
  
(In thousands)
 
Performing TDR's
 
$
4,410
  
$
30,622
  
$
35,032
 
Non-performing TDR's (2)
  
-
   
875
(3) 
  
875
 
Total
 
$
4,410
  
$
31,497
  
$
35,907
 

  
December 31, 2021
 
  
Commercial
  
Retail (1)
  
Total
 
  
(In thousands)
 
Performing TDR's
 
$
4,481
  
$
31,589
  
$
36,070
 
Non-performing TDR's (2)
  
-
   
1,016
(3) 
  
1,016
 
Total
 
$
4,481
  
$
32,605
  
$
37,086
 

(1) Retail loans include mortgage and installment loan portfolio 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 $0.1 million since year-end 2021, reflecting improving economic conditions and the Company’s ongoing collection efforts. Our collection and resolution efforts have generally resulted in a positive trend in non-performing loans.

Non-performing loans exclude performing loans that are classified as TDRs. Performing TDRs totaled $35.0 million, or 1.2% of total Portfolio Loans, and $36.1 million, or 1.2% of total Portfolio Loans, at March 31, 2022 and December 31, 2021, respectively. The decrease in the amount of performing TDRs in the first three months of 2022 reflects a decrease in both commercial and retail performing TDRs.

Other real estate and repossessed assets totaled $0.4 million and $0.2 million at March 31, 2022, and December 31, 2021, respectively.

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 following tables reflect activity in our ACL on loans and ACL for unfunded lending commitments as well as the allocation of our ACL on loans.

72
Allowance for credit losses on loans and unfunded lending commitments

  
Three months ended
March 31,
 
  
2022
  
2021
 
   
Loans
  
Unfunded
Commitments
  
Loans
  
Unfunded
Commitments
 
  
(Dollars in thousands)
 
Balance at beginning of period
 
$
47,252
  
$
4,481
  
$
35,429
  
$
1,805
 
Additions (deductions)
                
Impact of adoption of ASC 326
  
-
   
-
   
11,574
   
1,469
 
Provision for credit losses
  
(1,573
)
  
-
   
(474
)
  
-
 
Initial allowance on loans purchased with credit deterioration
  
-
   
-
   
134
   
-
 
Recoveries credited to allowance
  
621
   
-
   
548
   
-
 
Loans charged against the allowance
  
(673
)
  
-
   
(456
)
  
-
 
Recoveries included in non-interest expense
  
-
   
(355
)
  
-
   
(32
)
Balance at end of period
 
$
45,627
  
$
4,126
  
$
46,755
  
$
3,242
 
                 
Net loans charged (recovered) against the allowance to average Portfolio Loans
  
0.01
%
      
(0.01
)%
    

Allocation of the Allowance for Credit Losses

  
March 31,
2022
  
December 31,
2021
 
  
(Dollars in thousands)
 
Specific allocations
 
$
942
  
$
1,130
 
Pooled analysis allocations
  
32,614
   
33,359
 
Additional allocations based on subjective factors
  
12,071
   
12,763
 
Total
 
$
45,627
  
$
47,252
 

Some loans will not be repaid in full. Therefore, an ACL is maintained at a level which represents our best estimate of expected credit losses. Our ACL is comprised of three principal elements: (i) specific analysis of individual loans identified during the review of the loan portfolio, (ii) pooled analysis of loans with similar risk characteristics based on historical experience, adjusted for current conditions, reasonable and supportable forecasts, and expected prepayments, and (iii) 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. See note #4 to the Condensed Consolidated Financial Statements included within this report for further discussion on the ACL.

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.

73
The ACL decreased $1.6 million to $45.6 million at March 31, 2022 from $47.3 million at December 31, 2021 and was equal to 1.52% and 1.63% of total Portfolio Loans at March 31, 2022 and December 31, 2021, respectively.

All three components of the ACL outlined above decreased since December 31, 2021. The ACL related to specific loans decreased $0.2 million due primarily to a $1.1 million decrease in the amount of such loans. The ACL related to subjective factors decreased $0.7 million due primarily to lower reserve allocations reflecting a decrease in risk related to the COVID-19 pandemic that was partially offset by loan growth during the first quarter of 2022. The ACL related to pooled analysis of loans decreased $0.7 million due primarily to an improved loan risk rating mix in the first quarter of 2022 that was partially offset by loan growth.

Deposits and borrowings. Historically, the loyalty of our customer base has allowed us to price deposits competitively, contributing to a net interest margin that generally 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 $4.21 billion and $4.12 billion at March 31, 2022 and December 31, 2021, respectively. The increase in deposits is primarily due to growth in savings and interest bearing checking deposits and reciprocal deposits that were partially offset by a decline in non-interest bearing deposits and time deposits.   Reciprocal deposits totaled $605.3 million and $586.6 million at March 31, 2022 and December 31, 2021, respectively. These deposits represent demand, money market and time deposits from our customers that have been placed through IntraFi Network. This service allows our customers to access multi-million dollar FDIC deposit insurance on deposit balances greater than the standard FDIC insurance maximum. The continued increase in reciprocal deposits is due in part to 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 March 31, 2022, we had approximately $1.04 billion 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 $30.0 million at both March 31, 2022 and December 31, 2021.

74
As described above, we have utilized wholesale funding, including federal funds purchased, FHLB and FRB borrowings and Brokered CDs to augment our core deposits and fund a portion of our assets. At March 31, 2022, our use of such wholesale funding sources (including reciprocal deposits) amounted to approximately $638.3 million, or 15.1% of total funding (deposits and all borrowings, excluding subordinated debt and 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 three months of 2022 and 2021, we entered into $11.2 million and $7.6 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 $0.15 million and $0.09 million of fee income related to these transactions during the first three months of 2022 and 2021, 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 and FRB, federal funds purchased borrowing facilities with other banks, and access to the capital markets (for Brokered CDs).

At March 31, 2022, we had $253.0 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, $3.87 billion of our deposits at March 31, 2022, 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.

75
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 FRB 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 $47.4 million as of March 31, 2022 provides sufficient liquidity resources at the parent company to meet operating expenses, to make interest payments on the subordinated debt and debentures, and, along with dividends from the Bank, 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 subordinated debt and cumulative trust preferred securities.

Capitalization

  
March 31,
2022
  
December 31,
2021
 
  
(In thousands)
 
Subordinated debt
 
$
39,376
  
$
39,357
 
Subordinated debentures
  
39,609
   
39,592
 
Amount not qualifying as regulatory capital
  
(600
)
  
(581
)
Amount qualifying as regulatory capital
  
78,385
   
78,368
 
Shareholders’ equity
        
Common stock
  
321,981
   
323,401
 
Retained earnings
  
87,882
   
74,582
 
Accumulated other comprehensive income (loss)
  
(54,414
)
  
501
 
Total shareholders’ equity
  
355,449
   
398,484
 
Total capitalization
 
$
433,834
  
$
476,852
 

In May 2020, we issued $40.0 million of fixed to floating subordinated notes with a ten year maturity and a five year call option. The initial coupon rate is 5.95% fixed for five years and then floats at the Secured Overnight Financing Rate (“SOFR”) plus 5.825%. These notes are presented in the Condensed Consolidated Statement of Financial Condition under the caption “Subordinated debt” and the March 31, 2022 balance of $39.4 million is net of remaining unamortized deferred issuance costs of approximately $0.6 million that are being amortized through the maturity date into interest expense on other borrowings and subordinated debt and debentures in our Condensed Consolidated Statements of Operations.

76
We currently have four special purpose entities with $39.6 million of outstanding cumulative trust preferred securities as of March 31, 2022. 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 March 31, 2022 and December 31, 2021.

Common shareholders’ equity decreased to $355.4 million at March 31, 2022, from $398.5 million at December 31, 2021. The decrease is primarily due to a $54.9 million decline in accumulated other comprehensive income (loss) related to unrealized losses on securities available for sale, share repurchases and cash dividend payments that was partially offset by net income.  Our tangible common equity (“TCE”) totaled $324.0 million and $366.8 million, respectively, at those same dates. Our ratio of TCE to tangible assets was 6.85% and 7.85% at March 31, 2022, and December 31, 2021, 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 2021, our Board of Directors authorized a 2022 share repurchase plan. Under the terms of the 2022 share repurchase plan, we are authorized to buy back up to 1,100,000, or approximately 5% of our outstanding common stock. During the first three months of 2022, the Company repurchased 59,002 shares at a weighted average purchase price of $23.46 per share.

We pay a quarterly cash dividend on our common stock. These dividends totaled $0.22 per share and $0.21 per share in the first three months of 2022 and 2021, respectively. We generally favor a dividend payout ratio between 30% and 50% of net income.

As of March 31, 2022 and December 31, 2021, 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.

77
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. During 2022, our interest rate risk profile as measured by our short term earnings simulation has not changed significantly while our longer term interest rate risk measure based on changes in economic value indicates modest exposure to rising rates. The shift is primarily due to an increase in asset duration. The increase in asset duration is attributed to growth in portfolio mortgage loans. However, we are carefully monitoring this change in the composition of our earning assets 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. As a result, we may add some longer-term borrowings, may utilize derivatives (interest rate swaps and interest rate caps) to manage interest rate risk and may continue to sell some fixed rate jumbo and other portfolio mortgage loans in the future.

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)
 
March 31, 2022
            
200 basis point rise
 
$
511,800
   
(10.51
)%
 
$
147,500
   
3.51
%
100 basis point rise
  
550,800
   
(3.69
)
  
146,100
   
2.53
 
Base-rate scenario
  
571,900
   
-
   
142,500
   
-
 
100 basis point decline
  
543,100
   
(5.04
)
  
136,400
   
(4.28
)
                 
December 31, 2021
                
200 basis point rise
 
$
514,200
   
(5.86
)%
 
$
137,800
   
3.30
%
100 basis point rise
  
550,900
   
0.86
   
136,800
   
2.55
 
Base-rate scenario
  
546,200
   
-
   
133,400
   
-
 
100 basis point decline
  
473,000
   
(13.40
)
  
126,700
   
(5.02
)

(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 interim condensed consolidated financial statements.

78
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”). Securities available for sale, loans held for sale, carried at fair value, 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 fair value 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.

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 ACL 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, 2021.

79
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 March 31, 2022, have concluded that, as of such date, our disclosure controls and procedures were effective.

(b)
Changes in Internal Controls.

During the quarter ended March 31, 2022, 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.

80
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, 2021.

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 first quarter of 2022, the Company issued 345 shares of common stock to non-employee directors on a current basis and 3,630 shares of common stock to the trust for distribution to directors on a deferred basis.  These shares were issued on January 1, 2022 representing aggregate fees of $0.09 million. The shares on a current basis were issued at a price of $23.87 per share and the shares on a deferred basis were issued at a price of $21.48 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 March 31, 2022:

Period
 
Total Number of
Shares Purchased (1)
  
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
 
January 2022
  
22,482
  
$
24.58
   
-
   
1,100,000
 
February 2022
  
68,468
   
24.09
   
22,400
   
1,077,600
 
March 2022
  
37,871
   
23.11
   
36,602
   
1,040,998
 
Total
  
128,821
  
$
23.89
   
59,002
   
1,040,998
 

(1)
January, February and March include 22,482 shares, 614 shares and 1,269 shares, respectively, withheld from the shares that would otherwise have been issued to certain officers in order to satisfy tax withholding obligations resulting from the vesting of restricted stock and performance share units as well as satisfy tax withholding obligations and stock option exercise price resulting from the exercise of stock options. February also includes 45,454 shares of our common stock purchased in the open market by the Independent Bank Corporation Employee Stock Ownership Trust as part of our employee stock ownership plan.

81
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 Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
 
101.
SCH Inline XBRL Taxonomy Extension Schema Document
 
101.
CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
 
101.
DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
 
101.
LAB Inline XBRL Taxonomy Extension Label Linkbase Document
 
101.
PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
 
104
Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101)

82
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
May 5, 2022
 
By
/s/ Gavin A. Mohr
    
Gavin A. Mohr, Principal Financial Officer
    
Date
May 5, 2022
 
By
/s/ James J. Twarozynski
    
James J. Twarozynski, Principal Accounting Officer


83

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