SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 20182019

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)
(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 ClassTrading SymbolName of each exchange which registered
Common stock, no par valueIBCPThe 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'sissuer’s classes of common stock, as of the latest practicable date.date: common stock, no par value, 22,481,485 as of October 31, 2019.

Common stock, no par value24,105,586
ClassOutstanding at November 1, 2018

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

INDEX

 
Number(s)
PART I -
Financial Information
 
Item 1.
Condensed Consolidated Statements of Financial Condition September 30, 20182019 and December 31, 20172018
3
 
Condensed Consolidated Statements of Operations Three- and Nine-month periods ended September 30, 20182019 and 20172018
4
 
Condensed Consolidated Statements of Comprehensive Income Three- and Nine-month periods ended September 30, 20182019 and 20172018
5
 
Condensed Consolidated Statements of Cash Flows Nine-month periods ended September 30, 20182019 and 20172018
6
 
Condensed Consolidated Statements of Shareholders'Shareholders’ Equity Three- and Nine-month periods ended September 30, 20182019 and 20172018
7
 
Notes to Interim Condensed Consolidated Financial Statements
8-658-68
Item 2.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
66-9069-91
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
9192
Item 4.
Controls and Procedures
9192

  
PART II -
Other Information
 
Item 1A
Risk Factors
9293
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
9293
Item 6.
Exhibits
9394

FORWARD-LOOKING STATEMENTS

Statements in this report that are not statements of historical fact, including statements that include terms such as ‘‘will,’’ ‘‘may,’’ ‘‘should,’’ ‘‘believe,’’ ‘‘expect,’’ ‘‘forecast,’’ ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘project,’’ ‘‘intend,’’ ‘‘likely,’’ ‘‘optimistic’’ and ‘‘plan’’ and statements about future or projected financial and operating results, plans, projections, objectives, expectations, and intentions, are forward-looking statements. Forward-looking statements include, but are not limited to, descriptions of plans and objectives for future operations, products or services; projections of our future revenue, earnings or other measures of economic performance; forecasts of credit losses and other asset quality trends; statements about our business and growth strategies; and expectations about economic and market conditions and trends. These forward-looking statements express our current expectations, forecasts of future events, or long-term goals. They are based on assumptions, estimates, and forecasts that, although believed to be reasonable, may turn out to be incorrect. Actual results could differ materially from those discussed in the forward-looking statements for a variety of reasons, including:


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

·economic, market, operational, liquidity, credit, and interest rate risks associated with our business;
economic conditions generally and in the financial services industry, particularly economic conditions within Michigan and the regional and local real estate markets in which our bank operates;
the failure of assumptions underlying the establishment of, and provisions made to, our allowance for loan losses;

·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;
increased competition in the financial services industry, either nationally or regionally;
our ability to achieve loan and deposit growth;

·the failure of assumptions underlying the establishment of, and provisions made to, our allowance for loan losses;
volatility and direction of market interest rates;
the continued services of our management team; and

·increased competition in the financial services industry, either nationally or regionally;
implementation of new legislation, which may have significant effects on us and the financial services industry.

·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.

In addition, factors that may cause actual results to differ from expectations regarding the April 1, 2018 acquisition of TCSB Bancorp, Inc. include, but are not limited to, the reaction to the transaction of the companies’ customers, employees and counterparties; customer disintermediation; inflation; expected synergies, cost savings and other financial benefits of the transaction might not be realized within the expected timeframes or might be less than projected; credit and interest rate risks associated with the parties' respective businesses, customers, borrowings, repayment, investment, and deposit practices; general economic conditions, either nationally or in the market areas in which the parties operate or anticipate doing business, are less favorable than expected; new regulatory or legal requirements or obligations; and other risks.

The risk factors disclosed in Part I – Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017,2018, as updated by any new or modified risk factors disclosed in Part II – Item 1A of any subsequently filed Quarterly Report on Form 10-Q, include all known risks our management believes could materially affect the results described by forward-looking statements in this report. However, those risks may not be the only risks we face. Our results of operations, cash flows, financial position, and prospects could also be materially and adversely affected by additional factors that are not presently known to us that we currently consider to be immaterial, or that develop after the date of this report. We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this report are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.

Part I - Item 1.Item1.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
 

Condensed Consolidated Statements of Financial Condition

 
September 30,
2018
  
December 31,
2017
  
September 30,
2019
  
December 31,
2018
 
 (unaudited)  (unaudited) 
 
(In thousands, except share
amounts)
   (In thousands, except share amounts)
AssetsAssets Assets 
Cash and due from banks $35,180  $36,994  
$
38,662
  
$
23,350
 
Interest bearing deposits  17,990   17,744   
43,755
   
46,894
 
Cash and Cash Equivalents  53,170   54,738  
82,417
  
70,244
 
Interest bearing deposits - time  593   2,739  
499
  
595
 
Equity securities at fair value  285   -  
-
  
393
 
Trading securities  -   455 
Securities available for sale  436,957   522,925  
439,592
  
427,926
 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost  18,355   15,543  
18,359
  
18,359
 
Loans held for sale, carried at fair value  41,325   39,436  
87,358
  
44,753
 
Loans held for sale, carried at lower of cost or fair value 
36,622
  
41,471
 
Loans              
Commercial  1,112,101   853,260  
1,189,017
  
1,144,481
 
Mortgage  1,056,482   849,530  
1,070,035
  
1,042,890
 
Installment  393,995   316,027   
463,394
   
395,149
 
Total Loans  2,562,578   2,018,817  
2,722,446
  
2,582,520
 
Allowance for loan losses  (24,401)  (22,587)  
(26,148
)
  
(24,888
)
Net Loans  2,538,177   1,996,230  
2,696,298
  
2,557,632
 
Other real estate and repossessed assets  1,445   1,643 
Other real estate and repossessed assets, net 
1,789
  
1,299
 
Property and equipment, net  39,012   39,149  
37,424
  
38,777
 
Bank-owned life insurance  54,811   54,572  
55,412
  
55,068
 
Deferred tax assets, net  8,449   15,089  
2,773
  
5,779
 
Capitalized mortgage loan servicing rights  23,151   15,699 
Capitalized mortgage loan servicing rights, carried at fair value 
16,906
  
21,400
 
Other intangibles  6,709   1,586  
5,598
  
6,415
 
Goodwill  28,300   -  
28,300
  
28,300
 
Accrued income and other assets  46,385   29,551   
41,490
   
34,870
 
Total Assets $3,297,124  $2,789,355  
$
3,550,837
  
$
3,353,281
 
              
Liabilities and Shareholders' Equity 
Liabilities and Shareholders’ EquityLiabilities and Shareholders’ Equity 
Deposits              
Non-interest bearing $880,932  $768,333  
$
883,138
  
$
879,549
 
Savings and interest-bearing checking  1,217,939   1,064,391  
1,178,695
  
1,194,865
 
Reciprocal  92,635   50,979  
416,200
  
182,072
 
Time  399,110   374,872  
374,579
  
385,981
 
Brokered time  208,027   141,959   
199,700
   
270,961
 
Total Deposits  2,798,643   2,400,534  
3,052,312
  
2,913,428
 
Other borrowings  79,688   54,600  
63,974
  
25,700
 
Subordinated debentures  39,371   35,569  
39,439
  
39,388
 
Accrued expenses and other liabilities  34,218   33,719   
54,867
   
35,771
 
Total Liabilities  2,951,920   2,524,422   
3,210,592
   
3,014,287
 
        
Commitments and contingent liabilities      
Shareholders’ Equity              
Preferred stock, no par value, 200,000 shares authorized; none issued or outstanding  -   -  
-
  
-
 
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding: 24,150,341 shares at September 30, 2018 and 21,333,869 shares at December 31, 2017
  389,689   324,986 
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding: 22,480,748 shares at September 30, 2019 and 23,579,725 shares at December 31, 2018
 
351,839
  
377,372
 
Accumulated deficit  (34,596)  (54,054) 
(8,221
)
 
(28,270
)
Accumulated other comprehensive loss  (9,889)  (5,999)  
(3,373
)
  
(10,108
)
Total Shareholders’ Equity  345,204   264,933   
340,245
   
338,994
 
Total Liabilities and Shareholders’ Equity $3,297,124  $2,789,355  
$
3,550,837
  
$
3,353,281
 

See notes to interim condensed consolidated financial statements (unaudited)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations

 
Three months ended
September 30,
  
Nine months ended
September 30,
  
Three months ended
September 30,
 
Nine months ended
September 30,
 
 2018  2017  2018  2017  2019 2018 2019 2018 
 (unaudited)  (unaudited)  (unaudited) (unaudited) 
 (In thousands, except per share amounts)  (In thousands, except per share amounts) 
             
Interest Income                     
Interest and fees on loans $31,000  $21,831  $84,027  $61,638  
$
34,226
  
$
31,000
  
$
100,743
  
$
84,027
 
Interest on securities                                
Taxable  2,737   2,765   8,092   8,300   
2,771
   
2,737
   
8,811
   
8,092
 
Tax-exempt  412   512   1,335   1,478   
319
   
412
   
1,017
   
1,335
 
Other investments  303   263   898   867   
495
   
303
   
1,449
   
898
 
Total Interest Income  34,452   25,371   94,352   72,283   
37,811
   
34,452
   
112,020
   
94,352
 
Interest Expense                                
Deposits  3,976   1,833   9,472   4,754   
6,236
   
3,976
   
17,938
   
9,472
 
Other borrowings and subordinated debentures  779   626   2,267   1,659   
703
   
779
   
2,211
   
2,267
 
Total Interest Expense  4,755   2,459   11,739   6,413   
6,939
   
4,755
   
20,149
   
11,739
 
Net Interest Income  29,697   22,912   82,613   65,870   
30,872
   
29,697
   
91,871
   
82,613
 
Provision for loan losses  (53)  582   912   806   
(271
)
  
(53
)
  
1,045
   
912
 
Net Interest Income After Provision for Loan Losses  29,750   22,330   81,701   65,064   
31,143
   
29,750
   
90,826
   
81,701
 
Non-interest Income                                
Service charges on deposit accounts  3,166   3,281   9,166   9,465   
2,883
   
3,166
   
8,323
   
9,166
 
Interchange income  2,486   1,942   7,236   5,869   
2,785
   
2,486
   
7,744
   
7,236
 
Net gains (losses) on assets                                
Mortgage loans  2,745   2,971   8,571   8,886   
5,677
   
2,745
   
13,590
   
8,571
 
Securities  93   69   (71)  62   
-
   
93
   
304
   
(71
)
Mortgage loan servicing, net  1,212   1   4,668   668   
(1,562
)
  
1,212
   
(4,684
)
  
4,668
 
Other  2,134   2,040   6,294   6,139   
2,492
   
2,134
   
6,862
   
6,294
 
Total Non-interest Income  11,836   10,304   35,864   31,089   
12,275
   
11,836
   
32,139
   
35,864
 
Non-interest Expense                                
Compensation and employee benefits  16,169   13,577   46,506   41,104   
16,673
   
16,169
   
48,955
   
46,506
 
Occupancy, net  2,233   1,970   6,667   6,032   
2,161
   
2,233
   
6,797
   
6,667
 
Data processing  2,051   1,796   6,180   5,670   
2,282
   
2,051
   
6,597
   
6,180
 
Merger related expenses  98   10   3,354   10 
Furniture, fixtures and equipment  1,043   961   3,029   2,943   
1,023
   
1,043
   
3,058
   
3,029
 
Communications  727   685   2,111   2,046   
733
   
727
   
2,219
   
2,111
 
Interchange expense  715   294   1,974   869   
891
   
715
   
2,332
   
1,974
 
Loan and collection  531   481   1,900   1,564   
714
   
531
   
1,976
   
1,900
 
Advertising  594   526   1,578   1,551   
636
   
594
   
1,935
   
1,578
 
Legal and professional  477   540   1,311   1,366   
541
   
477
   
1,281
   
1,311
 
FDIC deposit insurance  270   208   750   608   
13
   
270
   
723
   
750
 
Merger related expenses  
-
   
98
   
-
   
3,354
 
Other  1,832   1,568   5,276   5,183   
2,181
   
1,832
   
6,557
   
5,276
 
Total Non-interest Expense  26,740   22,616   80,636   68,946   
27,848
   
26,740
   
82,430
   
80,636
 
Income Before Income Tax  14,846   10,018   36,929   27,207   
15,570
   
14,846
   
40,535
   
36,929
 
Income tax expense  2,921   3,159   7,026   8,443   
3,125
   
2,921
   
7,979
   
7,026
 
Net Income $11,925  $6,859  $29,903  $18,764  
$
12,445
  
$
11,925
  
$
32,556
  
$
29,903
 
Net Income Per Common Share                                
Basic $0.49  $0.32  $1.29  $0.88  
$
0.55
  
$
0.49
  
$
1.41
  
$
1.29
 
Diluted $0.49  $0.32  $1.27  $0.87  
$
0.55
  
$
0.49
  
$
1.40
  
$
1.27
 
Dividends Per Common Share                
Declared $0.15  $0.10  $0.45  $0.30 
Paid $0.15  $0.10  $0.45  $0.30 

See notes to interim condensed consolidated financial statements (unaudited)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income

 
Three months ended
September 30,
  
Nine months ended
September 30,
 
 2018  2017  2018  2017  
Three months ended
September 30,
  
Nine months ended
September 30,
 
 (unaudited)  2019  2018  2019  2018 
 (In thousands)  (unaudited - In thousands) 
                  
Net income $11,925  $6,859  $29,903  $18,764  
$
12,445
  
$
11,925
  
$
32,556
  
$
29,903
 
Other comprehensive income (loss)                            
Securities available for sale                            
Unrealized gains (losses) arising during period  (1,157)  20   (6,220)  7,738  
1,567
  
(1,157
)
 
10,851
  
(6,220
)
Change in unrealized gains (losses) for which a portion of other than temporary impairment has been recognized in earnings
  (14)  126   (17)  211 
Change in unrealized losses for which a portion of other than temporary impairment has been recognized in earnings 
(53
)
 
(14
)
 
(55
)
 
(17
)
Reclassification adjustments for (gains) losses included in earnings  -   (8)  45   (125)  
-
   
-
   
(137
)
  
45
 
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale
  (1,171)  138   (6,192)  7,824  
1,514
  
(1,171
)
 
10,659
  
(6,192
)
Income tax expense (benefit)  (246)  48   (1,300)  2,738   
318
   
(246
)
  
2,238
   
(1,300
)
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale, net of tax
  (925)  90   (4,892)  5,086   
1,196
   
(925
)
  
8,421
   
(4,892
)
Derivative instruments                            
Unrealized gain arising during period  389   95   1,400   95 
Reclassification adjustment for income (expense) recognized in earnings  (73)  5   (132)  5 
Unrealized gains recognized in other comprehensive income (loss) on derivative instruments
  316   100   1,268   100 
Income tax expense  66   35   266   35 
Unrealized gains recognized in other comprehensive income (loss) on derivative instruments, net of tax
  250   65   1,002   65 
Unrealized gain (loss) arising during period 
(72
)
 
389
  
(1,740
)
 
1,400
 
Reclassification adjustment for income recognized in earnings  
(102
)
  
(73
)
  
(393
)
  
(132
)
Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments 
(174
)
 
316
  
(2,133
)
 
1,268
 
Income tax expense (benefit)  
(36
)
  
66
   
(447
)
  
266
 
Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments, net of tax  
(138
)
  
250
   
(1,686
)
  
1,002
 
Other comprehensive income (loss)  (675)  155   (3,890)  5,151   
1,058
   
(675
)
  
6,735
   
(3,890
)
Comprehensive income $11,250  $7,014  $26,013  $23,915  
$
13,503
  
$
11,250
  
$
39,291
  
$
26,013
 

See notes to interim condensed consolidated financial statements (unaudited)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows

 Nine months ended September 30,  Nine months ended September 30, 
 2018  2017  2019  2018 
 (unaudited - In thousands)  (unaudited - In thousands) 
Net Income $29,903  $18,764  
$
32,556
  
$
29,903
 
Adjustments to Reconcile Net Income to Net Cash From Operating Activities              
Proceeds from the sale of equity securities at fair value 
560
  
-
 
Proceeds from sales of loans held for sale  351,486   313,559  
422,557
  
351,486
 
Disbursements for loans held for sale  (343,462)  (316,338) 
(451,572
)
 
(343,462
)
Provision for loan losses  912   806  
1,045
  
912
 
Deferred income tax expense  6,972   7,422  
1,216
  
6,972
 
Deferred loan fees and costs  (3,681)  (4,588) 
(3,122
)
 
(3,681
)
Net depreciation, amortization of intangible assets and premiums and accretion of discounts on securities, loans and interest bearing deposits - time  4,560   5,079  
4,427
  
4,560
 
Net gains on mortgage loans  (8,571)  (8,886) 
(13,590
)
 
(8,571
)
Net losses on securities  71   (62)
Net (gains) losses on securities 
(304
)
 
71
 
Share based compensation  1,293   1,342  
1,348
  
1,293
 
Increase in accrued income and other assets  (16,925)  (12,748) 
(2,149
)
 
(16,925
)
Increase (decrease) in accrued expenses and other liabilities  (1,930)  2,274   
13,088
   
(1,930
)
Total Adjustments  (9,275)  (12,140)  
(26,496
)
  
(9,275
)
Net Cash From Operating Activities  20,628   6,624   
6,060
   
20,628
 
Cash Flow Used in Investing Activities              
Proceeds from the sale of securities available for sale  31,445   8,834  
44,305
  
31,445
 
Proceeds from maturities, prepayments and calls of securities available for sale  125,275   143,953  
110,517
  
125,275
 
Purchases of securities available for sale  (71,067)  (84,080) 
(123,238
)
 
(71,067
)
Proceeds from the sale of interest bearing deposits - time  2,474   -  
-
  
2,474
 
Proceeds from the maturity of interest bearing deposits - time  3,728   2,100  
100
  
3,728
 
Purchase of Federal Reserve Bank stock  (2,034)  - 
Purchase of Federal Reserve Bank Stock 
-
  
(2,034
)
Net increase in portfolio loans (loans originated, net of principal payments)  (272,084)  (326,089) 
(213,116
)
 
(272,084
)
Proceeds from the sale of portfolio loans  27,577   -  
50,516
  
27,577
 
Acquisition of TCSB Bancorp Inc., less cash received  23,516   -  
-
  
23,516
 
Cash received from the sale of Mepco Finance Corporation assets, net  -   33,446 
Proceeds from bank-owned life insurance  474   523  
470
  
474
 
Proceeds from the sale of other real estate and repossessed assets  1,777   4,111  
1,438
  
1,777
 
Capital expenditures  (2,812)  (2,592)  
(2,587
)
  
(2,812
)
Net Cash Used in Investing Activities  (131,731)  (219,794)  
(131,595
)
  
(131,731
)
Cash Flow From Financing Activities              
Net increase in total deposits  110,400   118,042  
138,884
  
110,400
 
Net increase in other borrowings  18,903   3,003  
18,355
  
18,903
 
Proceeds from Federal Home Loan Bank Advances  1,202,000   461,000  
57,000
  
1,202,000
 
Payments of Federal Home Loan Bank Advances  (1,210,197)  (397,587) 
(37,143
)
 
(1,210,197
)
Dividends paid  (10,446)  (6,400) 
(12,507
)
 
(10,446
)
Proceeds from issuance of common stock  202   57  
282
  
202
 
Repurchase of common stock 
(26,284
)
 
-
 
Share based compensation withholding obligation  (1,327)  (536)  
(879
)
  
(1,327
)
Net Cash From Financing Activities  109,535   177,579   
137,708
   
109,535
 
Net Decrease in Cash and Cash Equivalents  (1,568)  (35,591)
Net Increase (Decrease) in Cash and Cash Equivalents 
12,173
  
(1,568
)
Cash and Cash Equivalents at Beginning of Period  54,738   83,194   
70,244
   
54,738
 
Cash and Cash Equivalents at End of Period $53,170  $47,603  
$
82,417
  
$
53,170
 
Cash paid during the period for              
Interest $11,168  $6,240  
$
20,185
  
$
11,168
 
Income taxes  120   988  
5,934
  
120
 
Operating leases 
1,692
  
-
 
Transfers to other real estate and repossessed assets  960   1,389  
1,901
  
960
 
Purchase of securities available for sale not yet settled 
3,075
  
1,000
 
Securitization of portfolio loans 
29,790
  
-
 
Right of use assets obtained in exchange for lease obligations 
7,767
  
-
 
Transfer of loans to held for sale  27,577   -  
36,622
  
27,577
 
Purchase of securities available for sale not yet settled  1,000   1,765 
Sale of securities available for sale not yet settled  -   760 

See notes to interim condensed consolidated financial statements (unaudited)

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

  
Nine months ended
September 30,
 
  2018  2017 
  (unaudited) 
  (In thousands) 
       
Balance at beginning of period $264,933  $248,980 
Cumulative effect of change in accounting  -   352 
Balance at beginning of period, as adjusted  264,933   249,332 
Net income  29,903   18,764 
Cash dividends declared  (10,446)  (6,400)
Acquisition of TCSB Bancorp, Inc.  64,536   - 
Issuance of common stock  202   57 
Share based compensation  1,293   1,342 
Share based compensation withholding obligation  (1,327)  (536)
Net change in accumulated other comprehensive loss, net of related tax effect
  (3,890)  5,151 
Balance at end of period $345,204  $267,710 

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

See notes to interim condensed consolidated financial statements (unaudited)(unaudited)

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.
Preparation of Financial Statements

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 20172018 included in our Annual Report on Form 10-K.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary to present fairly our consolidated financial condition as of September 30, 20182019 and December 31, 2017,2018, and the results of operations for the three and nine-month periods ended September 30, 20182019 and 2017.2018.  The results of operations for the three and nine-month periods ended September 30, 2018,2019, are not necessarily indicative of the results to be expected for the full year.  Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation.  Our critical accounting policies include the determination of the allowance for loan losses and the valuation of capitalized mortgage loan servicing rights and the valuation of deferred tax assets.rights.  Refer to our 20172018 Annual Report on Form 10-K for a disclosure of our accounting policies.

2.
New Accounting Standards

In FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”.  This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.  This ASU:

Replaces the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost, which will reflect our estimate of credit losses over the full remaining expected life of the financial assets and will consider expected future changes in macroeconomic conditions.
Eliminates existing guidance for purchase credit impaired (“PCI”) loans, and requires recognition of the nonaccretable difference as an increase to the allowance for expected credit losses on financial assets purchased with more than insignificant credit deterioration since origination, which will be offset by an increase in the recorded investment of the related loans.
Requires inclusion of expected recoveries, limited to the cumulative amount of prior write-offs, when estimating the allowance for credit losses for in scope financial assets (including collateral dependent assets).
Amends existing impairment guidance for securities available for sale to incorporate an allowance, which will allow for reversals of credit impairments in the event that the credit of an issuer improves. Credit losses on securities available for sale are limited to the amount of the decline in fair value regardless of what the credit loss model would show for impairment.
Generally requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.
Is effective for us on January 1, 2020.

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

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

In August 2018, the FASB issued ASU 2018-13, ‘‘Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement’’. This new ASU amends disclosure requirements in Topic 820 to eliminate, add and modify certain disclosure requirements for fair value measurements as part of its disclosure framework project. The amended guidance eliminates the requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the entity’s policy for the timing of transfers between levels of the fair value hierarchy and the entity’s valuation processes for Level 3 fair value measurements. The amended guidance adds the requirements to disclose the changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements of instruments held at the end of the reporting period and for recurring and nonrecurring Level 3 fair value measurements, the range and weighted average used to develop significant unobservable inputs and how the weighted average was calculated, with certain exceptions. This amended guidance is effective for us on January 1, 2020, and is not expected to have a material impact on our consolidated operating results or financial condition.

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

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”.  This ASU amends existing guidance related to the accounting for leases. These amendments, among other things, require lessees to account for most leases on the balance sheet while recognizing expense on the income statement in a manner similar to existing guidance.  For lessors the guidance modifies the classification criteria and the accounting for sales-type and direct finance leases. This amended guidance iswas effective for us on January 1, 2019 and isdid not expected to have a material impact on our consolidated operating results or financial condition.  Based on a review of our operating leases that we currently have in place we do not expect a material change in the recognition, measurement and presentation of lease expense or impact on cash flow.  While theThe primary impact will bewas the recognition of certain operating leases on our Condensed Consolidated Statements of Financial Condition this impact is not expected to be material.

In June 2016,which resulted in the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326), Measurementrecording of Credit Losses on Financial Instruments”.  This ASU significantly changes how entities will measure credit losses for most financialright of use (“ROU”) assets and certain other instruments that are not measuredoffsetting lease liabilities each totaling approximately $7.7 million at fair value through net income.  This ASU will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For securities available for sale, allowances will be recorded rather than reducing the carrying amount as is done under the current other-than-temporary impairment model. This ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. This amended guidance is effective for us on January 1, 2020.  We began evaluating this ASU in 2016 and have formed a committee that includes personnel from various areas of Independent Bank (the “Bank”) that meets regularly to discuss the implementation of the ASU.  We are currently in the process of gathering data and reviewing loss methodologies and have engaged third party resources that will assist us in the implementation of this ASU.  While we have not yet determined what the impact will be on our consolidated operating results or financial condition by the nature of the implementation of an expected loss model compared to an incurred loss approach, we would expect our allowance for loan losses (“AFLL”) to increase under this ASU.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)2019.  See note #16.

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

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, (“ASU 2014-09”). This ASU supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this ASU specifies the accounting for some costs to obtain or fulfill a contract with a customer.  We adopted this ASU using the modified retrospective approach with no impact to our accumulated deficit at January 1, 2018.  Financial instruments for the most part and related contractual rights and obligations which are the sources of the majority of our operating revenue are excluded from the scope of this amended guidance.  Those operating revenue streams that are included in the scope of this amended guidance were not materially impacted.  Results for reporting periods beginning after January 1, 2018 are presented under this ASU while prior period amounts continue to be reported in accordance with legacy GAAP.  The impact of the adoption of this ASU on our Condensed Consolidated Statements of Operations for the three and nine month periods ending September 30, 2018 is summarized in the table below.  In addition, see note #17 for further discussion on our accounting policies for operating revenue streams that are included in the scope of this amended guidance.

The impact of the adoption of ASU 2014-09 on our Condensed Consolidated Statement of Operations follows:

  As Reported  
Under
Legacy GAAP
  
Impact of
ASU 2014-09
  
  (In thousands)  
Three months ended September 30, 2018          
Non-interest income - Interchange income $2,486  $2,088  $398(1)
              
              
Non-interest expense - interchange expense $715  $317   398(1)
Impact on net income         $-  
              
              
Nine months ended September 30, 2018             
Non-interest income - Interchange income $7,236  $6,170  $1,066(1)
              
              
Non-interest expense - interchange expense $1,974  $908   1,066(1)
Impact on net income         $-  

(1)Represents certain costs charged by payment networks that were previously netted against interchange income.

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

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities”.  This ASU amends existing guidance related to the accounting for certain financial assets and liabilities. These amendments, among other things, require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. This amended guidance was effective for us on January 1, 2018.  The adoption of this ASU did not have a material impact on our consolidated operating results or financial condition.  As a result of the adoption of this ASU our equity securities previously classified as trading securities are now classified as equity securities at fair value on our September 30, 2018 Condensed Consolidated Statement of Financial Condition.  In addition, this amended guidance impacted certain fair value disclosure items (see note #12).

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business”.  This new ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses which distinction determines whether goodwill is recorded or not. This amended guidance was effective for us on January 1, 2018, and did not have a material impact on our consolidated operating results or financial condition.

In January 2017, the FASB issued ASU 2017-4, “Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment”.  This new ASU amends the requirement that entities compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, entities should perform their annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment if the carrying amount exceeds the reporting unit’s fair value. This amended guidance is effective for us on January 1, 2020 with early application permitted. Due to our recent acquisition (see note #16) and expectations this ASU will be relevant to us in 2018 we elected to adopt this amended guidance as of January 1, 2018. The adoption of this ASU did not have a material impact on our consolidated operating results or financial condition.

In February 2018, the FASB issued ASU 2018-02, ‘‘Income Statement – Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income’’. This new ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. As a result, this amended guidance eliminates the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. This amended guidance is effective for us on January 1, 2019, with early application permitted in any period for which financial statements have not yet been issued.  We elected to adopt this amended guidance during the fourth quarter of 2017 and it resulted in a $0.04 million reclassification between accumulated other comprehensive loss and accumulated deficit.

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

3.
Securities

Securities available for sale consist of the following:

 Amortized  Unrealized     Amortized  Unrealized    
 Cost  Gains  Losses  Fair Value  Cost  Gains  Losses  Fair Value 
 (In thousands)  (In thousands) 
September 30, 2018            
September 30, 2019            
U.S. agency $20,769  $-  $346  $20,423  
$
15,145
  
$
153
  
$
15
  
$
15,283
 
U.S. agency residential mortgage-backed  126,851   802   2,592   125,061  
146,128
  
1,806
  
214
  
147,720
 
U.S. agency commercial mortgage-backed  6,039   -   224   5,815  
11,182
  
155
  
18
  
11,319
 
Private label mortgage-backed  29,340   369   736   28,973  
31,195
  
686
  
55
  
31,826
 
Other asset backed  78,567   147   188   78,526  
94,799
  
185
  
199
  
94,785
 
Obligations of states and political subdivisions  143,138   219   3,703   139,654  
99,352
  
1,880
  
93
  
101,139
 
Corporate  35,017   65   512   34,570  
32,444
  
1,237
  
3
  
33,678
 
Trust preferred  1,963   -   38   1,925  
1,966
  
-
  
146
  
1,820
 
Foreign government  2,060   -   50   2,010   
2,020
   
4
   
2
   
2,022
 
Total $443,744  $1,602  $8,389  $436,957  
$
434,231
  
$
6,106
  
$
745
  
$
439,592
 
                            
December 31, 2017                
U.S. Treasury $898  $-  $-  $898 
December 31, 2018            
U.S. agency  25,667   82   67   25,682  
$
20,198
  
$
9
  
$
193
  
$
20,014
 
U.S. agency residential mortgage-backed  137,785   1,116   983   137,918  
124,777
  
817
  
1,843
  
123,751
 
U.S. agency commercial mortgage-backed  9,894   36   170   9,760  
5,909
  
1
  
184
  
5,726
 
Private label mortgage-backed  29,011   428   330   29,109  
29,735
  
321
  
637
  
29,419
 
Other asset backed  93,811   202   115   93,898  
83,481
  
86
  
248
  
83,319
 
Obligations of states and political subdivisions  174,073   755   1,883   172,945  
130,244
  
257
  
2,946
  
127,555
 
Corporate  47,365   578   90   47,853  
34,866
  
29
  
586
  
34,309
 
Trust preferred  2,929   -   127   2,802  
1,964
  
-
  
145
  
1,819
 
Foreign government  2,087   -   27   2,060   
2,050
   
-
   
36
   
2,014
 
Total $523,520  $3,197  $3,792  $522,925  
$
433,224
  
$
1,520
  
$
6,818
  
$
427,926
 

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

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

 Less Than Twelve Months  Twelve Months or More  Total  Less Than Twelve Months  Twelve Months or More  Total 
 Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
 
 (In thousands)  (In thousands) 
                                    
September 30, 2018                  
September 30, 2019                  
U.S. agency $11,938  $239  $8,485  $107  $20,423  $346  
$
2,189
  
$
4
  
$
2,888
  
$
11
  
$
5,077
  
$
15
 
U.S. agency residential mortgage-backed
  28,672   765   40,857   1,827   69,529   2,592  
26,084
  
33
  
16,902
  
181
  
42,986
  
214
 
U.S. agency commercial mortgage-backed
  1,358   12   4,391   212   5,749   224  
1,987
  
12
  
882
  
6
  
2,869
  
18
 
Private label mortgage- backed
  10,209   295   8,473   441   18,682   736  
5,636
  
6
  
612
  
49
  
6,248
  
55
 
Other asset backed  30,663   92   11,226   96   41,889   188  
23,926
  
100
  
11,487
  
99
  
35,413
  
199
 
Obligations of states and political subdivisions
  59,590   1,157   57,509   2,546   117,099   3,703  
14,457
  
37
  
4,362
  
56
  
18,819
  
93
 
Corporate  20,853   361   5,726   151   26,579   512  
285
  
2
  
999
  
1
  
1,284
  
3
 
Trust preferred  -   -   925   38   925   38  
900
  
100
  
920
  
46
  
1,820
  
146
 
Foreign government  -   -   2,010   50   2,010   50   
-
   
-
   
1,519
   
2
   
1,519
   
2
 
Total $163,283  $2,921  $139,602  $5,468  $302,885  $8,389  
$
75,464
  
$
294
  
$
40,571
  
$
451
  
$
116,035
  
$
745
 
                                          
December 31, 2017                        
December 31, 2018                  
U.S. agency $5,466  $26  $5,735  $41  $11,201  $67  
$
7,150
  
$
46
  
$
11,945
  
$
147
  
$
19,095
  
$
193
 
U.S. agency residential mortgage-backed
  22,198   229   40,698   754   62,896   983  
18,374
  
180
  
48,184
  
1,663
  
66,558
  
1,843
 
U.S. agency commercial mortgage-backed
  2,181   34   3,994   136   6,175   170  
566
  
3
  
5,094
  
181
  
5,660
  
184
 
Private label mortgage-backed
  11,390   92   4,396   238   15,786   330  
8,273
  
57
  
16,145
  
580
  
24,418
  
637
 
Other asset backed  20,352   40   16,648   75   37,000   115  
53,043
  
160
  
10,235
  
88
  
63,278
  
248
 
Obligations of states and political subdivisions
  76,574   936   28,246   947   104,820   1,883  
25,423
  
262
  
80,701
  
2,684
  
106,124
  
2,946
 
Corporate  14,440   33   3,943   57   18,383   90  
17,758
  
343
  
9,222
  
243
  
26,980
  
586
 
Trust preferred  -   -   2,802   127   2,802   127  
939
  
61
  
880
  
84
  
1,819
  
145
 
Foreign government  489   10   1,571   17   2,060   27   
-
   
-
   
2,014
   
36
   
2,014
   
36
 
Total $153,090  $1,400  $108,033  $2,392  $261,123  $3,792  
$
131,526
  
$
1,112
  
$
184,420
  
$
5,706
  
$
315,946
  
$
6,818
 

Our portfolio of securities available for sale is reviewed quarterly for impairment in value. In performing this review management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. For securities that do not meet the aforementioned recovery criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income (loss).

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

U.S. agency, U.S. agency residential mortgage-backed securities and U.S. agency commercial mortgage backed securities — at September 30, 2018,2019, we had 5126 U.S. agency, 13398 U.S. agency residential mortgage-backed and 15eight U.S. agency commercial mortgage-backed securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to increases in interest rates since acquisition and widening spreads to Treasury bonds. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Private label mortgage backed securities — at September 30, 2018,2019, we had 2712 of this type of security whose fair value is less than amortized cost. Unrealized losses are primarily due to credit spread widening and increases in interest rates since their acquisition.

Two private label mortgage-backed securities (included in the securities discussed(discussed further below) were reviewed for other than temporary impairment (“OTTI”(‘‘OTTI’’) utilizing a cash flow projection. The cash flow analysis forecasts cash flow from the underlying loans in each transaction and then applies these cash flows to the bonds in the securitization. See further discussion below.

As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no other declines discussed above are deemed to be other than temporary.

Other asset backed — at September 30, 2018,2019, we had 7240 other asset backed securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening and increases in interest rates since acquisition. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Obligations of states and political subdivisions — at September 30, 2018,2019, we had 39359 municipal securities whose fair value is less than amortized cost. The unrealized losses are primarily due to wider benchmark pricing spreads and increases in interest rates since acquisition. Tax exempt securities have been negatively impacted by lower federal tax rates signed into law in December, 2017. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Corporate — at September 30, 2018,2019, we had 32two corporate securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening and increases in interest rates since acquisition. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

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

Trust preferred securities — at September 30, 2018,2019, we had onetwo trust preferred securitysecurities whose fair value is less than amortized cost. ThisBoth of our trust preferred security is asecurities are single issue securitysecurities issued by a trust subsidiary of a bank holding company. The pricing of this trust preferred securitysecurities has suffered from credit spread widening. This securityOne of the securities is rated by a major rating agency as investment grade.grade while the other one is non-rated. The non-rated issue is a relatively small bank and was never rated. The issuer of this non-rated trust preferred security, which had a total amortized cost of $1.0 million and total fair value of $0.90 million as of September 30, 2019, continues to have satisfactory credit metrics and make interest payments. As management does not intend to liquidate this security and it is more likely than not that we will not be required to sell this security prior to recovery of the unrealized loss, this decline is not deemed to be other than temporary.

13
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Foreign government — at September 30, 2018,2019, we had twoone foreign government securitiessecurity whose fair value is less than amortized cost. The unrealized losses areloss is primarily due to increases in interest rates since acquisition. As management does not intend to liquidate these securitiesthis security and it is more likely than not that we will not be required to sell these securitiesthis security prior to recovery of thesethis unrealized losses, no declines areloss, this decline is not deemed to be other than temporary.

We recorded no credit related OTTI charges in our Condensed Consolidated Statements of Operations related to securities available for sale during the three and nine month periods ended September 30, 20182019 and 2017,2018, respectively.

At September 30, 2018, three2019, two private label mortgage-backed securities had credit related OTTI and are summarized as follows:

 
Senior
Security
  
Super
Senior
Security
  
Senior
Support
Security
  Total  
Senior
Security
  
Super
Senior
Security
  Total 
 (In thousands)  (In thousands) 
                     
Fair value $842  $808  $32  $1,682  
$
645
  
$
647
  
$
1,292
 
Amortized cost  698   633   -   1,331  
552
  
479
  
1,031
 
Non-credit unrealized loss  -   -   -   -  
-
  
-
  
-
 
Unrealized gain  144   175   32   351  
93
  
168
  
261
 
Cumulative credit related OTTI  757   457   380   1,594  
757
  
457
  
1,214
 

Each
Both of these securities isare receiving principal and interest payments similar to principal reductions in the underlying collateral.  All three of these securitiescollateral and have unrealized gains at September 30, 2018.2019. The original amortized cost (current amortized cost excluding cumulative credit related OTTI) for each of these securities has been permanently adjusted downward for previously recorded credit related OTTI. The unrealized loss (based on original amortized cost) for these securities is now less than previously recorded credit related OTTI amounts.

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

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

 
Three months ended
September 30,
  
Nine months ended
September 30,
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
 2018  2017  2018  2017  2019  2018  2019  2018 
 (In thousands)  (In thousands)  (In thousands)  (In thousands) 
Balance at beginning of period $1,594  $1,594  $1,594  $1,594  
$
1,594
  
$
1,594
  
$
1,594
  
$
1,594
 
Additions to credit losses on securities for which no previous OTTI was recognized
  -   -   -   -  
-
  
-
  
-
  
-
 
Increases to credit losses on securities for which OTTI was previously recognized
  -   -   -   -  
-
  
-
  
-
  
-
 
Reduction(1)  
(380
)
  
-
   
(380
)
  
-
 
Balance at end of period $1,594  $1,594  $1,594  $1,594  
$
1,214
  
$
1,594
  
$
1,214
  
$
1,594
 

14
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)(1)During the third quarter of 2019 one security with previously recorded OTTI was settled and balance is now zero.

The amortized cost and fair value of securities available for sale at September 30, 2018,2019, by contractual maturity, follow:

 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
 (In thousands)  (In thousands) 
Maturing within one year $14,513  $14,494  
$
13,331
  
$
13,347
 
Maturing after one year but within five years  79,683   78,634  
53,809
  
54,524
 
Maturing after five years but within ten years  62,609   60,979  
47,726
  
49,239
 
Maturing after ten years  46,142   44,475   
36,061
   
36,832
 
  202,947   198,582  
150,927
  
153,942
 
U.S. agency residential mortgage-backed  126,851   125,061  
146,128
  
147,720
 
U.S. agency commercial mortgage-backed  6,039   5,815  
11,182
  
11,319
 
Private label mortgage-backed  29,340   28,973  
31,195
  
31,826
 
Other asset backed  78,567   78,526   
94,799
   
94,785
 
Total $443,744  $436,957  
$
434,231
  
$
439,592
 

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

Gains and losses realized on the sale of securities available for sale are determined using the specific identification method and are recognized on a trade-date basis.  A summary of proceeds from the sale of securities available for sale and gains and losses for the nine month periods ending September 30, follows:

    Realized     Realized 
 Proceeds (1)  Gains (2)  Losses  Proceeds  Gains (1)  Losses 
 (In thousands)  (In thousands) 
2019
 
$
44,305
  
$
169
  
$
32
 
2018 $31,445  $81  $126  
$
31,445
  
$
81
  
$
126
 
2017  9,594   125   - 

(1)2017 includes $0.760 million for trades that did not settle until after September 30, 2017.
(2)2018 excludes a $0.144 million gain on the sale of 1,000 VISA Classclass B shares.

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

Certain preferred stocks havewhich were all sold during the first quarter of 2019 had been classified as equity securities at fair value in our Condensed Consolidated Statement of Financial Condition beginning on January 1, 2018.  Previously these preferred stocks were classified as trading securities.  See note #2.Condition.  During the nine months ended September 30, 20182019 and 20172018 we recognized lossesgains (losses) on these preferred stocks of $0.170$0.167 million and $0.063$(0.170) million, respectively, that are included in net gains (losses) on securities in the Condensed Consolidated Statements of Operations.  These amountsZero and $(0.170) million of these gains (losses) during the nine months ended September 30, 2019 and 2018, respectively relate to preferred stock still held at each respective period end.

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

4.
Loans

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

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

 Commercial  Mortgage  Installment  
Subjective
Allocation
  Total  Commercial  Mortgage  Installment  
Subjective
Allocation
  Total 
 (In thousands) 
2019               
Balance at beginning of period 
$
8,121
  
$
8,062
  
$
1,293
  
$
8,427
  
$
25,903
 
Additions (deductions)               
Provision for loan losses 
(810
)
 
83
  
289
  
167
  
(271
)
Recoveries credited to the allowance 
1,215
  
235
  
202
  
-
  
1,652
 
Loans charged against the allowance  
(303
)
  
(397
)
  
(436
)
  
-
   
(1,136
)
Balance at end of period 
$
8,223
  
$
7,983
  
$
1,348
  
$
8,594
  
$
26,148
 
 (In thousands)                
2018                              
Balance at beginning of period $6,073  $8,296  $848  $8,287  $23,504  
$
6,073
  
$
8,296
  
$
848
  
$
8,287
  
$
23,504
 
Additions (deductions)                                   
Provision for loan losses  (907)  415   (25)  464   (53) 
(907
)
 
415
  
(25
)
 
464
  
(53
)
Recoveries credited to the allowance
  1,418   192   298   -   1,908  
1,418
  
192
  
298
  
-
  
1,908
 
Loans charged against the allowance
  (225)  (448)  (285)  -   (958)  
(225
)
  
(448
)
  
(285
)
  
-
   
(958
)
Balance at end of period $6,359  $8,455  $836  $8,751  $24,401  
$
6,359
  
$
8,455
  
$
836
  
$
8,751
  
$
24,401
 
                    
2017                    
Balance at beginning of period $5,100  $8,145  $900  $6,441  $20,586 
Additions (deductions)                    
Provision for loan losses  (97)  68   (33)  644   582 
Recoveries credited to the allowance
  340   587   285   -   1,212 
Loans charged against the allowance
  (92)  (471)  (339)  -   (902)
Balance at end of period $5,251  $8,329  $813  $7,085  $21,478 

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

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

 Commercial  Mortgage  Installment  
Subjective
Allocation
  Total  Commercial  Mortgage  Installment  Subjective Allocation  Total 
 (In thousands) 
2019
               
Balance at beginning of period 
$
7,090
  
$
7,978
  
$
895
  
$
8,925
  
$
24,888
 
Additions (deductions)               
Provision for loan losses 
85
  
270
  
1,021
  
(331
)
 
1,045
 
Recoveries credited to the allowance 
1,720
  
786
  
603
  
-
  
3,109
 
Loans charged against the allowance  
(672
)
  
(1,051
)
  
(1,171
)
  
-
   
(2,894
)
Balance at end of period 
$
8,223
  
$
7,983
  
$
1,348
  
$
8,594
  
$
26,148
 
 (In thousands)                
2018                              
Balance at beginning of period $5,595  $8,733  $864  $7,395  $22,587  
$
5,595
  
$
8,733
  
$
864
  
$
7,395
  
$
22,587
 
Additions (deductions)                                   
Provision for loan losses  (1,404)  778   182   1,356   912  
(1,404
)
 
778
  
182
  
1,356
  
912
 
Recoveries credited to the allowance  2,458   549   761   -   3,768  
2,458
  
549
  
761
  
-
  
3,768
 
Loans charged against the allowance  (290)  (1,605)  (971)  -   (2,866)  
(290
)
  
(1,605
)
  
(971
)
  
-
   
(2,866
)
Balance at end of period $6,359  $8,455  $836  $8,751  $24,401  
$
6,359
  
$
8,455
  
$
836
  
$
8,751
  
$
24,401
 
                    
2017                    
Balance at beginning of period $4,880  $8,681  $1,011  $5,662  $20,234 
Additions (deductions)                    
Provision for loan losses  (197)  (593)  173   1,423   806 
Recoveries credited to the allowance  946   1,264   788   -   2,998 
Loans charged against the allowance  (378)  (1,023)  (1,159)  -   (2,560)
Balance at end of period $5,251  $8,329  $813  $7,085  $21,478 

1617
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

 Commercial  Mortgage  Installment  
Subjective
Allocation
  Total  Commercial  Mortgage  Installment  
Subjective
Allocation
  Total 
 (In thousands)  (In thousands) 
September 30, 2018               
Allowance for loan losses               
September 30, 2019               
Allowance for loan losses:               
Individually evaluated for impairment
 $727  $5,155  $220  $-  $6,102  
$
871
  
$
4,610
  
$
297
  
$
-
  
$
5,778
 
Collectively evaluated for impairment
  5,632   3,300   616   8,751   18,299  
7,352
  
3,373
  
1,051
  
8,594
  
20,370
 
Loans acquired with deteriorated credit quality
  -   -   -   -   -   
-
   
-
   
-
   
-
   
-
 
Total ending allowance balance
 $6,359  $8,455  $836  $8,751  $24,401 
Total ending allowance for loan losses balance 
$
8,223
  
$
7,983
  
$
1,348
  
$
8,594
  
$
26,148
 
                                   
Loans                                   
Individually evaluated for impairment
 $9,714  $48,815  $3,630      $62,159  
$
7,776
  
$
42,590
  
$
3,223
     
$
53,589
 
Collectively evaluated for impairment
  1,103,860   1,011,276   391,093       2,506,229  
1,182,825
  
1,031,163
  
460,973
     
2,674,961
 
Loans acquired with deteriorated credit quality
  1,653   557   355       2,565   
1,421
   
582
   
329
      
2,332
 
Total loans recorded investment
  1,115,227   1,060,648   395,078       2,570,953  
1,192,022
  
1,074,335
  
464,525
     
2,730,882
 
Accrued interest included in recorded investment
  3,126   4,166   1,083       8,375   
3,005
   
4,300
   
1,131
      
8,436
 
Total loans $1,112,101  $1,056,482  $393,995      $2,562,578  
$
1,189,017
  
$
1,070,035
  
$
463,394
     
$
2,722,446
 
                                   
December 31, 2017                    
Allowance for loan losses                    
December 31, 2018               
Allowance for loan losses:               
Individually evaluated for impairment
 $837  $5,725  $277  $-  $6,839  
$
1,305
  
$
4,799
  
$
206
  
$
-
  
$
6,310
 
Collectively evaluated for impairment
  4,758   3,008   587   7,395   15,748  
5,785
  
3,179
  
689
  
8,925
  
18,578
 
Total ending allowance balance
 $5,595  $8,733  $864  $7,395  $22,587 
Loans acquired with deteriorated credit quality  
-
   
-
   
-
   
-
   
-
 
Total ending allowance for loan losses balance 
$
7,090
  
$
7,978
  
$
895
  
$
8,925
  
$
24,888
 
                                   
Loans                                   
Individually evaluated for impairment
 $8,420  $53,179  $3,945      $65,544  
$
8,697
  
$
46,394
  
$
3,370
     
$
58,461
 
Collectively evaluated for impairment
  847,140   799,629   313,005       1,959,774  
1,137,586
  
1,000,038
  
392,460
     
2,530,084
 
Loans acquired with deteriorated credit quality  
1,609
   
555
   
349
      
2,513
 
Total loans recorded investment
  855,560   852,808   316,950       2,025,318  
1,147,892
  
1,046,987
  
396,179
     
2,591,058
 
Accrued interest included in recorded investment
  2,300   3,278   923       6,501   
3,411
   
4,097
   
1,030
      
8,538
 
Total loans $853,260  $849,530  $316,027      $2,018,817  
$
1,144,481
  
$
1,042,890
  
$
395,149
     
$
2,582,520
 

1718
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

 
90+ and
Still
Accruing
  
Non-
Accrual
  
Total Non-
Performing
Loans
  
90+ and
Still
Accruing
  
Non-
Accrual
  
Total Non-
Performing
Loans
 
 (In thousands)  (In thousands)    
September 30, 2018         
September 30, 2019         
Commercial                  
Income producing - real estate $-  $-  $-  
$
-
  
$
-
  
$
-
 
Land, land development and construction - real estate  -   2,402   2,402  
-
  
654
  
654
 
Commercial and industrial  -   380   380  
-
  
87
  
87
 
Mortgage                     
1-4 family  -   4,159   4,159  
-
  
3,873
  
3,873
 
Resort lending  -   969   969  
-
  
227
  
227
 
Home equity - 1st lien  -   324   324  
-
  
208
  
208
 
Home equity - 2nd lien  -   353   353  
-
  
665
  
665
 
Installment                     
Home equity - 1st lien  -   225   225  
-
  
125
  
125
 
Home equity - 2nd lien  -   246   246  
-
  
269
  
269
 
Boat lending  -   64   64  
-
  
378
  
378
 
Recreational vehicle lending  -   8   8  
-
  
2
  
2
 
Other  -   213   213   
-
   
161
   
161
 
Total recorded investment $-  $9,343  $9,343  
$
-
  
$
6,649
  
$
6,649
 
Accrued interest included in recorded investment
 $-  $-  $-  
$
-
  
$
-
  
$
-
 
December 31, 2017            
December 31, 2018         
Commercial                     
Income producing - real estate $-  $30  $30  
$
-
  
$
-
  
$
-
 
Land, land development and construction - real estate  -   9   9  
-
  
-
  
-
 
Commercial and industrial  -   607   607  
-
  
2,123
  
2,123
 
Mortgage                     
1-4 family  -   5,130   5,130  
5
  
4,332
  
4,337
 
Resort lending  -   1,223   1,223  
-
  
755
  
755
 
Home equity - 1st lien  -   326   326  
-
  
159
  
159
 
Home equity - 2nd lien  -   316   316  
-
  
419
  
419
 
Installment                     
Home equity - 1st lien  -   141   141  
-
  
178
  
178
 
Home equity - 2nd lien  -   159   159  
-
  
226
  
226
 
Boat lending  -   100   100  
-
  
166
  
166
 
Recreational vehicle lending  -   25   25  
-
  
7
  
7
 
Other  -   118   118   
-
   
204
   
204
 
Total recorded investment $-  $8,184  $8,184  
$
5
  
$
8,569
  
$
8,574
 
Accrued interest included in recorded investment
 $-  $-  $-  
$
-
  
$
-
  
$
-
 

1819
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

An aging analysis of loans by class follows:

 Loans Past Due

Loans not
Past Due


Total
Loans

 Loans Past Due  Loans not  Total 
 30-59 days  60-89 days  90+ days  Total 30-59 days  60-89 days  90+ days  Total  Past Due  Loans 
 (In thousands)  (In thousands) 
September 30, 2018                  
September 30, 2019                  
Commercial                                    
Income producing - real estate $-  $32  $-  $32  $378,201  $378,233  
$
44
  
$
-
  
$
-
  
$
44
  
$
424,472
  
$
424,516
 
Land, land development and construction - real estate
  -   -   2,402   2,402   61,760   64,162  
-
  
-
  
-
  
-
  
102,227
  
102,227
 
Commercial and industrial  881   25   51   957   671,875   672,832  
483
  
26
  
-
  
509
  
664,770
  
665,279
 
Mortgage                                          
1-4 family  2,146   687   4,344   7,177   844,584   851,761  
3,098
  
973
  
1,359
  
5,430
  
841,658
  
847,088
 
Resort lending  418   -   969   1,387   83,420   84,807  
703
  
81
  
93
  
877
  
69,949
  
70,826
 
Home equity - 1st lien  81   15   324   420   40,312   40,732  
87
  
101
  
79
  
267
  
37,069
  
37,336
 
Home equity - 2nd lien  364   209   353   926   82,422   83,348  
765
  
344
  
231
  
1,340
  
117,745
  
119,085
 
Installment                                          
Home equity - 1st lien  285   44   225   554   7,738   8,292  
83
  
19
  
10
  
112
  
5,871
  
5,983
 
Home equity - 2nd lien  190   45   246   481   7,099   7,580  
118
  
3
  
166
  
287
  
4,832
  
5,119
 
Boat lending  153   16   64   233   169,925   170,158  
625
  
49
  
140
  
814
  
205,526
  
206,340
 
Recreational vehicle lending  46   30   8   84   123,199   123,283  
92
  
33
  
2
  
127
  
152,904
  
153,031
 
Other  145   140   213   498   85,267   85,765   
233
   
85
   
104
   
422
   
93,630
   
94,052
 
Total recorded investment $4,709  $1,243  $9,199  $15,151  $2,555,802  $2,570,953  
$
6,331
  
$
1,714
  
$
2,184
  
$
10,229
  
$
2,720,653
  
$
2,730,882
 
Accrued interest included in recorded investment
 $53  $21  $-  $74  $8,301  $8,375  
$
65
  
$
17
  
$
-
  
$
82
  
$
8,354
  
$
8,436
 
                                          
December 31, 2017                        
December 31, 2018                  
Commercial                                          
Income producing - real estate $-  $-  $30  $30  $290,466  $290,496  
$
44
  
$
-
  
$
-
  
$
44
  
$
388,729
  
$
388,773
 
Land, land development and construction - real estate
  9   -   -   9   70,182   70,191  
-
  
-
  
-
  
-
  
84,458
  
84,458
 
Commercial and industrial  60   -   44   104   494,769   494,873  
1,538
  
-
  
-
  
1,538
  
673,123
  
674,661
 
Mortgage                                          
1-4 family  1,559   802   5,130   7,491   659,742   667,233  
1,608
  
194
  
4,882
  
6,684
  
833,760
  
840,444
 
Resort lending  713   -   1,223   1,936   88,620   90,556  
252
  
-
  
755
  
1,007
  
80,774
  
81,781
 
Home equity - 1st lien  308   38   326   672   34,689   35,361  
176
  
-
  
159
  
335
  
38,909
  
39,244
 
Home equity - 2nd lien  353   155   316   824   58,834   59,658  
446
  
100
  
419
  
965
  
84,553
  
85,518
 
Installment                                          
Home equity - 1st lien  90   11   141   242   9,213   9,455  
200
  
55
  
197
  
452
  
6,985
  
7,437
 
Home equity - 2nd lien  217   94   159   470   9,001   9,471  
111
  
24
  
226
  
361
  
6,683
  
7,044
 
Boat lending  59   36   100   195   129,777   129,972  
316
  
295
  
166
  
777
  
169,117
  
169,894
 
Recreational vehicle lending  28   20   25   73   92,737   92,810  
28
  
21
  
7
  
56
  
125,780
  
125,836
 
Other  275   115   118   508   74,734   75,242   
241
   
131
   
204
   
576
   
85,392
   
85,968
 
Total recorded investment $3,671  $1,271  $7,612  $12,554  $2,012,764  $2,025,318  
$
4,960
  
$
820
  
$
7,015
  
$
12,795
  
$
2,578,263
  
$
2,591,058
 
Accrued interest included in recorded investment
 $43  $22  $-  $65  $6,436  $6,501  
$
44
  
$
11
  
$
-
  
$
55
  
$
8,483
  
$
8,538
 

1920
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Impaired loans are as follows:

 
September 30,
2018
  
December 31,
2017
  
September 30,
2019
  
December 31,
2018
 
Impaired loans with no allocated allowance for loan losses (In thousands)  (In thousands) 
TDR $347  $349 
Troubled debt restructurings (“TDR”) 
$
-
  
$
-
 
Non - TDR  2,402   175  
1,144
  
-
 
Impaired loans with an allocated allowance for loan losses              
TDR - allowance based on collateral  2,366   2,482  
1,129
  
2,787
 
TDR - allowance based on present value cash flow  56,599   62,113  
49,094
  
53,258
 
Non - TDR - allowance based on collateral  168   148   
1,969
   
2,145
 
Total impaired loans $61,882  $65,267  
$
53,336
  
$
58,190
 
              
Amount of allowance for loan losses allocated              
TDR - allowance based on collateral $692  $684  
$
230
  
$
769
 
TDR - allowance based on present value cash flow  5,335   6,089  
4,865
  
4,849
 
Non - TDR - allowance based on collateral  75   66   
683
   
692
 
Total amount of allowance for loan losses allocated $6,102  $6,839  
$
5,778
  
$
6,310
 

2021
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Impaired loans by class  are as follows:

 September 30, 2018  December 31, 2017  September 30, 2019  December 31, 2018 
 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
For Loan
Losses
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
For Loan
Losses
 
With no related allowance for loan losses recorded: (In thousands)  (In thousands)    
Commercial                                    
Income producing - real estate $-  $-  $-  $-  $-  $-  
$
-
  
$
-
  
$
-
  
$
-
  
$
-
  
$
-
 
Land, land development & construction-real estate  2,402   2,402   -   -   -   -  
654
  
734
  
-
  
-
  
-
  
-
 
Commercial and industrial  347   347   -   524   549   -  
-
  
-
  
-
  
-
  
-
  
-
 
Mortgage                                          
1-4 family  2   447   -   2   469   -  
490
  
774
  
-
  
3
  
474
  
-
 
Resort lending  -   -   -   -   -   -  
-
  
-
  
-
  
-
  
-
  
-
 
Home equity - 1st lien  -   -   -   -   -   -  
-
  
-
  
-
  
-
  
-
  
-
 
Home equity - 2nd lien  -   34   -   -   -   -  
-
  
-
  
-
  
-
  
-
  
-
 
Installment                                          
Home equity - 1st lien  1   90   -   1   69   -  
-
  
-
  
-
  
1
  
122
  
-
 
Home equity - 2nd lien  -   -   -   -   -   -  
-
  
15
  
-
  
-
  
-
  
-
 
Boat lending  -   5   -   -   -   -  
-
  
5
  
-
  
-
  
5
  
-
 
Recreational vehicle lending  -   -   -   -   -   -  
-
  
-
  
-
  
-
  
-
  
-
 
Other  -   16   -   -   -   -   
-
   
24
   
-
   
-
   
15
   
-
 
  2,752   3,341   -   527   1,087   -   
1,144
   
1,552
   
-
   
4
   
616
   
-
 
With an allowance for loan losses recorded:                                          
Commercial                                          
Income producing - real estate  4,829   4,808   307   5,195   5,347   347  
$
5,859
  
$
5,837
  
619
  
4,770
  
4,758
  
303
 
Land, land development & construction-real estate  152   152   4   166   194   9  
113
  
113
  
25
  
290
  
289
  
35
 
Commercial and industrial  1,984   2,133   416   2,535   2,651   481  
1,150
  
1,244
  
227
  
3,637
  
3,735
  
967
 
Mortgage                                          
1-4 family  34,656   36,169   3,126   36,848   38,480   3,454  
29,521
  
31,657
  
3,164
  
32,842
  
34,427
  
2,859
 
Resort lending  13,934   13,972   2,017   15,978   16,046   2,210  
11,741
  
11,949
  
1,197
  
13,328
  
13,354
  
1,927
 
Home equity - 1st lien  66   65   3   173   236   43  
190
  
219
  
49
  
65
  
64
  
4
 
Home equity - 2nd lien  157   156   9   178   213   18  
648
  
657
  
200
  
156
  
155
  
9
 
Installment                                          
Home equity - 1st lien  1,520   1,640   97   1,667   1,804   108  
1,219
  
1,395
  
77
  
1,440
  
1,524
  
89
 
Home equity - 2nd lien  1,626   1,644   93   1,793   1,805   140  
1,406
  
1,417
  
116
  
1,471
  
1,491
  
92
 
Boat lending  -   -   -   1   5   1  
140
  
177
  
37
  
-
  
-
  
-
 
Recreational vehicle lending  81   81   4   90   90   5  
49
  
50
  
3
  
79
  
79
  
4
 
Other  402   428   26   393   418   23   
409
   
477
   
64
   
379
   
406
   
21
 
  59,407   61,248   6,102   65,017   67,289   6,839   
52,445
   
55,192
   
5,778
   
58,457
   
60,282
   
6,310
 
Total                                          
Commercial                                          
Income producing - real estate  4,829   4,808   307   5,195   5,347   347  
5,859
  
5,837
  
619
  
4,770
  
4,758
  
303
 
Land, land development & construction-real estate  2,554   2,554   4   166   194   9  
767
  
847
  
25
  
290
  
289
  
35
 
Commercial and industrial  2,331   2,480   416   3,059   3,200   481  
1,150
  
1,244
  
227
  
3,637
  
3,735
  
967
 
Mortgage                                          
1-4 family  34,658   36,616   3,126   36,850   38,949   3,454  
30,011
  
32,431
  
3,164
  
32,845
  
34,901
  
2,859
 
Resort lending  13,934   13,972   2,017   15,978   16,046   2,210  
11,741
  
11,949
  
1,197
  
13,328
  
13,354
  
1,927
 
Home equity - 1st lien  66   65   3   173   236   43  
190
  
219
  
49
  
65
  
64
  
4
 
Home equity - 2nd lien  157   190   9   178   213   18  
648
  
657
  
200
  
156
  
155
  
9
 
Installment                                          
Home equity - 1st lien  1,521   1,730   97   1,668   1,873   108  
1,219
  
1,395
  
77
  
1,441
  
1,646
  
89
 
Home equity - 2nd lien  1,626   1,644   93   1,793   1,805   140  
1,406
  
1,432
  
116
  
1,471
  
1,491
  
92
 
Boat lending  -   5   -   1   5   1  
140
  
182
  
37
  
-
  
5
  
-
 
Recreational vehicle lending  81   81   4   90   90   5  
49
  
50
  
3
  
79
  
79
  
4
 
Other  402   444   26   393   418   23   
409
   
501
   
64
   
379
   
421
   
21
 
Total $62,159  $64,589  $6,102  $65,544  $68,376  $6,839  
$
53,589
  
$
56,744
  
$
5,778
  
$
58,461
  
$
60,898
  
$
6,310
 
                        
Accrued interest included in recorded investment $277          $277          
$
253
        
$
271
       

2122
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

 2018  2017  2019  2018 
 
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance for loan losses recorded: (In thousands)  (In thousands) 
Commercial                        
Income producing - real estate $-  $-  $-  $-  
$
-
  
$
-
  
$
-
  
$
-
 
Land, land development & construction-real estate  2,402   -   -   -  
327
  
5
  
2,402
  
-
 
Commercial and industrial  425   7   445   8  
-
  
-
  
425
  
7
 
Mortgage                            
1-4 family  121   9   127   7  
552
  
7
  
121
  
9
 
Resort lending  -   -   -   -  
-
  
-
  
-
  
-
 
Home equity - 1st lien  -   -   -   -  
-
  
-
  
-
  
-
 
Home equity - 2nd lien  -   -   -   -  
-
  
-
  
-
  
-
 
Installment                            
Home equity - 1st lien  1   1   1   1  
-
  
-
  
1
  
1
 
Home equity - 2nd lien  -   -   -   -  
-
  
-
  
-
  
-
 
Boat lending  -   -   -   -  
-
  
-
  
-
  
-
 
Recreational vehicle lending  -   -   -   -  
-
  
-
  
-
  
-
 
Other  -   -   -   1   
-
   
1
   
-
   
-
 
  2,949   17   573   17   
879
   
13
   
2,949
   
17
 
With an allowance for loan losses recorded:                            
Commercial                            
Income producing - real estate  4,968   64   7,311   91  
5,867
  
68
  
4,968
  
64
 
Land, land development & construction-real estate  153   3   171   2  
202
  
3
  
153
  
3
 
Commercial and industrial  2,264   24   2,878   26  
1,534
  
16
  
2,264
  
24
 
Mortgage                            
1-4 family  34,731   458   38,533   462  
29,966
  
420
  
34,731
  
458
 
Resort lending  14,276   161   16,175   153  
12,067
  
171
  
14,276
  
161
 
Home equity - 1st lien  67   1   201   1  
158
  
1
  
67
  
1
 
Home equity - 2nd lien  157   2   180   2  
601
  
8
  
157
  
2
 
Installment                            
Home equity - 1st lien  1,545   27   1,808   40  
1,242
  
27
  
1,545
  
27
 
Home equity - 2nd lien  1,679   24   2,058   26  
1,420
  
20
  
1,679
  
24
 
Boat lending  1   -   1   -  
86
  
2
  
1
  
-
 
Recreational vehicle lending  83   1   98   1  
50
  
1
  
83
  
1
 
Other  406   5   361   6   
443
   
3
   
406
   
5
 
  60,330   770   69,775   810   
53,636
   
740
   
60,330
   
770
 
Total                            
Commercial                            
Income producing - real estate  4,968   64   7,311   91  
5,867
  
68
  
4,968
  
64
 
Land, land development & construction-real estate  2,555   3   171   2  
529
  
8
  
2,555
  
3
 
Commercial and industrial  2,689   31   3,323   34  
1,534
  
16
  
2,689
  
31
 
Mortgage                            
1-4 family  34,852   467   38,660   469  
30,518
  
427
  
34,852
  
467
 
Resort lending  14,276   161   16,175   153  
12,067
  
171
  
14,276
  
161
 
Home equity - 1st lien  67   1   201   1  
158
  
1
  
67
  
1
 
Home equity - 2nd lien  157   2   180   2  
601
  
8
  
157
  
2
 
Installment                            
Home equity - 1st lien  1,546   28   1,809   41  
1,242
  
27
  
1,546
  
28
 
Home equity - 2nd lien  1,679   24   2,058   26  
1,420
  
20
  
1,679
  
24
 
Boat lending  1   -   1   -  
86
  
2
  
1
  
-
 
Recreational vehicle lending  83   1   98   1  
50
  
1
  
83
  
1
 
Other  406   5   361   7   
443
   
4
   
406
   
5
 
Total $63,279  $787  $70,348  $827  
$
54,515
  
$
753
  
$
63,279
  
$
787
 

2223
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

 2018  2017  2019  2018 
 
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance for loan losses recorded: (In thousands)  (In thousands) 
Commercial                        
Income producing - real estate $-  $-  $222  $-  
$
-
  
$
-
  
$
-
  
$
-
 
Land, land development & construction-real estate  1,201   -   8   -  
164
  
5
  
1,201
  
-
 
Commercial and industrial  472   20   808   16  
-
  
-
  
472
  
20
 
Mortgage                            
1-4 family  70   18   64   16  
365
  
9
  
70
  
18
 
Resort lending  -   -   -   -  
-
  
-
  
-
  
-
 
Home equity - 1st lien  -   -   -   -  
-
  
-
  
-
  
-
 
Home equity - 2nd lien  -   -   -   -  
-
  
-
  
-
  
-
 
Installment                            
Home equity - 1st lien  1   5   1   4  
-
  
-
  
1
  
5
 
Home equity - 2nd lien  -   -   -   -  
-
  
-
  
-
  
-
 
Boat lending  -   -   -   -  
-
  
-
  
-
  
-
 
Recreational vehicle lending  -   -   -   -  
-
  
-
  
-
  
-
 
Other  -   1   -   1   
-
   
1
   
-
   
1
 
  1,744   44   1,103   37   
529
   
15
   
1,744
   
44
 
With an allowance for loan losses recorded:                            
Commercial                            
Income producing - real estate  5,077   202   7,525   300  
5,306
  
214
  
5,077
  
202
 
Land, land development & construction-real estate  157   7   187   6  
246
  
7
  
157
  
7
 
Commercial and industrial  2,391   90   3,488   98  
2,406
  
52
  
2,391
  
90
 
Mortgage                            
1-4 family  35,549   1,347   39,716   1,420  
31,273
  
1,280
  
35,549
  
1,347
 
Resort lending  15,027   475   16,485   464  
12,607
  
493
  
15,027
  
475
 
Home equity - 1st lien  115   4   218   5  
125
  
4
  
115
  
4
 
Home equity - 2nd lien  167   5   217   5  
479
  
14
  
167
  
5
 
Installment                            
Home equity - 1st lien  1,595   81   1,874   107  
1,328
  
70
  
1,595
  
81
 
Home equity - 2nd lien  1,728   76   2,210   96  
1,446
  
61
  
1,728
  
76
 
Boat lending  1   -   1   -  
68
  
2
  
1
  
-
 
Recreational vehicle lending  86   3   103   4  
65
  
2
  
86
  
3
 
Other  406   18   373   19   
437
   
14
   
406
   
18
 
  62,299   2,308   72,397   2,524   
55,786
   
2,213
   
62,299
   
2,308
 
Total                            
Commercial                            
Income producing - real estate  5,077   202   7,747   300  
5,306
  
214
  
5,077
  
202
 
Land, land development & construction-real estate  1,358   7   195   6  
410
  
12
  
1,358
  
7
 
Commercial and industrial  2,863   110   4,296   114  
2,406
  
52
  
2,863
  
110
 
Mortgage                            
1-4 family  35,619   1,365   39,780   1,436  
31,638
  
1,289
  
35,619
  
1,365
 
Resort lending  15,027   475   16,485   464  
12,607
  
493
  
15,027
  
475
 
Home equity - 1st lien  115   4   218   5  
125
  
4
  
115
  
4
 
Home equity - 2nd lien  167   5   217   5  
479
  
14
  
167
  
5
 
Installment                            
Home equity - 1st lien  1,596   86   1,875   111  
1,328
  
70
  
1,596
  
86
 
Home equity - 2nd lien  1,728   76   2,210   96  
1,446
  
61
  
1,728
  
76
 
Boat lending  1   -   1   -  
68
  
2
  
1
  
-
 
Recreational vehicle lending  86   3   103   4  
65
  
2
  
86
  
3
 
Other  406   19   373   20   
437
   
15
   
406
   
19
 
Total $64,043  $2,352  $73,500  $2,561  
$
56,315
  
$
2,228
  
$
64,043
  
$
2,352
 

2324
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

Troubled debt restructurings
TDRs follow:

  September 30, 2018 
  Commercial  Retail (1)  Total 
  (In thousands) 
Performing TDRs $6,904  $49,397  $56,301 
Non-performing TDRs(2)  212   2,799 
(3) 
 3,011 
Total $7,116  $52,196  $59,312 

 December 31, 2017  September 30, 2019 
 Commercial  Retail (1)  Total  Commercial  Retail (1)  Total 
 (In thousands)  (In thousands) 
Performing TDRs $7,748  $52,367  $60,115  
$
6,947
  
$
40,873
  
$
47,820
 
Non-performing TDRs(2)  323   4,506 
(3) 
 4,829   
46
   
2,357
(3) 
  
2,403
 
Total $8,071  $56,873  $64,944  
$
6,993
  
$
43,230
  
$
50,223
 
         
 December 31, 2018 
 Commercial  Retail (1)  Total 
 (In thousands) 
Performing TDRs 
$
6,460
  
$
46,627
  
$
53,087
 
Non-performing TDRs(2)  
74
   
2,884
(3) 
  
2,958
 
Total 
$
6,534
  
$
49,511
  
$
56,045
 

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

We allocated $6.0$5.1 million and $6.8$5.6 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 20182019 and December 31, 2017,2018, respectively.

During the nine months ended September 30, 20182019 and 2017,2018, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans generally included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

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

2425
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

 
Number of
Contracts
  
Pre-modification
Recorded
Balance
  
Post-modification
Recorded
Balance
  
Number of
Contracts
  
Pre-modification
Recorded
Balance
  
Post-modification
Recorded
Balance
 
 (Dollars in thousands) 
2019         
Commercial         
Income producing - real estate 
-
  
$
-
  
$
-
 
Land, land development & construction-real estate 
-
  
-
  
-
 
Commercial and industrial 
2
  
137
  
137
 
Mortgage         
1-4 family 
1
  
198
  
202
 
Resort lending 
-
  
-
  
-
 
Home equity - 1st lien 
-
  
-
  
-
 
Home equity - 2nd lien 
3
  
75
  
75
 
Installment         
Home equity - 1st lien 
1
  
28
  
28
 
Home equity - 2nd lien 
-
  
-
  
-
 
Boat lending 
-
  
-
  
-
 
Recreational vehicle lending 
-
  
-
  
-
 
Other  
-
   
-
   
-
 
Total  
7
  
$
438
  
$
442
 
 (Dollars in thousands)          
2018                  
Commercial                  
Income producing - real estate  -  $-  $-  
-
  
$
-
  
$
-
 
Land, land development & construction-real estate  -   -   -  
-
  
-
  
-
 
Commercial and industrial  1   24   24  
1
  
24
  
24
 
Mortgage                     
1-4 family  3   609   609  
3
  
609
  
609
 
Resort lending  1   115   114  
1
  
115
  
114
 
Home equity - 1st lien  -   -   -  
-
  
-
  
-
 
Home equity - 2nd lien  -   -   -  
-
  
-
  
-
 
Installment                     
Home equity - 1st lien  1   15   15  
1
  
15
  
15
 
Home equity - 2nd lien  1   20   21  
1
  
20
  
21
 
Boat lending  -   -   -  
-
  
-
  
-
 
Recreational vehicle lending  -   -   -  
-
  
-
  
-
 
Other  -   -   -   
-
   
-
   
-
 
Total  7  $783  $783   
7
  
$
783
  
$
783
 
            
2017            
Commercial            
Income producing - real estate  -  $-  $- 
Land, land development & construction-real estate  -   -   - 
Commercial and industrial  -   -   - 
Mortgage            
1-4 family  1   93   95 
Resort lending  -   -   - 
Home equity - 1st lien  -   -   - 
Home equity - 2nd lien  -   -   - 
Installment            
Home equity - 1st lien  -   -   - 
Home equity - 2nd lien  2   51   50 
Boat lending  -   -   - 
Recreational vehicle lending  -   -   - 
Other  1   10   10 
Total  4  $154  $155 

2526
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

 
Number of
Contracts
  
Pre-modification
Recorded
Balance
  
Post-modification
Recorded
Balance
  
Number of
Contracts
  
Pre-modification
Recorded
Balance
  
Post-modification
Recorded
Balance
 
 (Dollars in thousands) 
2019         
Commercial         
Income producing - real estate 
2
  
$
1,329
  
$
1,329
 
Land, land development & construction-real estate 
-
  
-
  
-
 
Commercial and industrial 
3
  
186
  
186
 
Mortgage         
1-4 family 
3
  
985
  
988
 
Resort lending 
-
  
-
  
-
 
Home equity - 1st lien 
-
  
-
  
-
 
Home equity - 2nd lien 
3
  
75
  
75
 
Installment         
Home equity - 1st lien 
3
  
77
  
79
 
Home equity - 2nd lien 
4
  
111
  
112
 
Boat lending 
-
  
-
  
-
 
Recreational vehicle lending 
-
  
-
  
-
 
Other  
-
   
-
   
-
 
Total  
18
  
$
2,763
  
$
2,769
 
 (Dollars in thousands)          
2018                  
Commercial                  
Income producing - real estate  1  $67  $67  
1
  
$
67
  
$
67
 
Land, land development & construction-real estate  -   -   -  
-
  
-
  
-
 
Commercial and industrial  6   611   611  
6
  
611
  
611
 
Mortgage                     
1-4 family  7   903   889  
7
  
903
  
889
 
Resort lending  1   115   114  
1
  
115
  
114
 
Home equity - 1st lien  -   -   -  
-
  
-
  
-
 
Home equity - 2nd lien  -   -   -  
-
  
-
  
-
 
Installment                     
Home equity - 1st lien  6   203   205  
6
  
203
  
205
 
Home equity - 2nd lien  3   113   114  
3
  
113
  
114
 
Boat lending  -   -   -  
-
  
-
  
-
 
Recreational vehicle lending  -   -   -  
-
  
-
  
-
 
Other  2   76   73   
2
   
76
   
73
 
Total  26  $2,088  $2,073   
26
  
$
2,088
  
$
2,073
 
            
2017            
Commercial            
Income producing - real estate  -  $-  $- 
Land, land development & construction-real estate  -   -   - 
Commercial and industrial  12   786   786 
Mortgage            
1-4 family  3   142   144 
Resort lending  1   189   189 
Home equity - 1st lien  -   -   - 
Home equity - 2nd lien  -   -   - 
Installment            
Home equity - 1st lien  2   34   37 
Home equity - 2nd lien  7   300   301 
Boat lending  -   -   - 
Recreational vehicle lending  -   -   - 
Other  1   10   10 
Total  26  $1,461  $1,467 

The troubled debt restructurings described above for 2019 increased the allowance for loan losses by $0.04 million and resulted in zero charge offs during the three months ended September 30, 2019, and increased the allowance for loan losses by $0.09 million and resulted in zero charge offs during the nine months ended September 30, 2019.

The troubled debt restructurings described above for 2018 decreased the allowance for loan losses by $0.01 million and resulted in zero charge offs during the three months ended September 30, 2018, and decreased the allowance by $0.004 million and resulted in zero charge offs during the nine months ended September 30, 2018.

2627
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The troubled debt restructurings described above for 2017 increased the allowance for loan losses by $0.02 million and resulted in zero charge offs during the three months ended September 30, 2017, and increased the allowance by $0.08 million and resulted in zero charge offs during the nine months ended September 30, 2017.

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

Six commercial2019 and industrial loans with a recorded balance of $0.16 million that have been classified as troubled debt restructurings during the past twelve months (from September 30, 2017) subsequently defaulted during the three and nine month periods ended September 30, 2017.  These subsequent defaults resulted in an increase in the allowance of $0.02 million and $0.04 million during the three and nine month periods ended September 30, 2017, respectively and resulted in charge-offs of $0.05 million during both the three and nine month periods ended September 30, 2017.  There were no troubled debt restructurings that subsequently defaulted within twelve months following the modification during the three and nine months ended September 30, 2017 for any other loan class.2018.

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

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

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

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

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

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

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

27
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

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

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

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

 Commercial  Commercial 
 
Non-watch
1-6
  
Watch
7-8
  
Substandard
Accrual
9
  
Non-
Accrual
10-11
  Total  
Non-watch
1-6
  
Watch
7-8
  
Substandard
Accrual
9
  
Non-
Accrual
10-11
  
Total
 
 (In thousands)        
(In thousands)
       
September 30, 2018               
September 30, 2019               
Income producing - real estate $374,965  $3,060  $208  $-  $378,233  
$
408,132
  
$
15,619
  
$
765
  
$
-
  
$
424,516
 
Land, land development and construction - real estate
  55,126   6,623   11   2,402   64,162  
93,563
  
8,010
  
-
  
654
  
102,227
 
Commercial and industrial  634,763   27,174   10,515   380   672,832   
604,311
   
59,425
   
1,456
   
87
   
665,279
 
Total $1,064,854  $36,857  $10,734  $2,782  $1,115,227  
$
1,106,006
  
$
83,054
  
$
2,221
  
$
741
  
$
1,192,022
 
Accrued interest included in total $2,869  $146  $111  $-  $3,126  
$
2,713
  
$
284
  
$
8
  
$
-
  
$
3,005
 
                                   
December 31, 2017                    
December 31, 2018               
Income producing - real estate $288,869  $1,293  $304  $30  $290,496  
$
375,142
  
$
13,387
  
$
200
  
$
44
  
$
388,773
 
Land, land development and construction - real estate
  70,122   60   -   9   70,191  
76,120
  
8,328
  
-
  
10
  
84,458
 
Commercial and industrial  463,570   28,351   2,345   607   494,873   
631,345
   
35,469
   
5,577
   
2,270
   
674,661
 
Total $822,561  $29,704  $2,649  $646  $855,560  
$
1,082,607
  
$
57,184
  
$
5,777
  
$
2,324
  
$
1,147,892
 
Accrued interest included in total $2,198  $94  $8  $-  $2,300  
$
3,107
  
$
174
  
$
130
  
$
-
  
$
3,411
 

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

2829
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

  Mortgage (1)  Mortgage (1) 
  1-4 Family  
Resort
Lending
  
Home
Equity
1st Lien
  
Home
Equity
2nd Lien
  Total  1-4 Family  
Resort
Lending
  
Home
Equity
1st Lien
  
Home
Equity
2nd Lien
  Total 
  (In thousands)  (In thousands) 
September 30, 2018                
September 30, 2019               
800 and above  $110,400  $12,423  $7,872  $12,318  $143,013  
$
101,927
  
$
11,151
  
$
6,165
  
$
12,177
  
$
131,420
 
750-799   358,072   32,498   15,037   30,573   436,180   
385,243
   
31,372
   
16,300
   
52,564
   
485,479
 
700-749   211,575   21,239   9,562   21,561   263,937   
204,241
   
15,323
   
9,209
   
32,897
   
261,670
 
650-699   104,395   9,271   3,222   9,539   126,427   
84,458
   
7,612
   
3,747
   
13,168
   
108,985
 
600-649   30,578   4,142   569   2,884   38,173   
30,819
   
2,241
   
668
   
4,196
   
37,924
 
550-599   13,491   1,220   503   1,261   16,475   
16,410
   
1,171
   
663
   
1,881
   
20,125
 
500-549   7,641   822   228   1,205   9,896   
10,972
   
620
   
330
   
1,072
   
12,994
 
Under 500   1,702   84   86   190   2,062   
3,718
   
80
   
254
   
372
   
4,424
 
Unknown   13,907   3,108   3,653   3,817   24,485   
9,300
   
1,256
   
-
   
758
   
11,314
 
Total  $851,761  $84,807  $40,732  $83,348  $1,060,648  
$
847,088
  
$
70,826
  
$
37,336
  
$
119,085
  
$
1,074,335
 
Accrued interest included in total  $3,161  $360  $206  $439  $4,166  
$
3,327
  
$
343
  
$
166
  
$
464
  
$
4,300
 
                                         
December 31, 2017                     
December 31, 2018                    
800 and above  $78,523  $11,625  $6,169  $7,842  $104,159  
$
94,492
  
$
10,898
  
$
6,784
  
$
8,838
  
$
121,012
 
750-799   283,558   36,015   16,561   24,126   360,260   
384,344
   
36,542
   
17,303
   
38,295
   
476,484
 
700-749   154,239   22,099   7,317   15,012   198,667   
202,440
   
17,282
   
9,155
   
23,249
   
252,126
 
650-699   84,121   12,145   2,793   7,420   106,479   
91,847
   
9,945
   
3,987
   
8,681
   
114,460
 
600-649   25,087   3,025   1,189   2,512   31,813   
34,342
   
3,088
   
959
   
3,359
   
41,748
 
550-599   15,136   2,710   518   1,118   19,482   
13,771
   
1,867
   
427
   
1,236
   
17,301
 
500-549   9,548   1,009   397   1,156   12,110   
8,439
   
106
   
418
   
826
   
9,789
 
Under 500   2,549   269   260   385   3,463   
2,533
   
143
   
98
   
381
   
3,155
 
Unknown   14,472   1,659   157   87   16,375   
8,236
   
1,910
   
113
   
653
   
10,912
 
Total  $667,233  $90,556  $35,361  $59,658  $852,808  
$
840,444
  
$
81,781
  
$
39,244
  
$
85,518
  
$
1,046,987
 
Accrued interest included in total  $2,456  $371  $157  $294  $3,278  
$
3,079
  
$
363
  
$
199
  
$
456
  
$
4,097
 

(1) Other than for the TCSB Bancorp, Inc. ("TCSB") acquired loans, credit
(1)
Credit scores have been updated within the last twelve months.

2930
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

  Installment(1)  Installment(1) 
  
Home
Equity
1st Lien
  
Home
Equity
2nd Lien
  Boat Lending  
Recreational
Vehicle
Lending
  Other  Total  
Home
Equity
1st Lien
  
Home
Equity
2nd Lien
  Boat Lending  
Recreational
Vehicle
Lending
  Other  Total 
  (In thousands)  (In thousands) 
September 30, 2018                   
September 30, 2019
                  
800 and above  $651  $264  $25,231  $22,621  $6,223  $54,990  
$
380
  
$
219
  
$
29,581
  
$
24,296
  
$
7,140
  
$
61,616
 
750-799   1,899   1,519   95,664   72,298   32,094   203,474  
1,104
  
1,265
  
120,085
  
90,692
  
35,671
  
248,817
 
700-749   1,471   1,806   36,743   22,996   23,917   86,933  
1,323
  
1,123
  
42,869
  
29,990
  
25,052
  
100,357
 
650-699   1,608   1,627   8,760   4,093   10,002   26,090  
1,399
  
1,104
  
10,536
  
5,560
  
10,324
  
28,923
 
600-649   1,174   1,065   2,064   778   2,504   7,585  
934
  
678
  
1,783
  
1,692
  
2,762
  
7,849
 
550-599   1,065   850   410   334   961   3,620  
526
  
457
  
808
  
617
  
735
  
3,143
 
500-549   305   132   340   76   433   1,286  
299
  
208
  
455
  
145
  
748
  
1,855
 
Under 500   87   172   43   21   152   475  
18
  
50
  
223
  
39
  
156
  
486
 
Unknown   32   145   903   66   9,479   10,625   
-
   
15
   
-
   
-
   
11,464
   
11,479
 
Total  $8,292  $7,580  $170,158  $123,283  $85,765  $395,078  
$
5,983
  
$
5,119
  
$
206,340
  
$
153,031
  
$
94,052
  
$
464,525
 
Accrued interest included in total  $33  $27  $431  $319  $273  $1,083  
$
21
  
$
16
  
$
467
  
$
350
  
$
277
  
$
1,131
 
                                           
December 31, 2017                         
December 31, 2018
                  
800 and above  $815  $825  $15,531  $16,754  $7,060  $40,985  
$
555
  
$
235
  
$
20,767
  
$
20,197
  
$
6,272
  
$
48,026
 
750-799   1,912   1,952   73,251   52,610   28,422   158,147  
1,502
  
1,642
  
100,191
  
74,154
  
31,483
  
208,972
 
700-749   1,825   2,142   28,922   17,993   20,059   70,941  
1,582
  
1,682
  
35,455
  
24,890
  
24,369
  
87,978
 
650-699   1,840   2,036   9,179   4,270   9,258   26,583  
1,606
  
1,217
  
10,581
  
4,918
  
9,840
  
28,162
 
600-649   1,567   1,065   2,052   754   2,402   7,840  
996
  
1,272
  
1,657
  
992
  
2,751
  
7,668
 
550-599   950   1,028   640   305   871   3,794  
759
  
658
  
652
  
453
  
838
  
3,360
 
500-549   499   303   281   83   475   1,641  
384
  
229
  
286
  
225
  
651
  
1,775
 
Under 500   32   88   57   6   194   377  
51
  
6
  
266
  
7
  
218
  
548
 
Unknown   15   32   59   35   6,501   6,642   
2
   
103
   
39
   
-
   
9,546
   
9,690
 
Total  $9,455  $9,471  $129,972  $92,810  $75,242  $316,950  
$
7,437
  
$
7,044
  
$
169,894
  
$
125,836
  
$
85,968
  
$
396,179
 
Accrued interest included in total  $39  $43  $346  $254  $241  $923  
$
28
  
$
25
  
$
403
  
$
311
  
$
263
  
$
1,030
 

(1) Other than for the TCSB acquired loans, credit
(1)
Credit scores have been updated within the last twelve months.

Foreclosed residential real estate properties included in other real estate and repossessed assets on our Condensed Consolidated Statements of Financial Condition totaled $1.3 million and $1.6$1.2 million at both September 30, 20182019 and December 31, 2017,2018, respectively.  Retail mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements totaled $0.4$0.2 million and $0.8$0.3 million at September 30, 20182019 and December 31, 2017,2018, respectively.

In MarchDuring the first quarter of 2019, we sold $40.6 million, of residential adjustable rate mortgage loans servicing released (classified on the Condensed Consolidated Statements of Financial Condition as held for sale, carried at the lower of cost or fair value at December 31, 2018) to another financial institution and Julyrecognized a gain on sale of $0.01 million.  During the first quarter of 2019 we also securitized $29.8 million, of portfolio residential fixed rate mortgage loans servicing retained with Freddie Mac and recognized a gain on sale of $0.53 million.  During the third quarter of 2019, we sold $9.9 million of residential fixed and adjustable rate portfolio mortgage loans servicing retained to another financial institution and recognized a gain on sale of $0.07 million.  During the third quarter of 2019 we also transferred $36.6 million, of portfolio residential fixed rate mortgage loans to loans held for sale, carried at the lower of cost or fair value.  At the time of transfer and at September 30, 2019 the fair value of these loans exceeded their cost.  During the fourth quarter of 2019 these loans were securitized servicing retained with Freddie Mac and we recognized a gain on sale of approximately $1.0 million. These transactions were done primarily for asset/liability management purposes.

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

During the first and third quarters of 2018, we sold $16.5 million and $11.1 million, respectively, of single-family residential fixed and adjustable rate portfolio mortgage loans servicing retained to another financial institution and recognized a gain (loss) on sale of $0.05 million and ($0.01) million, respectively.  These mortgage loans were all on properties located in Ohio, had weighted average interest rates of 3.59% and 4.07%, respectively, and were sold primarily for asset/liability management purposes.

30
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Purchase Credit Impaired (“PCI”) Loans

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

As a result of our acquisition of TCSB Bancorp, Inc. (“TCSB”) (see note #16)#17) we purchased loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. For these loans that meet the criteria of ASC 310-30 treatment, the carrying amount was as follows:

 
September 30,
2018
  
December 31,
2017
  
September 30,
2019
  
December 31,
2018
 
 (In thousands)  (In thousands) 
Commercial $1,653  $-  
$
1,421
  
$
1,609
 
Mortgage  557   -  
582
  
555
 
Installment  355   -   
329
   
349
 
Total carrying amount  2,565   -  
2,332
  
2,513
 
Allowance for loan losses  -   -   
-
   
-
 
Carrying amount, net of allowance for loan losses $2,565  $-  
$
2,332
  
$
2,513
 

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

The accretable difference on PCI loans is the difference between the expected cash flows and the net present value of expected cash flows with such difference accreted into earnings using the effective yield method over the term of the loans. Accretion recorded as loan interest income totaled $0.03 million and $0.07 million duringis included in the three and nine months ended September 30, 2018, respectively.table below.  Accretable yield of PCI loans, or income expected to be collected follows:

  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2018  2017  2018  2017 
  (unaudited)  (unaudited) 
  (In thousands)  (In thousands) 
             
Balance at beginning of period $533  $-  $-  $- 
New loans purchased  -   -   568   - 
Accretion of income  (32)  -   (67)  - 
Reclassification from (to) nonaccretable difference  -   -   -   - 
Displosals/other adjustments  -   -   -   - 
Balance at end of period $501  $-  $501  $- 

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

PCI loans purchased during 2018 (all relating to the TCSB acquisition) for which it was probable at acquisition that all contractually required payments would not be collected follows:

  (In thousands) 
    
Contractually required payments $4,213 
Non accretable difference  (742)
Cash flows expected to be collected at acquisition  3,471 
Accretable yield  (568)
Fair value of acquired loans at acquisition $2,903 

Income would not be recognized on certain purchased loans if we could not reasonably estimate cash flows to be collected.  We did not have any purchased loans for which we could not reasonably estimate cash flows to be collected.
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2019  2018  2019  2018 
  (unaudited)  (unaudited) 
  (In thousands)  (In thousands) 
             
Balance at beginning of period 
$
749
  
$
533
  
$
462
  
$
-
 
New loans purchased  
-
   
-
   
-
   
568
 
Accretion recorded as loan interest income  
(56
)
  
(32
)
  
(134
)
  
(67
)
Reclassification from (to) nonaccretable difference  
-
   
-
   
365
   
-
 
Displosals/other adjustments  
-
   
-
   
-
   
-
 
Balance at end of period 
$
693
  
$
501
  
$
693
  
$
501
 

5.
Shareholders’ Equity and Earnings Per Common Share

On January 22,In December, 2018, our Board of Directors authorized a share repurchase plan (the “Repurchase Plan”) to buy back up to 5% of our outstanding common stock through December 31, 2018.2019.  In May 2019, we completed the repurchase of 5% of our outstanding common shares.  In June 2019, our Board of Directors authorized a 300,000 share expansion of the 2019 repurchase plan.  We expect to accomplish theany remaining repurchases through open market transactions, though we could affectexecute repurchases through other means, such as privately negotiated transactions.  The timing and amount of any share repurchases will depend on a variety of factors, including, among others, securities law restrictions, the trading price of our common stock, regulatory requirements, potential alternative uses for capital, and our financial performance. The Repurchase Plan does not obligate us to acquire any particular amount of common stock, and it may be modified or suspended at any time at our discretion. We expect to fund any repurchases from cash on hand.  We did not repurchase anyDuring the nine month periods ended September 30, 2019 and 2018 repurchases were made totaling 1,204,688 shares and zero shares of common stock, during the nine months ended September 30, 2018.respectively for an aggregate purchase price of $26.3 million and zero, respectively.

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

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

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 2018  2017  2018  2017  2019  2018  2019  2018 
 (In thousands, except per share data)  (In thousands, except per share data) 
Net income $11,925  $6,859  $29,903  $18,764  
$
12,445
  
$
11,925
  
$
32,556
  
$
29,903
 
                            
Weighted average shares outstanding (1)  24,149   21,334   23,218   21,325  
22,486
  
24,149
  
23,033
  
23,218
 
Stock units for deferred compensation plan for non-employee directors
 
132
  
129
  
131
  
126
 
Effect of stock options  182   138   180   144  
110
  
182
  
116
  
180
 
Stock units for deferred compensation plan for non-employee directors
  129   121   126   120 
Performance share units  55   59   52   57   
42
   
55
   
39
   
52
 
Weighted average shares outstanding for calculation of diluted earnings per share
  24,515   21,652   23,576   21,646   
22,770
   
24,515
   
23,319
   
23,576
 
                            
Net income per common share                            
Basic (1) $0.49  $0.32  $1.29  $0.88  
$
0.55
  
$
0.49
  
$
1.41
  
$
1.29
 
Diluted $0.49  $0.32  $1.27  $0.87  
$
0.55
  
$
0.49
  
$
1.40
  
$
1.27
 

(1)Basic net income per common share includes weighted average common shares outstanding during the period and participating share awards.
(1)
Basic net income per common share includes weighted average common shares outstanding during the period and participating share awards.

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

Weighted average stock options outstanding that were not considered in computing diluted net income per common share because they were anti-dilutive were zero for the three and nine month periods ended September 30, 20182019 and 2017,2018, respectively.

6.
Derivative Financial Instruments

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

3334
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:


  September 30, 2018
 September 30, 2019 
Notional
Amount
  
Average
Maturity
(years)
  
Fair
Value
 
Notional
Amount
  
Average
Maturity
(years)
  
Fair
Value
 
 (Dollars in thousands) 
         
Fair value hedge designation - Pay-fixed interest rate swap agreements
 
$
7,117
  9.6  
$
(391
)
 (Dollars in thousands)          
Cash flow hedge designation                  
Pay-fixed interest rate swap agreements $25,000   2.8  $581  
$
25,000
  1.8  
$
(220
)
Interest rate cap agreements  130,000   3.6   3,391   
150,000
  2.8   
318
 
 $155,000   3.5  $3,972 
            
Total 
$
175,000
  2.7  
$
98
 
                     
No hedge designation                     
Rate-lock mortgage loan commitments $44,609   0.1  $884  $79,446  0.1  $2,051 
Mandatory commitments to sell mortgage loans  65,633   0.1   182  137,315  0.1  (27)
Pay-fixed interest rate swap agreements - commercial  88,657   5.7   2,242  141,427  5.4  (4,849)
Pay-variable interest rate swap agreements - commercial  88,657   5.7   (2,242) 141,427  5.4  4,849 
Purchased options  3,119   2.8   178  3,088  1.8  125 
Written options  3,119   2.8   (178)  3,028  1.8   (124)
Total $293,794   3.5  $1,066  
$
505,731
  3.1  
$
2,025
 



December 31, 2017 

Notional
Amount


Average
Maturity
(years)



Fair
Value
 
(Dollars in thousands)  (Dollars in thousands) 
Cash flow hedge designation                     
Pay-fixed interest rate swap agreements $15,000   3.7  $245  
$
25,000
  2.6  
$
280
 
Interest rate cap agreements  45,000   3.5   976   
150,000
  3.6   
2,245
 
 $60,000   3.6  $1,221 
Total 
$
175,000
  3.5  
$
2,525
 
                     
No hedge designation                     
Rate-lock mortgage loan commitments $25,032   0.1  $530  $32,473  0.1  $687 
Mandatory commitments to sell mortgage loans  56,127   0.1   37  57,583  0.1  (383)
Pay-fixed interest rate swap agreements - commercial  75,990   6.2   292  94,451  5.5  405 
Pay-variable interest rate swap agreements - commercial  75,990   6.2   (292)
 94,451  5.5  (405)
Purchased options  3,119   3.5   322  3,095  2.5  116 
Written options  3,119   3.5   (322)
  3,095  2.5   (116)
Total $239,377   4.1  $567  
$
285,148
  3.7  
$
304
 

3435
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

We use variable-rate and short-term fixed-rate (less than 12 months) debt obligations to fund a portion of our Condensed Consolidated Statements of Financial Condition, which exposes us to variability in interest rates. To meet our asset/liability management objectives, we may periodically enter into derivative financial instruments to mitigate exposure to fluctuations in cash flows resulting from changes in interest rates (“Cash Flow Hedges”).  Cash Flow Hedges included certain pay-fixed interest rate swaps and interest rate cap agreements.  Pay-fixed interest rate swaps convert the variable-rate cash flows on debt obligations to fixed-rates.  Under interest-rate cap agreements, we will receive cash if interest rates rise above a predetermined level. As a result, we effectively have variable-rate debt with an established maximum rate. We pay an upfront premium on interest rate caps which is recognized in earnings in the same period in which the hedged item affects earnings.  Unrecognized premiums from interest rate caps aggregated to $2.3$2.4 million at September 30, 20182019 and $0.9$2.7 million at December 31, 2017.2018.

We record the fair value of Cash Flow Hedges in accrued income and other assets and accrued expenses and other liabilities on our Condensed Consolidated Statements of Financial Condition.  On an ongoing basis, we adjust our Condensed Consolidated Statements of Financial Condition to reflect the then current fair value of Cash Flow Hedges.  The related gains or losses are reported in other comprehensive income or loss and are subsequently reclassified into earnings, as a yield adjustment in the same period in which the related interest on the hedged items (variable-rate debt obligations) affect earnings.  It is anticipated that approximately $0.66$0.03 million, of unrealized gainslosses on Cash Flow Hedges at September 30, 20182019 will be reclassified to earnings over the next twelve months.  To the extent that the Cash Flow Hedges are not effective, the ineffective portion of the Cash Flow Hedges is immediately recognized in interest expense.  The maximum term of the Cash Flow Hedge at September 30, 20182019 is 5.04.0 years.

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

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

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

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

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

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

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

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

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

Fair Values of Derivative Instruments

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

 
 Balance
 Sheet
 Location
 
Fair
Value
 
 Balance
 Sheet
 Location
 
Fair
Value
  
 Balance
 Sheet
 Location
 
Fair
Value
 
 Balance
 Sheet
 Location
 
Fair
Value
 
  (In thousands)
Derivatives designated as hedging instruments
                  
Pay-fixed interest rate swap agreements
 
Other assets
 
$
-
 
Other assets
 
$
280
  Other liabilities 
$
611
 
Other liabilities
 
$
-
 
Interest rate cap agreements
 
Other assets
  
318
 
Other assets
  
2,245
  
Other liabilities
  
-
 
Other liabilities
  
-
 
     
318
    
2,525
     
611
    
-
 
Derivatives not designated as hedging instruments
                      
Rate-lock mortgage loan commitments
 
Other assets
  
2,051
 
Other assets
  
687
  
Other liabilities
  
-
 
Other liabilities
  
-
 
Mandatory commitments to sell mortgage loans
 
Other assets
  
-
 
Other assets
  
-
  
Other liabilities
  
27
 
Other liabilities
  
383
 
Pay-fixed interest rate swap agreements - commercial
 
Other assets
  
23
 
Other assets
  
1,116
  
Other liabilities
  
4,872
 
Other liabilities
  
711
 
Pay-variable interest rate swap agreements - commercial
 
Other assets
  
4,872
 
Other assets
  
711
  
Other liabilities
  
23
 
Other liabilities
  
1,116
 
Purchased options 
Other assets
  
125
 
Other assets
  
116
  
Other liabilities
  
-
 
Other liabilities
  
-
 
Written options 
Other assets
  
-
 
Other assets
  
-
  
Other liabilities
  
124
 
Other liabilities
  
116
 
     7,071
    2,630
     5,046
    2,326
 
Total derivatives   
$
7,389
   
$
5,155
    
$
5,657
   
$
2,326
 
  Asset Derivatives  Liability Derivatives 
 
September 30,
2018
 
 December 31,
2017
 
September 30,
2018
 
December 31,
2017
 
 
 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
 $581 
Other assets
 $245 
Other liabilities
 $- 
Other liabilities
 $- 
Interest rate cap agreements
Other assets
  3,391 
Other assets
  976 
Other liabilities
  - 
Other liabilities
  - 
    3,972    1,221    -    - 
Derivatives not designated as hedging instruments
                    
Rate-lock mortgage loan commitments
Other assets
  884 
Other assets
  530 
Other liabilities
  - 
Other liabilities
  - 


    
    
    
    
Mandatory commitments to sell mortgage loans
Other assets
  182 
Other assets
  37 
Other liabilities
  - 
Other liabilities
  - 


    
    
    
    
Pay-fixed interest rate swap agreements - commercial
Other assets
  2,380 
Other assets
  631 
Other liabilities
  138 
Other liabilities
  339 


    
    
    
    
Pay-variable interest rate swap agreements - commercial
Other assets
  138 
Other assets
  339 
Other liabilities
  2,380 
Other liabilities
  631 

     
    
    
    
Purchased options
Other assets
  178 
Other assets
  322 
Other liabilities
  - 
Other liabilities
  - 


    
    
    
    
Written options
Other assets
  - 
Other assets
  - 
Other liabilities
  178 
Otherliabilities
  322 
    3,762    1,859    2,696    1,292 
Total derivatives  $7,734   $3,080   $2,696   $1,292 

3638
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

Three Month Periods Ended September 30,
Three Month Periods Ended September 30,Three Month Periods Ended September 30, 


Gain
Recognized in
Other
Comprehensive
Income (Loss)
(Effective Portion)

 Location of
 Gain (Loss)
 Reclassified
 from
 Accumulated
 Other
 Comprehensive
 Loss into
 Income
 (Effective
 Portion)

Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective Portion)

 Location of
 Gain
 Recognized
 in Income (1)

Gain
Recognized
in Income (1)

 
Gain (Loss)
Recognized in
Other
Comprehensive
Income (Loss)
(Effective Portion)
 
 Location of
 Gain
 Reclassified
 from
 Accumulated
 Other
 Comprehensive
 Loss into
 Income
 (Effective
 
Gain
Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective Portion)
 
 Location of
 Gain (Loss)
 Recognized
 
Gain (Loss)
Recognized
in Income (1)
 
2018  20172018  20172018  2017 2019  2018  Portion) 2019  2018  in Income (1) 2019  2018 

(In thousands)  (In thousands) 







 




        
Fair Value Hedges                    
Pay-fixed interest rate swap agreements
             
Non-interest income-other
 
$
(188
)
 
$
-
 
Cash Flow Hedges
  
 
    
 


                               
Interest rate cap agreements

$297

$-
Interest expense

$67

$-
Interest expense $-  $-  
$
(37
)
 
$
297
 
Interest expense
 
$
88
  
$
67
 
Interest expense
 
$
-
  
$
-
 
Pay-fixed interest rate swap agreements


92
 
95 Interest expense 
6
 
(5)
Interest expense
  16   5   
(35
)
  
92
 
Interest expense
  
14
   
6
 Interest expense  
-
   
16
 
Total
$389
 $95  
$73
 $(5)  $16  $5  
$
(72
)
 
$
389
   
$
102
  
$
73
   
$
-
  
$
16
 


 
 
 
 

 
 
                               
No hedge designation


 
 
 

 
 
                               
Rate-lock mortgage loan commitments


 
 
 
 

 
 
  
Net gains on mortgage loans
 $(318) $(313)             
Net gains on mortgage loans
 
$
(96
)
 
$
(318
)
Mandatory commitments to sell mortgage loans



 
 
 

 
 
  Net gains on mortgage loans  415   2              
Net gains on mortgage loans
 
307
  
415
 
Pay-fixed interest rate swap agreements - commercial


 
 
 
 

 
 
  
Interest income
  407   52              
Interest income
 
(1,670
)
 
407
 
Pay-variable interest rate swap agreements - commercial


 
 
 
 

 
 
  
Interest income
  (407)  (52)             
Interest income
 
1,670
  
(407
)
Purchased options

 
 
 
  
 
 
  
Interest expense
  (45)  5              
Interest income
 
(46
)
 
(45
)
Written options

 
 
 
 

 
 
  
Interest expense
  45   (5)             
Interest income
  
46
   
45
 
Total

 
 
 
 

 
 
  
 $97  $(311)                    
$
211
  
$
97
 

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

3739
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Nine Month Periods Ended September 30,
Nine Month Periods Ended September 30,Nine Month Periods Ended September 30, 


Gain
Recognized in
Other
Comprehensive
Income (Loss)
(Effective Portion)

 Location of
 Gain (Loss)
 Reclassified
 from
 Accumulated
 Other
 Comprehensive
 Loss into
 Income
 (Effective
 Portion)

Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective Portion)

 Location of
 Gain
 Recognized
 in Income (1)

Gain
Recognized
in Income (1)

 
Gain (Loss)
Recognized in
Other
Comprehensive
Income (Loss)
(Effective Portion)
 
 Location of
 Gain
 Reclassified
 from
 Accumulated
 Other
 Comprehensive
 Loss into
 Income
 (Effective
 
Gain
Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective Portion)
 
 Location of
 Gain (Loss)
 Recognized
 
Gain (Loss)
Recognized
in Income (1)
 
2018
 20172018

20172018
 2017 2019  2018  Portion) 2019  2018  in Income (1) 2019  2018 
 (In thousands)  (In thousands) 
Fair Value Hedges                    
Pay-fixed interest rate swap agreements
             Non-interest income-other 
$
(391
)
 
$
-
 
Cash Flow Hedges                                        
Interest rate cap agreements
 $1,054  $- 
Interest expense
 $119  $- 
Interest expense
 $-  $-  
$
(1,311
)
 
$
1,054
 
Interest expense
 
$
321
  
$
119
 
Interest expense
 
$
-
  
$
-
 
Pay-fixed interest rate swap agreements
  346   95 
Interest expense
  13   (5)
Interest expense
  4   5   
(429
)
  
346
 
Interest expense
  
72
   
13
 
Interest expense
  
-
   
4
 
Total $1,400  $95   $132  $(5)  $4  $5  
$
(1,740
)
 
$
1,400
   
$
393
  
$
132
   
$
-
  
$
4
 
                    
No hedge designation                                             
Rate-lock mortgage loan commitments
                 
Net gains on mortgage loans
 $354  $123              
Net gains on mortgage loans
 
$
1,364
  
$
354
 
Mandatory commitments to sell mortgage loans
                Net gains on mortgage loans  145   (604)             
Net gains on mortgage loans
 
356
  
145
 
Pay-fixed interest rate swap agreements - commercial
                 
Interest income
  1,950   (197)             
Interest income
 
(5,254
)
 
1,950
 
Pay-variable interest rate swap agreements - commercial
                 Interest income  (1,950)  197              
Interest income
 
5,254
  
(1,950
)
Purchased options                 
Interest expense
  (144)  39              Interest expense 
9
  
(144
)
Written options                 
Interest expense
  144   (39)             Interest expense  
(8
)
  
144
 
Total                 
 $499  $(481)                    
$
1,721
  
$
499
 

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

3840
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

7.  Intangible Assets
7.
Goodwill and other Intangibles

The following table summarizes intangible assets, net of amortization:



September 30, 2018

December 31, 2017
 September 30, 2019  December 31, 2018 
Gross
Carrying
Amount


Accumulated
Amortization
Gross
Carrying
Amount


Accumulated
Amortization
 
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Gross
Carrying
Amount
  
Accumulated
Amortization
 
(In thousands) (In thousands) 
                        
Amortized intangible assets - core deposits $11,916  $5,207  $6,118  $4,532  
$
11,916
  
$
6,318
  
$
11,916
  
$
5,501
 
Unamortized intangible assets - goodwill $28,300      $-      
$
28,300
     
$
28,300
    

The $5.8 million and $28.3 million increases in the gross carrying amountA summary of core deposit intangibles and goodwill, respectively are the result of our acquisition of TCSB (see note #16).  There is no expected residual value relating to theestimated core deposit intangible asset which is expected to be amortized over a period of 10 years (weighted average of 5.2 years).  In the third quarter of 2018, goodwill was reduced by $0.7 million (to $28.3 million) related to the collection of a TCSB acquired loan that had been charged off in full prior to the Merger. Because of the status of the collection activities related to this loanamortization at the time of the Merger, we determined that this transaction was a measurement period adjustment and reduced goodwill accordingly.

Amortization of other intangibles has been estimated through 2022 in the following table.


  (In thousands)
   
Three months ending December 31, 2018 $293 
2019  1,089 
2020  1,020 
2021  970 
2022  785 
2023 and thereafter  2,552 
Total $6,709 

Changes in the carrying amount of goodwill for the nine month period ending September 30, 20182019 follows:

  (In thousands) 
    
Balance at beginning of year $- 
Acquired during the year  28,300 
Balance at end of the period $28,300 
  
(In thousands)
 
    
Three months ending December 31, 2019 
$
272
 
2020  
1,020
 
2021  
970
 
2022  
785
 
2023  
547
 
2024 and thereafter  
2,004
 
Total 
$
5,598
 

39
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

8.  Share Based Compensation
8.
Share Based Compensation

We maintain share based payment plans that include a non-employee director stock purchase plan and a long-term incentive plan that permits the issuance of share based compensation, including stock options and non-vested share awards. The long-term incentive plan, which is shareholder approved, permits the grant of additional share based awards for up to 0.5 million shares of common stock as of September 30, 2018.2019.  The non-employee director stock purchase plan permits the issuance of additional share based payments for up to 0.2 million shares of common stock as of September 30, 2018.2019. Share based awards and payments are measured at fair value at the date of grant and are expensed over the requisite service period. Common shares issued upon exercise of stock options come from currently authorized but unissued shares.

During the nine month periods ended September 30, 2018A summary of restricted stock and 2017,performance stock units (“PSU”) granted pursuant to our long-term incentive plan we granted 0.05follows:

  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2019  2018  2019  2018 
    
Restricted stock  
8,000
   
-
   
64,267
   
53,420
 
PSU  
-
   
-
   
22,016
   
19,986
 

Except for 0.008 million shares of restricted stock during each period, and 0.02 million performance stock units (“PSU”), during each period to certain officers.  No long term incentive grants were madeissued during the three months ended September 30, 2018third quarter of 2019 and 2017.  Except for 0.002 million shares of restricted stock issued induring the first quarters of 2019 and 2018  that vest ratably over three years, 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 based on a comparison of our total shareholder return over the three year period starting on the grant date to the total shareholder return over that period for a banking index of our peers.

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

Our directors may elect to receive a portion of their quarterly cash retainer fees in the form of common stock (either on a current basis or on a deferred basis pursuant to the non-employee director stock purchase plan referenced above). Shares equal in value to that portion of each director’s fees that he or she has elected to receive in stock are issued each quarter and vest immediately.  We issued 0.0070.008 million shares and 0.0060.007 million shares during the nine monthsmonth periods ended September 30, 2019 and 2018, and 2017, respectively, pursuant to this plan 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 $1.1$1.2 million during the three and nine month periods ended September 30, 2018,2019, respectively, and was $0.4 million and $1.2$1.1 million during the same periods in 2017,2018, respectively.  The corresponding tax benefit relating to this expense was $0.1 million and $0.2 million for the three and nine month periods ended September 30, 2018,2019, respectively and $0.1 million and $0.4$0.2 million for the same periods in 2017.2018. Total expense recognized for non-employee director share based payments was $0.05$0.06 million and $0.16$0.18 million during the three and nine month periods ended September 30, 2018,2019, respectively, and was $0.05 million and $0.12$0.16 million during the same periods in 2017,2018, respectively.  The corresponding tax benefit relating to this expense was $0.01 million and $0.03$0.04 million for the three and nine month periods ended September 30, 2018,2019, respectively and $0.02$0.01 million and $0.04$0.03 million during the same periods in 2017.2018.

At September 30, 2018,2019, the total expected compensation cost related to non-vested restricted stock and PSUs not yet recognized was $2.4$2.5 million.  The weighted-average period over which this amount will be recognized is 2.01.9 years.

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

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, 2018  176,055  $5.24       
Issued for acquisition (see note #16)  187,915   9.94       
Exercised  (113,548)  9.18       
Forfeited  -           
Expired  -           
Outstanding at September 30, 2018  250,422  $6.98   4.7  $4,174 
                 
Vested and expected to vest at September 30, 2018
  250,422  $6.98   4.7  $4,174 
Exercisable at September 30, 2018  250,422  $6.98   4.7  $4,174 
  
Number of
Shares
  
Average
Exercise
Price
  
Weighted-
Average
Remaining
Contractual
Term (Years)
  
Aggregated
Intrinsic
Value
 
           (In thousands) 
Outstanding at January 1, 2019  
211,421
  
$
6.48
       
Granted  
-
           
Exercised  
(70,299
)
  
9.98
       
Forfeited  
-
           
Expired  
(1,116
)
  
22.35
       
Outstanding at September 30, 2019  
140,006
  
$
4.60
   
3.2
  
$
2,340
 
Vested and expected to vest at September 30, 2019
  
140,006
  
$
4.60
   
3.2
  
$
2,340
 
Exercisable at September 30, 2019  
140,006
  
$
4.60
   
3.2
  
$
2,340
 

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, 2018  290,527  $15.88 
Granted  73,406   23.62 
Vested  (96,255)  13.17 
Forfeited  (8,259)  18.53 
Outstanding at September 30, 2018  259,419  $19.00 

A summary of weighted-average assumptions used in the Black-Scholes option pricing model for the issue of stock options relating to the acquisition of TCSB (see note #16) during the second quarter of 2018 follows:

Expected dividend yield  2.62%
Risk-free interest rate  2.40 
Expected life (in years)  3.14 
Expected volatility  45.99%
Per share weighted-average fair value $13.25 

The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life was obtained using a simplified method that, in general, averaged the vesting term and original contractual term of the stock option. This method was used as relevant historical data of actual exercise activity was very limited. The expected volatility was based on historical volatility of our common stock.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
  
Number
of Shares
  
Weighted-
Average
Grant Date
Fair Value
 
Outstanding at January 1, 2019  
258,419
  
$
19.00
 
Granted  
86,283
   
22.87
 
Vested  
(85,978
)
  
14.57
 
Forfeited  
(12,998
)
  
22.85
 
Outstanding at September 30, 2019  
245,726
  
$
21.72
 

Certain information regarding options exercised during the periods follows:

  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
2018  2017  2018  2017 2019  2018  2019  2018 
(In thousands)  (In thousands) 
Intrinsic value $153  $39  $1,827  $513  
$
32
  
$
153
  
$
868
  
$
1,827
 
Cash proceeds received $58  $18  $1,042  $117  
$
6
  
$
58
  
$
701
  
$
1,042
 
Tax benefit realized $32  $14  $384  $180  
$
6
  
$
32
  
$
182
  
$
384
 

9.  Income Tax
9.
Income Tax

Income tax expense was $2.9$3.1 million and $3.2$2.9 million during the three month periods ended September 30, 20182019 and 2017,2018, respectively and $7.0$8.0 million and $8.4$7.0 million during the nine months ended September 30, 2019 and 2018, and 2017, respectively.  On December 22, 2017, "H.R. 1" (also known as the "Tax Cuts and Jobs Act") was signed into law.  H.R. 1, among other things, reduced the federal corporate income tax rate to 21% effective January 1, 2018 from 35% during 2017.

Our actual federal income tax expense is different than the amount computed by applying our statutory income tax rate to our income before income tax primarily due to tax-exempt interest income and tax-exempt income from the increase in the cash surrender value on life insurance.  In addition, the three and nine month periods ending September 30, 20182019 include reductions of $0.01 million and $0.33$0.18 million, respectively, of income tax expense related to the impact of the excess value of stock awards that vested and stock options that were exercised as compared to the initial fair values that were expensed.  These amounts during the same periods in 20172018 were $0.02$0.01 million and $0.23$0.33 million, respectively.

We assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  The ultimate realization of this asset is primarily based on generating future income.  We concluded at bothSeptember 30, 2019, September 30, 2018 and 2017,December 31, 2018 that the realization of substantially all of our deferred tax assets continues to be more likely than not.

At both September 30, 20182019 and December 31, 2017,2018, we had approximately $0.7$0.6 million, of gross unrecognized tax benefits.  We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease during the balance of 2018.2019.

10.  43
Regulatory MattersNOTES 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 September 30, 2018,2019, the Bank had positive undivided profits of $27.2$38.3 million.  It is not our intent to have dividends paid in amounts that would reduce the capital of our Bank to levels below those which we consider prudent and in accordance with guidelines of regulatory authorities.

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

We are also subject to various regulatory capital requirements. The prompt corrective action regulations establish quantitative measures to ensure capital adequacy and require minimum amounts and ratios of total, Tier 1, and common equity Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. Failure to meet minimum capital requirements can result in certain mandatory, and possibly discretionary, actions by regulators that could have a material effect on our interim condensed consolidated financial statements. Under capital adequacy guidelines, we must meet specific capital requirements that involve quantitative measures as well as qualitative judgments by the regulators. The most recent regulatory filings as of September 30, 20182019 and December 31, 2017,2018, categorized our Bank as well capitalized. Management is not aware of any conditions or events that would have changed the most recent Federal Deposit Insurance Corporation (“FDIC”) categorization.

On July 2, 2013, the Federal Reserve approved a final rule that establishes an integrated regulatory capital framework (the “New Capital Rules”). The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act.  In general, under the New Capital Rules, minimum requirements have increased for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the New Capital Rules include a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions.  The capital conservation buffer began to phase in on January 1, 2016 with 1.875% and 1.25% added to the minimum ratio for adequately capitalized institutions for 2018 and 2017, respectively and 0.625% will be added each subsequent year until fully phased in during 2019.  This capital conservation buffer is not reflected in the table that follows.  To avoid limits on capital distributions and certain discretionary bonus payments we must meet the minimum ratio for adequately capitalized institutions plus the phased in buffer.  The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations.  As to the quality of capital, the New Capital Rules emphasize common equity Tier 1 capital, the most loss-absorbing form of capital, and implement strict eligibility criteria for regulatory capital instruments. The New Capital Rules also change the methodology for calculating risk-weighted assets to enhance risk sensitivity.

4344
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Our actual capital amounts and ratios follow:follow (1):



Actual

Minimum for
Adequately Capitalized
Institutions


Minimum for
Well-Capitalized
Institutions

 Actual  
Minimum for
Adequately Capitalized
Institutions
  
Minimum for
Well-Capitalized
Institutions
 
Amount  RatioAmount

RatioAmount

Ratio Amount  Ratio  Amount  Ratio  Amount  Ratio 
(Dollars in thousands) (Dollars in thousands) 
                                    
September 30, 2018                  
September 30, 2019                  
Total capital to risk-weighted assets                                    
Consolidated $373,748   14.57% $205,173   8.00% NA  NA  
$
369,923
  
13.39
%
 
$
221,065
  
8.00
%
 NA  NA 
Independent Bank  337,905   13.18   205,044   8.00  $256,305   10.00% 
352,432
  
12.76
  
220,984
  
8.00
  
$
276,230
  
10.00
%
                                          
Tier 1 capital to risk-weighted assets                                          
Consolidated $348,228   13.58% $153,880   6.00% NA  NA  
$
342,138
  
12.38
%
 
$
165,799
  
6.00
%
 NA  NA 
Independent Bank  312,385   12.19   153,783   6.00  $205,044   8.00% 
324,647
  
11.75
  
165,738
  
6.00
  
$
220,984
  
8.00
%
                                          
Common equity tier 1 capital to risk-weighted assets                                          
Consolidated $310,081   12.09% $115,410   4.50% NA  NA  
$
303,923
  
11.00
%
 
$
124,349
  
4.50
%
 NA  NA 
Independent Bank  312,385   12.19   115,337   4.50  $166,598   6.50% 
324,647
  
11.75
  
124,304
  
4.50
  
$
179,550
  
6.50
%
                                          
Tier 1 capital to average assets                                          
Consolidated $348,228   10.84% $128,543   4.00% NA  NA  
$
342,138
  
9.93
%
 
$
137,762
  
4.00
%
 NA  NA 
Independent Bank  312,385   9.73   128,376   4.00  $160,469   5.00% 
324,647
  
9.43
  
137,736
  
4.00
  
$
172,170
  
5.00
%
                                          
December 31, 2017                        
December 31, 2018                  
Total capital to risk-weighted assets                                          
Consolidated $312,163   15.16% $164,782   8.00% NA  NA  
$
371,603
  
14.25
%
 
$
208,572
  
8.00
%
 NA  NA 
Independent Bank  290,188   14.10   164,675   8.00  $205,843   10.00% 
337,227
  
12.94
  
208,456
  
8.00
  
$
260,569
  
10.00
%
                                          
Tier 1 capital to risk-weighted assets                                          
Consolidated $288,451   14.00% $123,586   6.00% NA  NA  
$
345,419
  
13.25
%
 
$
156,429
  
6.00
%
 NA  NA 
Independent Bank  266,476   12.95   123,506   6.00  $164,675   8.00% 
311,043
  
11.94
  
156,342
  
6.00
  
$
208,456
  
8.00
%
                                          
Common equity tier 1 capital to risk-weighted assets
                                          
Consolidated $255,934   12.43% $92,690   4.50% NA  NA  
$
307,255
  
11.79
%
 
$
117,322
  
4.50
%
 NA  NA 
Independent Bank  266,476   12.95   92,630   4.50  $133,798   6.50% 
311,043
  
11.94
  
117,256
  
4.50
  
$
169,370
  
6.50
%
                                          
Tier 1 capital to average assets                                          
Consolidated $288,451   10.57% $109,209   4.00% NA  NA  
$
345,419
  
10.47
%
 
$
131,930
  
4.00
%
 NA  NA 
Independent Bank  266,476   9.78   109,041   4.00  $136,301   5.00% 
311,043
  
9.44
  
131,778
  
4.00
  
$
164,723
  
5.00
%

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

4445
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The components of our regulatory capital are as follows:



Consolidated

Independent Bank
 Consolidated  Independent Bank 
September 30,
2018


December 31,
2017
September 30,
2018


December 31,
2017
 
September 30,
2019
  
December 31,
2018
  
September 30,
2019
  
December 31,
2018
 
 (In thousands)  (In thousands) 
Total shareholders' equity $345,204  $264,933  $343,351  $269,481 

                
Total shareholders’ equity 
$
340,245
  
$
338,994
  
$
360,969
  
$
341,496
 
Add (deduct)
                            
Accumulated other comprehensive loss for regulatory purposes
  4,092   201   4,092   201 
Accumulated other comprehensive (income) loss for regulatory purposes
 
(2,424
)
 
4,311
  
(2,424
)
 
4,311
 
Goodwill and other intangibles  (35,009)  (1,269)  (35,009)  (1,269) 
(33,898
)
 
(34,715
)
 
(33,898
)
 
(34,715
)
Disallowed deferred tax assets  (4,206)  (7,931)  (49)  (1,937)  
-
   
(1,335
)
  
-
   
(49
)
Common equity tier 1 capital  310,081   255,934   312,385   266,476  
303,923
  
307,255
  
324,647
  
311,043
 
Qualifying trust preferred securities  38,147   34,500   -   -   
38,215
   
38,164
   
-
   
-
 
Disallowed deferred tax assets  -   (1,983)  -   - 
Tier 1 capital  348,228   288,451   312,385   266,476  
342,138
  
345,419
  
324,647
  
311,043
 
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets
  25,520   23,712   25,520   23,712   
27,785
   
26,184
   
27,785
   
26,184
 
Total risk-based capital $373,748  $312,163  $337,905  $290,188  
$
369,923
  
$
371,603
  
$
352,432
  
$
337,227
 

11.
Fair Value Disclosures

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

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

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

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

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

4546
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

Securities:  Where quoted market prices are available in an active market, securities (equity securities at fair value trading or available for sale) are classified as Level 1 of the valuation hierarchy.  Level 1 securities include certain preferred stocks included in our equity securities at fair value (trading securities as of December 31, 2017) for which there are quoted prices in active markets and US Treasuries (at December 31, 2017) in our securities available for sale portfolio.2018).  If quoted market prices are not available for the specific security, then fair values are estimated by (1) using quoted market prices of securities with similar characteristics, (2) matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or (3) a discounted cash flow analysis whose significant fair value inputs can generally be verified and do not typically involve judgment by management. These securities are classified as Level 2 of the valuation hierarchy and primarily include agency securities, private label mortgage-backed securities, other asset backed securities, obligations of states and political subdivisions, trust preferred securities, corporate securities and foreign government securities.

Loans held for sale:  The fair value of mortgage loans held for sale, carried at fair value is based on agency cash window loan pricing for comparable assets (recurring Level 2) and the fair value of mortgage loans held for sale, carried at the lower of cost or fair value (December 31, 2018) is based on a quoted sales price (non-recurring Level 1).  The fair value of Loans held for sale, carried at the lower of cost or fair value at September 30, 2019 exceeded their cost and therefore were carried at cost and not included in the table that follows.

Impaired loans with specific loss allocations based on collateral value:  From time to time, certain loans are considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. We measure our investment in an impaired loan based on one of three methods: the loan’s observable market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. Those impaired loans not requiring an allowance for loan losses represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 20182019 and December 31, 2017,2018, all of our impaired loans were evaluated based on either the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. When the fair value of the collateral is based on an appraised value or when an appraised value is not available we record the impaired loan as nonrecurring Level 3.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and thus will typically result in a Level 3 classification of the inputs for determining fair value.

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

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

46
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
 (unaudited)

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

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

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

4748
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
Measure-
ments


Fair Value Measurements Using
     Fair Value Measurements Using 
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)


Significant
Other
Observable
Inputs
(Level 2)


Significant
Un-
observable
Inputs
(Level 3)

 
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)  (In thousands) 
September 30, 2018:            
September 30, 2019:            
Measured at Fair Value on a Recurring Basis                        
Assets                        
Equity securities at fair value $285  $285  $-  $- 
Securities available for sale                            
U.S. agency  20,423   -   20,423   -  
$
15,283
  
$
-
  
$
15,283
  
$
-
 
U.S. agency residential mortgage-backed  125,061   -   125,061   -  
147,720
  
-
  
147,720
  
-
 
U.S. agency commercial mortgage-backed  5,815   -   5,815   -  
11,319
  
-
  
11,319
  
-
 
Private label mortgage-backed  28,973   -   28,973   -  
31,826
  
-
  
31,826
  
-
 
Other asset backed  78,526   -   78,526   -  
94,785
  
-
  
94,785
  
-
 
Obligations of states and political subdivisions  139,654   -   139,654   -  
101,139
  
-
  
101,139
  
-
 
Corporate  34,570   -   34,570   -  
33,678
  
-
  
33,678
  
-
 
Trust preferred  1,925   -   1,925   -  
1,820
  
-
  
1,820
  
-
 
Foreign government  2,010   -   2,010   -  
2,022
  
-
  
2,022
  
-
 
Loans held for sale  41,325   -   41,325   - 
Loans held for sale, carried at fair value 
87,358
  
-
  
87,358
  
-
 
Capitalized mortgage loan servicing rights  23,151   -   -   23,151  
16,906
  
-
  
-
  
16,906
 
Derivatives (1)  7,734   -   7,734   -  
7,389
  
-
  
7,389
  
-
 
Liabilities                            
Derivatives (2)  2,696   -   2,696   -  
5,657
  
-
  
5,657
  
-
 
                            
Measured at Fair Value on a Non-recurring basis:                
Measured at Fair Value on a Non-recurring Basis:            
Assets                            
Impaired loans (3)                            
Commercial                            
Income producing - real estate  225   -   -   225  
115
  
-
  
-
  
115
 
Land, land development & construction-real estate
 
87
  
-
  
-
  
87
 
Commercial and industrial  944   -   -   944  
706
  
-
  
-
  
706
 
Mortgage                            
1-4 family  334   -   -   334  
666
  
-
  
-
  
666
 
Resort lending  264   -   -   264  
60
  
-
  
-
  
60
 
Home equity - 1st lien 
83
  
-
  
-
  
83
 
Home equity - 2nd lien 
199
  
-
  
-
  
199
 
Installment            
Home equity - 1st lien 
9
  
-
  
-
  
9
 
Home equity - 2nd lien 
70
  
-
  
-
  
70
 
Boat lending 
103
  
-
  
-
  
103
 
Recreational vehicle lending 
1
  
-
  
-
  
1
 
Other 
86
  
-
  
-
  
86
 
Other real estate (4)                            
Mortgage                            
1-4 family  94   -   -   94  
23
  
-
  
-
  
23
 
Resort lending  1   -   -   1 
Home equity - 2nd lien 
57
  
-
  
-
  
57
 

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

4849
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Fair Value
Measure-
ments


Fair Value Measurements Using
    Fair Value Measurements Using 
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)


Significant
Other
Observable
Inputs
(Level 2)


Significant
Un-
observable
Inputs
(Level 3)
 
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)  (In thousands) 
December 31, 2017:            
Measured at Fair Value on a Recurring Basis:            
December 31, 2018:            
Measured at Fair Value on a Recurring Basis            
Assets                        
Trading securities $455  $455  $-  $- 
Equity securities at fair value 
$
393
  
$
393
  
$
-
  
$
-
 
Securities available for sale                            
U.S. Treasury  898   898   -   - 
U.S. agency  25,682   -   25,682   -  
20,014
  
-
  
20,014
  
-
 
U.S. agency residential mortgage-backed  137,918   -   137,918   -  
123,751
  
-
  
123,751
  
-
 
U.S. agency commercial mortgage-backed  9,760   -   9,760   -  
5,726
  
-
  
5,726
  
-
 
Private label mortgage-backed  29,109   -   29,109   -  
29,419
  
-
  
29,419
  
-
 
Other asset backed  93,898   -   93,898   -  
83,319
  
-
  
83,319
  
-
 
Obligations of states and political subdivisions  172,945   -   172,945   -  
127,555
  
-
  
127,555
  
-
 
Corporate  47,853   -   47,853   -  
34,309
  
-
  
34,309
  
-
 
Trust preferred  2,802   -   2,802   -  
1,819
  
-
  
1,819
  
-
 
Foreign government  2,060   -   2,060   -  
2,014
  
-
  
2,014
  
-
 
Loans held for sale  39,436   -   39,436   - 
Loans held for sale, carried at fair value 
44,753
  
-
  
44,753
  
-
 
Capitalized mortgage loan servicing rights  15,699   -   -   15,699  
21,400
  
-
  
-
  
21,400
 
Derivatives (1)  3,080   -   3,080   -  
5,155
  
-
  
5,155
  
-
 
Liabilities                            
Derivatives (2)  1,292   -   1,292   -  
2,326
  
-
  
2,326
  
-
 
                            
Measured at Fair Value on a Non-recurring basis:                
Measured at Fair Value on a Non-recurring Basis:            
Assets                            
Loans held for sale, carried at the lower of cost or fair value
 
41,471
  
41,471
  
-
  
-
 
Impaired loans (3)                            
Commercial                            
Income producing - real estate  274   -   -   274  
217
  
-
  
-
  
217
 
Land, land development & construction-real estate
  9   -   -   9  
106
  
-
  
-
  
106
 
Commercial and industrial  1,051   -   -   1,051  
2,243
  
-
  
-
  
2,243
 
Mortgage                            
1-4 family  339   -   -   339  
333
  
-
  
-
  
333
 
Resort lending  207   -   -   207  
572
  
-
  
-
  
572
 
Other real estate (4)                            
Mortgage                            
1-4 family  186   -   -   186  
95
  
-
  
-
  
95
 
Resort lending  65   -   -   65 
Home equity - 2nd lien 
59
  
-
  
-
  
59
 

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

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 20182019 and 2017.2018.

4950
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 nine-Month Periods
Ended September 30 for Items Measured at Fair Value
Pursuant to Election of the Fair Value Option
   
Changes in Fair Values for the Nine-Month Periods
Ended September 30 for Items Measured at Fair Value
Pursuant to Election of the Fair Value Option
 

Net Gains (Losses)
on Assets
  
Mortgage
Loan
Servicing, net
  
Total
Change
in Fair
Values
Included
in Current
Period
Earnings
 
Net Gains (Losses)
on Assets
  Mortgage  
Total
Change
in Fair
Values
Included
in Current
 

Securities
  
Mortgage
Loans
  
Securities
  
Mortgage
Loans
  
Loan
Servicing, net
  
Period
Earnings
 
 (In thousands) 
2019            
Equity securities at fair value 
$
167
  
$
-
  
$
-
  
$
167
 
Loans held for sale 
-
  
822
  
-
  
822
 
Capitalized mortgage loan servicing rights 
-
  
-
  
(9,258
)
 
(9,258
)
 (In thousands)             
2018                        
Equity securities at fair value $(170) $-  $-  $(170) 
$
(170
)
 
$
-
  
$
-
  
$
(170
)
Loans held for sale  -   (120)  -   (120) 
-
  
(120
)
 
-
  
(120
)
Capitalized mortgage loan servicing rights  -   -   694   694  
-
  
-
  
694
  
694
 
     ��          
2017                
Trading securities $(63) $-  $-  $(63)
Loans held for sale  -   713   -   713 
Capitalized mortgage loan servicing rights  -   -   (2,585)  (2,585)

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

The following represent impairment charges recognized during the three and nine month periods ended September 30, 20182019 and 20172018 relating to assets measured at fair value on a non-recurring basis:

Loans which are measured for impairment using the fair value of collateral for collateral dependent loans had a carrying amount of $2.2 million, which is net of a valuation allowance of $0.9 million at September 30, 2019, and had a carrying amount of $3.5 million, which is net of a valuation allowance of $1.5 million at December 31, 2018.  The provision for loan losses included in our results of operations relating to impaired loans was a net expense of $0.5 million and $0.1 million for the three month periods ending September 30, 2019 and 2018, respectively, and a net expense of $0.8 million and $0.5 million for the nine month periods ending September 30, 2019 and 2018, respectively.
Other real estate, which is measured using the fair value of the property, had a carrying amount of $0.1 million which is net of a valuation allowance of $0.1 million at September 30, 2019, and a carrying amount of $0.2 million, which is net of a valuation allowance of $0.1 million, at December 31, 2018. Charges included in our results of operations relating to other real estate measured at fair value were $0.07 million and $0.08 million during the three and nine month periods ended September 30, 2019, and were $0.04 million during each of the three and nine month periods ended September 30, 2018.

·
Loans which are measured for impairment using the fair value of collateral for collateral dependent loans had a carrying amount of $1.8 million, which is net of a valuation allowance of $0.8 million at September 30, 2018, and had a carrying amount of $1.9 million, which is net of a valuation allowance of $0.7 million at December 31, 2017.  The provision for loan losses included in our results of operations relating to impaired loans was a net expense of $0.1 million and $0.3 million for the three month periods ending September 30, 2018 and 2017, respectively, and a net expense of $0.5 million for both nine month periods ending September 30, 2018 and 2017, respectively.

·
Other real estate, which is measured using the fair value of the property, had a carrying amount of $0.1 million which is net of a valuation allowance of $0.1 million at September 30, 2018, and a carrying amount of $0.3 million, which is net of a valuation allowance of $0.1 million, at December 31, 2017. Additional charges relating to other real estate measured at fair value of $0.04 million and $0.04 million were included in our results of operations during the three and nine month periods ended September 30, 2018, respectively and $0.03 million and $0.04 million during the same periods in 2017.

5051
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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


 Capitalized Mortgage Loan Servicing Rights  Capitalized Mortgage Loan Servicing Rights 

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 

 2018  2017  2018  2017  2019  2018  2019  2018 
 (In thousands)  (In thousands)  (In thousands)  (In thousands) 
Beginning balance $21,848  $14,515  $15,699  $-  
$
17,894
  
$
21,848
  
$
21,400
  
$
15,699
 
Change in accounting  -   -   -   14,213 
Beginning balance, as adjusted  21,848   14,515   15,699   14,213 
Total gains (losses) realized and unrealized:                            
Included in results of operations  (198)  (1,090)  694   (2,585) 
(3,145
)
 
(198
)
 
(9,258
)
 
694
 
Included in other comprehensive income (loss)  -   -   -   -  
-
  
-
  
-
  
-
 
Purchases, issuances, settlements, maturities and calls  1,501   1,250   6,758   3,047  
2,157
  
1,501
  
4,764
  
6,758
 
Transfers in and/or out of Level 3  -   -   -   -   
-
   
-
   
-
   
-
 
Ending balance $23,151  $14,675  $23,151  $14,675  
$
16,906
  
$
23,151
  
$
16,906
  
$
23,151
 

                            
Amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at September 30
 $(198) $(1,090) $694  $(2,585) 
$
(3,145
)
 
$
(198
)
 
$
(9,258
)
 
$
694
 

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 floatprepayment rate.  Significant changes in all four of these assumptions in isolation would result in significant changes to the value of our capitalized mortgage loan servicing rights.  Quantitative information about our Level 3 fair value measurements measured on a recurring basis follows:


 
Asset
Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 Range  
Weighted
Average
 
  (In thousands)          
September 30, 2018            
Capitalized mortgage loan servicing rights $23,151 Present value of net Discount rate
10.00% to 13.00%  10.15%
     servicing revenue Cost to service $68 to $317  $81 
         Ancillary income 20 to 36   22 
         Float rate  3.07%  3.07%
                
December 31, 2017               
Capitalized mortgage loan servicing rights
 $15,699 Present value of net Discount rate 9.88% to 11.00%  10.11%
     servicing revenue Cost to service $66 to $216  $81 
         Ancillary income 20 to 36   23 
         Float rate  2.24%  2.24%
  
Asset
Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 Range  
Weighted
Average
 
  
(In thousands)
          
September 30, 2019            
Capitalized mortgage loan servicing rights
 
$
16,906
 
Present value of net
 
Discount rate
 10.00% to 13.00
%
  
10.14
%
     
servicing revenue
 
Cost to service
 
$
63 to $216
  
$
80
 
         
Ancillary income
 20 to 36   
22
 
         
Float rate
  
1.50
%
  
1.50
%
         
Prepayment rate
 7.01% to 29.80
%
  
16.08
%
December 31, 2018               
Capitalized mortgage loan servicing rights
 
$
21,400
 
Present value of net
 
Discount rate
 10.00% to 13.00
%
  
10.15
%
     
servicing revenue
 
Cost to service
 
$
68 to $216
  
$
81
 
         
Ancillary income
 20 to 36   
23
 
         
Float rate
  
2.57
%
  
2.57
%
         
Prepayment rate
 6.68% to 78.78
%
  
10.54
%

5152
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
  
Asset
Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 Range 
Weighted
Average
 
 (In thousands)          
(In thousands)
         

           
September 30, 2018 

 
 
     
September 30, 2019           
Impaired loans    

 
        

 

     
Commercial
 $1,169 
Sales comparison approach
 
Adjustment for differences between comparable sales
 (32.5)% to 25.0%  (4.5)% 
$
908
 Sales comparison approach 
Adjustment for differences between comparable sales
 (48.0)% to 6.3
%
 
(12.3
)%

 

 

 
     
Mortgage and Installment(1)
 
1,277
 Sales comparison approach 
Adjustment for differences between comparable sales
 (61.4) to 65.2 
(6.8
)

           
Other real estate   
 
     
Mortgage 80 Sales comparison approach 
Adjustment for differences between comparable sales
 (36.4) to 16.3 
(20.3
)
           
December 31, 2018           
Impaired loans   
 
     
Commercial(2) $
2,566
 Sales comparison approach 
Adjustment for differences between comparable sales
 (32.5)% to 60.0
%
 
(1.9
)%
    

 

         
       
Mortgage  598 
Sales comparison approach
 
Adjustment for differences between comparable sales
 (40.1) to 30.4  (1.9) 905
 Sales comparison approach 
Adjustment for differences between comparable sales
 (40.1) to 25.6 
0.7
 

    
                   
Other real estate  
 

 

         
 
     
Mortgage  95 
Sales comparison approach
 
Adjustment for differences between comparable sales
 2.2 to 34.1  17.9  
154
 Sales comparison approach 
Adjustment for differences between comparable sales
 0.0 to 34.1 
11.2
 
             
December 31, 2017  

 
 
      
Impaired loans    

 

      
Commercial  1,334 
Sales comparison approach
 
Adjustment for differences between comparable sales
 (32.5)% to 25.0%  (4.5)%

  

 
 
      
Mortgage  546 
Sales comparison approach
 
Adjustment for differences between comparable sales
 (21.1) to 34.1  (2.7)

             
Other real estate    

 

      
Mortgage  251 
Sales comparison approach
 
Adjustment for differences between comparable sales
 (33.0) to 44.5  (1.0)

(1)
In addition to the valuation techniques and unobservable inputs discussed above, at September 30, 2019 certain impaired collateral dependent installment loans totaling approximately $0.2 million are secured by collateral other than real estate.  For the majority of these loans, we apply internal discount rates to industry valuation guides.
(2)
In addition to the valuation techniques and unobservable inputs discussed above, at December 31, 2018, we had an impaired collateral dependent commercial relationship that totaled $0.7 million that was secured by collateral other than real estate. Collateral securing this relationship primarily included accounts receivable, inventory and cash at December 31, 2018. Valuation techniques at December 31, 2018, included discounting financial statement values for each particular asset type. Discount rates used ranged from 20% to 80% of stated values at December 31, 2018.

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         
  September 30, 2018 $41,325  $724  $40,601 
  December 31, 2017  39,436   844   38,592 
  
Aggregate
Fair Value
  Difference  
Contractual
Principal
 
  (In thousands) 
Loans held for sale         
September 30, 2019 
$
87,358
  
$
2,079
  
$
85,279
 
December 31, 2018  
44,753
   
1,257
   
43,496
 

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

12.
Fair Values of Financial Instruments

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

52
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

As discussed in note #2, we adopted ASU 2016-02 as of January 1, 2018.  This new ASU requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. All of estimated fair values of our financial instruments in the table below at September 30, 2018 have used this exit price notion.   In addition, except as discussed below in the net loans and loans held for sale section, all of our financial assets and liabilities have historically been valued using an exit price notion.  This new ASU also removes the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost.  The methods and significant assumptions for those financial instruments measured at amortized cost disclosed below are presented for fair values at December 31, 2017.

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.

Cash and due from banks and interest bearing deposits:  The recorded book balance of cash and due from banks and interest bearing deposits approximate fair value and are classified as Level 1.

Interest bearing deposits - time:  Interest bearing deposits - time have been valued based on a model using a benchmark yield curve plus a base spread and are classified as Level 2.

Securities:  Financial instrument assets actively traded in a secondary market have been valued using quoted market prices.  Equity securities at fair value, trading securities and U.S. Treasury securities available for sale are classified as Level 1 while all other securities available for sale are classified as Level 2 as described in note #11.

Federal Home Loan Bank and FederalReserve Bank stock:  It is not practicable to determine the fair value of FHLB and FRB stock due to restrictions placed on transferability.

Net loans and loans held for sale:  The fair value of loans at December 31, 2017 is calculated by discounting estimated future cash flows using estimated market discount rates that reflect credit and interest-rate risk inherent in the loans and do not necessarily represent an exit price. Loans are classified as Level 3. Impaired loans are valued at the lower of cost or fair value as described in note #11. Loans held for sale are classified as Level 2 as described in note #11.

Accrued interest receivable and payable:  The recorded book balance of accrued interest receivable and payable approximate fair value and are classified at the same Level as the asset and liability they are associated with.

Derivative financial instruments:  The fair value of rate-lock mortgage loan commitments is based on agency cash window loan pricing for comparable assets, the fair value of mandatory commitments to sell mortgage loans is based on mortgage backed security pricing for comparable assets, the fair value of interest rate swap and interest rate cap agreements is derived from proprietary models which utilize current market data whose significant fair value inputs can generally be observed in the market place and do not typically involve judgment by management and the fair value of purchased and written options is based on prices of financial instruments with similar characteristics and do not typically involve judgment by management. Each of these instruments has been classified as Level 2 as described in note #11.

5354
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Deposits:  Deposits without a stated maturity, including demand deposits, savings, NOW and money market accounts, have a fair value equal to the amount payable on demand.  Each of these instruments is classified as Level 1.  Deposits with a stated maturity, such as time deposits have generally been valued based on the discounted value of contractual cash flows using a discount rate approximating current market rates for liabilities with a similar maturity resulting in a Level 2 classification.

Other borrowings:  Other borrowings have been valued based on the discounted value of contractual cash flows using a discount rate approximating current market rates for liabilities with a similar maturity resulting in a Level 2 classification.

Subordinated debentures:  Subordinated debentures have generally been valued based on a quoted market price of similar instruments resulting in a Level 2 classification.

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

The estimated recorded book balances and fair values follow:



 
Recorded
Book
Balance


Fair Value

Fair Value Using      
  Fair Value Using 
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)


Significant
Other
Observable
Inputs
(Level 2)

 
Significant
Un-
observable
Inputs
(Level 3)
 
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)  (In thousands) 
September 30, 2018               
September 30, 2019               
Assets               
Cash and due from banks 
$
38,662
  
$
38,662
  
$
38,662
  
$
-
  
$
-
 
Interest bearing deposits 
43,755
  
43,755
  
43,755
  
-
  
-
 
Interest bearing deposits - time 
499
  
500
  
-
  
500
  
-
 
Securities available for sale 
439,592
  
439,592
  
-
  
439,592
  
-
 
Federal Home Loan Bank and Federal Reserve Bank Stock
 
18,359
  NA  NA  NA  NA 
Net loans and loans held for sale 
2,820,278
  
2,841,484
  
-
  
125,013
  
2,716,471
 
Accrued interest receivable 
10,480
  
10,480
  
1
  
1,995
  
8,484
 
Derivative financial instruments 
7,389
  
7,389
  
-
  
7,389
  
-
 
               
Liabilities               
Deposits with no stated maturity (1) 
$
2,429,013
  
$
2,429,013
  
$
2,429,013
  
$
-
  
$
-
 
Deposits with stated maturity (1) 
623,299
  
623,916
  
-
  
623,916
  
-
 
Other borrowings 
63,974
  
63,930
  
-
  
63,930
  
-
 
Subordinated debentures 
39,439
  
32,427
  
-
  
32,427
  
-
 
Accrued interest payable 
1,610
  
1,610
  
100
  
1,510
  
-
 
Derivative financial instruments 
5,657
  
5,657
  
-
  
5,657
  
-
 
               
December 31, 2018               
Assets                              
Cash and due from banks $35,180  $35,180  $35,180  $-  $-  
$
23,350
  
$
23,350
  
$
23,350
  
$
-
  
$
-
 
Interest bearing deposits  17,990   17,990   17,990   -   -  
46,894
  
46,894
  
46,894
  
-
  
-
 
Interest bearing deposits - time  593   593   -   593   -  
595
  
594
  
-
  
594
  
-
 
Equity securities at fair value  285   285   285   -   -  
393
  
393
  
393
  
-
  
-
 
Securities available for sale  436,957   436,957   -   436,957   -  
427,926
  
427,926
  
-
  
427,926
  
-
 
Federal Home Loan Bank and Federal Reserve Bank Stock
  18,355  NA  NA  NA  NA  
18,359
  NA  NA  NA  NA 
Net loans and loans held for sale  2,579,502   2,533,221   -   41,325   2,491,896  
2,643,856
  
2,606,256
  
41,471
  
44,753
  
2,520,032
 
Accrued interest receivable  10,791   10,791   1   2,383   8,407  
10,164
  
10,164
  
22
  
1,789
  
8,353
 
Derivative financial instruments  7,734   7,734   -   7,734   -  
5,155
  
5,155
  
-
  
5,155
  
-
 
                                   
Liabilities                                   
Deposits with no stated maturity (1) $2,143,552  $2,143,552  $2,143,552  $-  $-  
$
2,197,494
  
$
2,197,494
  
$
2,197,494
  
$
-
  
$
-
 
Deposits with stated maturity (1)  655,091   649,709   -   649,709   -  
715,934
  
711,312
  
-
  
711,312
  
-
 
Other borrowings  79,688   79,275   -   79,275   -  
25,700
  
25,706
  
-
  
25,706
  
-
 
Subordinated debentures  39,371   36,888   -   36,888   -  
39,388
  
35,021
  
-
  
35,021
  
-
 
Accrued interest payable  1,463   1,463   110   1,353   -  
1,646
  
1,646
  
114
  
1,532
  
-
 
Derivative financial instruments  2,696   2,696   -   2,696   -  
2,326
  
2,326
  
-
  
2,326
  
-
 
                    
December 31, 2017                    
Assets                    
Cash and due from banks $36,994  $36,994  $36,994  $-  $- 
Interest bearing deposits  17,744   17,744   17,744   -   - 
Interest bearing deposits - time  2,739   2,740   -   2,740   - 
Trading securities  455   455   455   -   - 
Securities available for sale  522,925   522,925   898   522,027   - 
Federal Home Loan Bank and Federal Reserve Bank Stock
  15,543  NA  NA  NA  NA 
Net loans and loans held for sale  2,035,666   1,962,937   -   39,436   1,923,501 
Accrued interest receivable  8,609   8,609   1   2,192   6,416 
Derivative financial instruments  3,080   3,080   -   3,080   - 
                    
Liabilities                    
Deposits with no stated maturity (1) $1,845,716  $1,845,716  $1,845,716  $-  $- 
Deposits with stated maturity (1)  554,818   551,489   -   551,489   - 
Other borrowings  54,600   54,918   -   54,918   - 
Subordinated debentures  35,569   29,946   -   29,946   - 
Accrued interest payable  892   892   48   844   - 
Derivative financial instruments  1,292   1,292   -   1,292   - 

(1)
Deposits with no stated maturity include reciprocal deposits with a recorded book balance of $44.681$367.180 million and $12.992$123.080 million at September 30, 20182019 and December 31, 2017,2018, respectively. Deposits with a stated maturity include reciprocal deposits with a recorded book balance of $47.95449.020 million and $37.987$58.992 million at September 30, 20182019 and December 31, 2017,2018, respectively.

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

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

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

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

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

13. Contingent Liabilities
13.
Contingencies

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

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

In connection with the sale of Mepco Finance Corporation (“Mepco”) (see note #15), we agreed to contractually indemnify the purchaser from certain losses it may incur, including as a result of its failure to collect certain receivables it purchased as part of the business as well as breaches of representations and warranties we made in the sale agreement, subject to various limitations. We have not accrued any liability related to these indemnification requirements in our September 30, 2018 Condensed Consolidated Statement of Financial Condition because we believe the likelihood of having to pay any amount as a result of these indemnification obligations is remote. However, if the purchaser is unable to collect the receivables it purchased from Mepco or otherwise encounters difficulties in operating the business, it is possible it could make one or more claims against us pursuant to the sale agreement. In that event, we may incur expenses in defending any such claims and/or amounts paid to such purchaser to resolve such claims. As of September 30, 2018 these receivables balances had declined to $2.1 million and to date the purchaser has made no claims for indemnification.

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

The provision for loss reimbursement on sold loans represents our estimate of incurred losses related to mortgage loans that we have sold to investors (primarily Fannie Mae, Freddie Mac, Ginnie Mae and the FHLB)Federal Home Loan Bank of Indianapolis). Since we sell mortgage loans without recourse, loss reimbursements only occur in those instances where we have breached a representation or warranty or other contractual requirement related to the loan sale. The provision for loss reimbursement on sold loans was an expense of $0.05$0.03 million and $0.02$0.05 million for the three month periods ended September 30, 2019 and 2018, and 2017respectively and an expense of $0.08$0.18 million and $0.07$0.08 million for the nine month periods ended September 30, 20182019 and 2017,2018, respectively. The reserve for loss reimbursements on sold mortgage loans totaled $0.85 million and $0.67$0.78 million at September 30, 20182019 and December 31, 2017,2018, respectively. This reserve is included in accrued expenses and other liabilities in our Condensed Consolidated Statements of Financial Condition. This reserve is based on an analysis of mortgage loans that we have sold which are further categorized by delinquency status, loan to value, and year of origination. The calculation includes factors such as probability of default, probability of loss reimbursement (breach of representation or warranty) and estimated loss severity. We believe that the amounts that we have accrued for incurred losses on sold mortgage loans are appropriate given our analyses. However, future losses could exceed our current estimate.

We own 12,566 shares of VISA Class B common stock. At the present time, these shares can only be sold to other Class B shareholders. As a result, there has generally been limited transfer 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 1.6228 to Class A shares and the closing price of VISA Class A shares on October 17, 2019 of $177.94 per share, our 12,566 Class B shares would have a current “value” of approximately $3.6 million. We continue to monitor Class B trading activity and the status of the resolution of certain litigation matters at VISA that would trigger the conversion of Class B common shares into Class A common shares that would have no trading restrictions.

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

14.  Accumulated Other Comprehensive Loss (“AOCL”)
14.
Accumulated Other Comprehensive Loss (“AOCL”)

A summary of changes in AOCL follows:


 
Unrealized
Gains
(Losses) on
Securities
Available
for Sale
  
Dispropor-
tionate
Tax Effects
from
Securities
Available
for Sale
  
Unrealized
Gains on
Cash Flow
Hedges
  Total  
Unrealized
Gains
(Losses) on
Securities
Available
for Sale
  
Dispropor-
tionate
Tax Effects
from
Securities
Available
for Sale
  
Unrealized
Gains
(Losses) on
Cash Flow
Hedges
  Total 
 (In thousands)  (In thousands) 
For the three months ended September 30,                        
2019            
Balances at beginning of period 
$
3,040
  
$
(5,798
)
 
$
(1,673
)
 
$
(4,431
)
Other comprehensive income (loss) before reclassifications 
1,196
  
-
  
(58
)
 
1,138
 
Amounts reclassified from AOCL  
-
   
-
   
(80
)
  
(80
)
Net current period other comprehensive income (loss)  
1,196
   
-
   
(138
)
  
1,058
 
Balances at end of period 
$
4,236
  
$
(5,798
)
 
$
(1,811
)
 
$
(3,373
)
            
2018                        
Balances at beginning of period $(4,437) $(5,798) $1,021  $(9,214) 
$
(4,437
)
 
$
(5,798
)
 
$
1,021
  
$
(9,214
)
Other comprehensive income (loss) before reclassifications  (925)  -   307   (618) 
(925
)
 
-
  
307
  
(618
)
Amounts reclassified from AOCL  -   -   (57)  (57)  
-
   
-
   
(57
)
  
(57
)
Net current period other comprehensive income (loss)  (925)  -   250   (675)  
(925
)
  
-
   
250
   
(675
)
Balances at end of period $(5,362) $(5,798) $1,271  $(9,889) 
$
(5,362
)
 
$
(5,798
)
 
$
1,271
  
$
(9,889
)
                            
2017                
For the nine months ended September 30,            
2019            
Balances at beginning of period $1,986  $(5,798) $-  $(3,812) 
$
(4,185
)
 
$
(5,798
)
 
$
(125
)
 
$
(10,108
)
Other comprehensive income before reclassifications  95   -   62   157 
Other comprehensive income (loss) before reclassifications 
8,529
  
-
  
(1,376
)
 
7,153
 
Amounts reclassified from AOCL  (5)  -   3   (2)  
(108
)
  
-
   
(310
)
  
(418
)
Net current period other comprehensive income  90   -   65   155 
Net current period other comprehensive income (loss)  
8,421
   
-
   
(1,686
)
  
6,735
 
Balances at end of period $2,076  $(5,798) $65  $(3,657) 
$
4,236
  
$
(5,798
)
 
$
(1,811
)
 
$
(3,373
)
                            
For the nine months ended September 30,                
2018                            
Balances at beginning of period $(470) $(5,798) $269  $(5,999) 
$
(470
)
 
$
(5,798
)
 
$
269
  
$
(5,999
)
Other comprehensive income (loss) before reclassifications  (4,928)  -   1,106   (3,822) 
(4,928
)
 
-
  
1,106
  
(3,822
)
Amounts reclassified from AOCL  36   -   (104)  (68)  
36
   
-
   
(104
)
  
(68
)
Net current period other comprehensive income (loss)  (4,892)  -   1,002   (3,890)  
(4,892
)
  
-
   
1,002
   
(3,890
)
Balances at end of period $(5,362) $(5,798) $1,271  $(9,889) 
$
(5,362
)
 
$
(5,798
)
 
$
1,271
  
$
(9,889
)
                
2017                
Balances at beginning of period $(3,310) $(5,798) $-  $(9,108)
Cumulative effect of change in accounting  300   -   -   300 
Balances at beginning of period, as adjusted  (3,010)  (5,798)  -   (8,808)
Other comprehensive income before reclassifications  5,167   -   62   5,229 
Amounts reclassified from AOCL  (81)  -   3   (78)
Net current period other comprehensive income  5,086   -   65   5,151 
Balances at end of period $2,076  $(5,798) $65  $(3,657)

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

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

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

AOCL Component 
Amount
Reclassified
From
AOCL
 
 Affected Line Item in Condensed
 Consolidated Statements of Operations
  (In thousands)  
2018     
Unrealized losses on securities available for sale
     
  $- Net gains (losses) on securities
   - Net impairment loss recognized in earnings
   - Total reclassifications before tax
   - Income tax expense
  $- Reclassifications, net of tax
Unrealized gains on cash flow hedges      

      
  $(73)Interest expense
   (16)Income tax expense
  $(57)Reclassification, net of tax
        
  $57 Total reclassifications for the period, net of tax
        
2017      
Unrealized gains on securities available for sale      
  $8 Net gains (losses) on securities
   - Net impairment loss recognized in earnings
   8 Total reclassifications before tax
   3 Income tax expense
  $5 Reclassifications, net of tax
        
Unrealized gains on cash flow hedges      
  $(5)Interest expense
   (2)Income tax expense
  $(3)Reclassification, net of tax
        
  $2 Total reclassifications for the period, net of tax
AOCL Component 
Amount
Reclassified
From
AOCL
 
 Affected Line Item in Condensed
 Consolidated Statements of Operations
  (In thousands)  
2019     
Unrealized gains (losses) on securities available for sale
     
  
$
-
 
Net gains (losses) on securities
   
-
 
Net impairment loss recognized in earnings
   
-
 
Total reclassifications before tax
   
-
 
Income tax expense
  
$
-
 
Reclassifications, net of tax
        
Unrealized gains (losses) on cash flow hedges
      
  
$
(102
)
Interest expense
   
(22
)
Income tax expense
  
$
(80
)
Reclassification, net of tax
        
  
$
80
 
Total reclassifications for the period, net of tax
        
2018      
Unrealized gains (losses) on securities available for sale
      
  
$
-
 
Net gains (losses) on securities
   
-
 
Net impairment loss recognized in earnings
   
-
 
Total reclassifications before tax
   
-
 
Income tax expense
  
$
-
 
Reclassifications, net of tax
        
Unrealized gains (losses) on cash flow hedges
      
  
$
(73
)
Interest expense
   
(16
)
Income tax expense
  
$
(57
)
Reclassification, net of tax
        
  
$
57
 
Total reclassifications for the period, net of tax

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

A summary of reclassifications out of each component of AOCL for the nine months ended September 30 follows:

AOCL Component 
Amount
Reclassified
From
AOCL
 
 Affected Line Item in Condensed
 Consolidated Statements of Operations
  (In thousands)  
2018     
Unrealized losses on securities  available for sale     
  $(45)Net gains (losses) on securities
   - Net impairment loss recognized in earnings
   (45)Total reclassifications before tax
   (9)Income tax expense
  $(36)Reclassifications, net of tax
        
Unrealized gains on cash flow hedges      
  $(132)Interest expense
   (28)Income tax expense
  $(104)Reclassification, net of tax
        
  $68 Total reclassifications for the period, net of tax
        
2017      
Unrealized gains on securities available for sale      
  $125 Net gains (losses) on securities
   - Net impairment loss recognized in earnings
   125 Total reclassifications before tax
   44 Income tax expense
  $81 Reclassifications, net of tax
        
Unrealized gains on cash flow hedges      
  $(5)Interest expense
   (2)Income tax expense
  $(3)Reclassification, net of tax
        
  $78 Total reclassifications for the period, net of tax
AOCL Component 
Amount
Reclassified
From
AOCL
 
 Affected Line Item in Condensed
 Consolidated Statements of Operations
  (In thousands)  
2019     
Unrealized gains (losses) on securities available for sale
     
  
$
137
 
 Net gains (losses) on securities
   
-
 
 Net impairment loss recognized in earnings
   
137
 
 Total reclassifications before tax
   
29
 
 Income tax expense
  
$
108
 
 Reclassifications, net of tax
        
Unrealized gains (losses) on cash flow hedges
      
  
$
(393
)
 Interest expense
   
(83
)
 Income tax expense
  
$
(310
)
 Reclassification, net of tax
        
  
$
418
 
 Total reclassifications for the period, net of tax
        
2018      
Unrealized gains (losses) on securities available for sale
      
  
$
(45
)
 Net gains (losses) on securities
   
-
 
 Net impairment loss recognized in earnings
   
(45
)
 Total reclassifications before tax
   
(9
)
 Income tax expense
  
$
(36
)
 Reclassifications, net of tax
        
Unrealized gains (losses) on cash flow hedges
      
  
$
(132
)
 Interest expense
   
(28
)
 Income tax expense
  
$
(104
)
 Reclassification, net of tax
        
  
$
68
 
 Total reclassifications for the period, net of tax

15.  Mepco Sale
15.
Revenue from Contracts with Customers

On DecemberWe account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. We derive the majority of our revenue from financial instruments and their related contractual rights and obligations which for the most part are excluded from the scope of this topic.  These sources of revenue that are excluded from the scope of this topic include interest income, net gains on mortgage loans, net gains (losses) on securities, mortgage loan servicing, net and bank owned life insurance and were approximately 84.7% and 83.1% of total revenues at September 30, 2016, Mepco executed an Asset Purchase Agreement (the “APA”) with Seabury Asset Management LLC (“Seabury”). Pursuant to the terms of the APA, we sold our payment plan processing business, payment plan receivables,2019 and certain other assets to Seabury, who also assumed certain liabilities of Mepco.2018, respectively.

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

This transaction closedMaterial sources of revenue that are included in the scope of this topic include service charges on May 18, 2017, with an effective datedeposit accounts, other deposit related income, interchange income and investment and insurance commissions and are discussed in the following paragraphs.  Generally these sources of May 1, 2017.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 September 30, 2019 and December 31, 2018.

Service charges on deposit accounts and other deposit related income: Revenues are earned on depository accounts for commercial and retail customers and include fees for transaction-based, account maintenance and overdraft services. Transaction-based fees, which includes services such as ATM use fees, stop payment charges and ACH fees are recognized at the time the transaction is executed as that is the time we fulfill our customer’s request.  Account maintenance fees, which includes monthly maintenance services are earned over the course of a month representing the period over which the performance obligation is satisfied. Our obligation for overdraft services is satisfied at the time of the closing, Mepco sold $33.1 millionoverdraft.

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

Investment and insurance commissions:  Investment and insurance commissions include fees and commissions from asset management, custody, recordkeeping, investment advisory and other services provided to our customers. Revenue is recognized on an accrual basis at the time the services are performed and are generally based on either the market value of the assets managed or the services provided.  We have an agent relationship with a third party provider of these services and net payment plan receivables, $0.5 million of commercial loans, $0.2 million of furniturecertain direct costs charged by the third party provider associated with providing these services to our customers.

Net (gains) losses on other real estate and equipment and $1.6 million of other assets to Seabury, who also assumed $2.0 million of specified liabilities.repossessed assets:  We received cash totaling $33.4 million and recorded norecord a gain or loss in 2017 asfrom the assetssale 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 soldto 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 liabilitiesgain or loss on sale would be recorded upon the transfer of control of the property to the buyer.  There were assumed at book value.no other real estate properties sold during the three and nine month periods ending September 30, 2019 and 2018 that were financed by us.

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

Disaggregation of our revenue sources by attribute follows:

Three months ending September 30, 2019
  
Service
Charges
on Deposit
Accounts
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  Total 
  (In thousands) 
Retail               
Overdraft fees $1,970  $-  $-  $-  $1,970 
Account service charges  552   -   -   -   552 
ATM fees  -   373   -   -   373 
Other  -   
240
   -   -   240 
Business                    
Overdraft fees  361   -   -   -   361 
Account service charges  -   -   -   -   - 
ATM fees  -   9   -   -   9 
Other  -   
91
   -   -   91 
Interchange income  -   -   2,785   -   2,785 
Asset management revenue  -   -   -   292   292 
Transaction based revenue  -   -   -   158   158 
                     
Total $2,883  $713  $2,785  $450  $6,831 
                     
Reconciliation to Condensed Consolidated Statement of Operations:         
Non-interest income - other:                    
Other deposit related income                 $713 
Investment and insurance commissions               450 
Bank owned life insurance                  301 
Other                  1,028 
Total                 $2,492 

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

Three months ending September 30, 2018
  
Service
Charges
on Deposit
Accounts
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  Total 
  (In thousands) 
Retail               
Overdraft fees $2,161  $-  $-  $-  $2,161 
Account service charges  519   -   -   -   519 
ATM fees  -   374   -   -   374 
Other  -   
219
   -   -   219 
Business                    
Overdraft fees  408   -   -   -   408 
Account service charges  78   -   -   -   78 
ATM fees  -   10   -   -   10 
Other  -   
124
   -   -   124 
Interchange income  -   -   2,486   -   2,486 
Asset management revenue  -   -   -   274   274 
Transaction based revenue  -   -   -   239   239 
                     
Total $3,166  $727  $2,486  $513  $6,892 
                     
Reconciliation to Condensed Consolidated Statement of Operations:         
Non-interest income - other:                    
Other deposit related income                 $727 
Investment and insurance commissions               513 
Bank owned life insurance                  237 
Other                  657 
Total                 $2,134 

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

Nine months ending September 30, 2019
  
Service
Charges
on Deposit
Accounts
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  Total 
  (In thousands) 
Retail               
Overdraft fees $5,582  $-  $-  $-  $5,582 
Account service charges  1,609   -   -   -   1,609 
ATM fees  -   1,041   -   -   1,041 
Other  -   
703
   -   -   703 
Business                    
Overdraft fees  1,123   -   -   -   1,123 
Account service charges  9   -   -   -   9 
ATM fees  -   26   -   -   26 
Other  -   
309
   -   -   309 
Interchange income  -   -   7,744   -   7,744 
Asset management revenue  -   -   -   823   823 
Transaction based revenue  -   -   -   374   374 
                     
Total $8,323  $2,079  $7,744  $1,197  $19,343 
                     
Reconciliation to Condensed Consolidated Statement of Operations:         
Non-interest income - other:                    
Other deposit related income                 $2,079 
Investment and insurance commissions               1,197 
Bank owned life insurance                  813 
Other                  2,773 
Total                 $6,862 

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

Nine months ending September 30, 2018
  
Service
Charges
on Deposit
Accounts
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  Total 
  (In thousands) 
Retail               
Overdraft fees $6,177  $-  $-  $-  $6,177 
Account service charges  1,607   -   -   -   1,607 
ATM fees  -   1,077   -   -   1,077 
Other  -   
656
   -   -   656 
Business                    
Overdraft fees  1,153   -   -   -   1,153 
Account service charges  229   -   -   -   229 
ATM fees  -   26   -   -   26 
Other  -   
399
   -   -   399 
Interchange income  -   -   7,236   -   7,236 
Asset management revenue  -   -   -   826   826 
Transaction based revenue  -   -   -   608   608 
                     
Total $9,166  $2,158  $7,236  $1,434  $19,994 
                     
Reconciliation to Condensed Consolidated Statement of Operations:         
Non-interest income - other:                    
Other deposit related income                 $2,158 
Investment and insurance commissions               1,434 
Bank owned life insurance                  713 
Other                  1,989 
Total                 $6,294 

16.  Leases

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

The cost components of our operating leases follows:

  
Three Months
Ended
  
Nine Months
Ended
 
  September 30, 2019 
  (In thousands) 
Operating lease cost 
$
565
  
$
1,692
 
Variable lease cost  
43
   
115
 
Short-term lease cost  
4
   
14
 
Total 
$
612
  
$
1,821
 

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

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

Supplemental balance sheet information related to our operating leases follows:

  September 30, 2019 
  (In thousands) 
Lease right of use asset (1) 
$
6,244
 
Lease liabilities (2) 
$
6,257
 
     
Weighted average remaining lease term (years)  
5.50
 
Weighted average discount rate  
3.2
%

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

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

  (In thousands) 
    
Three months ending December 31, 2019 
$
543
 
2020  
1,790
 
2021  
1,269
 
2022  
963
 
2023  
925
 
2024 and thereafter  
1,381
 
Total lease payments  
6,871
 
Less imputed interest  
(614
)
Total 
$
6,257
 

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

17.  Recent Acquisition

Effective April 1, 2018, we completed the acquisition of all of the issued and outstanding shares of common stock of TCSB through a merger of TCSB into Independent Bank Corporation (“IBCP”), with IBCP as the surviving corporation (the ‘‘Merger’’).  On that same date we also consolidated Traverse City State Bank, TCSB’s wholly-owned subsidiary bank, into Independent Bank (with Independent Bank as the surviving institution).  Under the terms of the merger agreement each holder of TCSB common stock received 1.1166 shares of IBCP common stock plus cash in lieu of fractional shares totaling $0.005 million.  TCSB option holders had their options converted into IBCP stock options.  As a result we issued 2.71 million shares of common stock and 0.19 million stock options with a fair value of approximately $64.5 million to the shareholders and option holders of TCSB.  The fair value of common stock and stock options issued as the consideration paid for TCSB was determined using the closing price of our common stock on the acquisition date.  This acquisition was accounted for under the acquisition method of accounting.  Accordingly, we recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values.  TCSB results of operations are included in our results beginning April 1, 2018.  Non-interest expense includes $0.1 million and $3.4 million of costs incurred during the three and nine month periods ended September 30, 2018, respectively related to the Merger. Any remaining merger related costs will be expensed as incurred in future periods.

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

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

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

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

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

Management views the disclosed fair values presented above to be provisional.  Prior to the end offinal as the one-year measurement period for finalizing acquisition-date fair values if information becomes available which would indicate adjustments are requiredhas expired.  During this measurement period we had one adjustment to the allocation, such adjustments will be included in the allocation in the reporting period in which the adjustment amounts are determined. Inour acquisition date fair values.  During the third quarter of 2018, goodwill was reduced by $0.7 million (to $28.3 million) related to the collection of a TCSB acquired loan that had been charged off in full prior to the Merger.  Because of the status of the collection activities related to this loan at the time of the Merger, we determined that this transaction was a measurement period adjustment and reduced goodwill accordingly.

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

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

62
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
 (unaudited)

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

17.  Revenue from Contracts with Customers

We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2018, using the modified retrospective method (see note #2). 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 ASU 2014-09.  These sources of revenue that are excluded from the scope of this amended guidance include interest income, net gains on mortgage loans, net gains (losses) on securities, mortgage loan servicing, net and bank owned life insurance and were approximately 83.1% and 80.0% of total revenues at September 30, 2018 and 2017, respectively.

Material sources of revenue that are included in the scope of ASC Topic 606 include service charges on deposits, 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 September 30, 2018.

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

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

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

6368
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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 nine months ending September 30, 2018 that were financed by us.

Disaggregation of our revenue sources by attribute for the three months ending September 30, 2018 follows:

  
Service
Charges
on Deposits
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  Total 
  (In thousands) 
Retail               
Overdraft fees $2,161           $2,161 
Account service charges  519            519 
ATM fees     $374         374 
Other      219         219 
Business                  
Overdraft fees  408             408 
Account service charges  78             78 
ATM fees      10         10 
Other      124         124 
Interchange income         $2,486      2,486 
Asset management revenue             $274   274 
Transaction based revenue              239   239 
                     
Total $3,166  $727  $2,486  $513  $6,892 
                     
Reconciliation to Condensed Consolidated Statement of Operations:         
Non-interest income - other:                    
Other deposit related income                 $727 
Investment and insurance commissions               513 
Bank owned life insurance                  237 
Other                  657 
Total                 $2,134 

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

Disaggregation of our revenue sources by attribute for the nine months ending September 30, 2018 follows:

  
Service
Charges
on Deposits
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  Total 
  (In thousands) 
Retail               
Overdraft fees $6,177           $6,177 
Account service charges  1,607            1,607 
ATM fees     $1,077         1,077 
Other      656         656 
Business                  
Overdraft fees  1,153             1,153 
Account service charges  229             229 
ATM fees      26         26 
Other      399         399 
Interchange income         $7,236      7,236 
Asset management revenue             $826   826 
Transaction based revenue              608   608 
                     
Total $9,166  $2,158  $7,236  $1,434  $19,994 
                     
Reconciliation to Condensed Consolidated Statement of Operations:         
Non-interest income - other:                    
Other deposit related income                 $2,158 
Investment and insurance commissions               1,434 
Bank owned life insurance                  713 
Other                  1,989 
Total                 $6,294 

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"“Bank”), and their subsidiaries. This section should be read in conjunction with the Condensed Consolidated Financial Statements. We also encourage you to read our 20172018 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC"(“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. At times, we have experienced a difficult economy in Michigan. Economic conditions in Michigan began to show signs of improvement during 2010.  Generally, these improvements have continued into 2018, albeit at an uneven pace.  In addition, since early- to mid-2009, we have seen an improvement in our asset quality metrics. In particular, since early 2012, we have generally experienced a decline in non-performing assets, lower levels of new loan defaults, and reduced levels of loan net charge-offs.

Recent Developments. On December 22, 2017, "H.R. 1" (also known as the "Tax Cuts and Jobs Act") was signed into law.  H.R. 1, among other things, reduced the federal corporate income tax rate to 21% effective January 1, 2018.  As a result, we concluded that our deferred tax assets, net (“DTA”) had to be remeasured. Our DTA represents expected corporate tax benefits anticipated to be realized in the future.  The reduction in the federal corporate income tax rate reduces these anticipated future benefits.  The remeasurement of our DTA at December 31, 2017 resulted in a reduction of these net assets and a corresponding increase in income tax expense of $6.0 million that was recorded in the fourth quarter of 2017.

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

We paid aggregate Merger consideration of approximately $64.5 million in IBCP common stock or stock options for all of the shares of TCSB common stock and TCSB stock options issued and outstanding immediately before the effective time of the Merger. Based on a preliminary valuation of the assets acquired and liabilities assumed in the Merger, we initially recorded: $29.0 million of goodwill, a core deposit intangible (“CDI”) of $5.8 million, discounts of $6.5 million, $0.4 million and $1.5 million on loans, time deposits and borrowings, respectively, and a $0.5 million write-down of property and equipment.  In the third quarter of 2018, goodwill was reduced by $0.7 million (to $28.3 million) related to the collection of a TCSB acquired loan that had been charged off in full prior to the Merger.  Because of the status of the collection activities related to this loan at the time of the Merger, we determined that this transaction was a measurement period adjustment and reduced goodwill accordingly. The goodwill will be periodically tested for impairment and the CDI will be amortized over a ten year period ($0.2 million and $0.4 million of amortization for this CDI was recorded in the third quarter and first nine months of 2018, respectively).  The discounts will be accreted based on the lives of the related assets or liabilities.  On or before March 31, 2019, we will finalize the valuation of the assets acquired and liabilities assumed in the Merger and record and disclose any additional adjustments to the preliminary valuation.

Regulation. On July 2, 2013, the Federal Reserve Board approved a final rule that establishes an integrated regulatory capital framework (the "New Capital Rules"). The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  In general, under the New Capital Rules, minimum requirements have increased for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the New Capital Rules include a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. The 2.5% capital conservation buffer is being phased in ratably over a four-year period that began in 2016.  In 2018, 1.875% is being added to the minimum ratio for adequately capitalized institutions.  To avoid limits on capital distributions and certain discretionary bonus payments we must meet the minimum ratio for adequately capitalized institutions plus the phased in buffer (now 6.375% in 2018).  The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. As to the quality of capital, the New Capital Rules emphasize common equity tier 1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments. The New Capital Rules also change the methodology for calculating risk-weighted assets to enhance risk sensitivity.  Under the New Capital Rules our existing trust preferred securities are grandfathered as qualifying regulatory capital.  As of September 30, 2018 and December 31, 2017 we exceeded all of the capital ratio requirements of the New Capital Rules. See note #17.

It is against this backdrop that we discuss our results of operations and financial condition in the third quarter and first nine months of 20182019 as compared to 2017.2018.

Results of Operations

Summary.  We recorded net income of $11.9$12.4 million and $6.9$11.9 million, respectively, during the three months ended September 30, 20182019 and 2017.2018.  The increase in 20182019 third quarter results as compared to 20172018 reflects increases in net interest income and non-interest income as well as decreases in the provision for loan losses and income tax expense that were partially offset by an increase in non-interest expense.

We recorded net income of $29.9 million and $18.8 million, respectively, during the nine months ended September 30, 2018 and 2017.  The increase in 2018 year-to-date results as compared to 2017 is due to increases in net interest income and non-interest income as well as a decrease in income tax expensethe provision for loan losses that were partially offset by increases in non-interest expense and income tax expense.

We recorded net income of $32.6 million and $29.9 million, respectively, during the nine months ended September 30, 2019 and 2018.  The increase in 2019 year-to-date results as compared to 2018 is due to an increase in net interest income that was partially offset by a decrease in non-interest income and by increases in the provision for loan losses, non-interest expense and in non-interestincome tax expense.

6769
Key performance ratios

 
Three months ended
September 30,
  
Nine months ended
September 30,
  
Three months ended
 September 30,


Nine months ended
September 30,
 
 2018  2017  2018  2017  2019  2018  2019  2018 
Net income (annualized) to                        
Average assets  1.46%  1.01%  1.30%  0.96% 1.42% 1.46% 1.28% 1.30%
Average common shareholders’ equity  13.83   10.27   12.73   9.69  14.64  13.83  12.84  12.73 
                            
Net income per common share                            
Basic $0.49  $0.32  $1.29  $0.88  $0.55  $0.49  $1.41  $1.29 
Diluted  0.49   0.32   1.27   0.87  0.55  0.49  1.40  1.27 

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 or interest-rate risk, in particular, can adversely impact our net interest income.

Our net interest income totaled $29.7$30.9 million during the third quarter of 2018,2019, an increase of $6.8$1.2 million, or 29.6%4.0% from the year-ago period.  This increase primarily reflects a $516.2$246.9 million increase in average interest-earning assets as well asthat was partially offset by a 2515 basis point increasedecrease in our tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”).

For the first nine months of 2018,2019, net interest income totaled $82.6$91.9 million, an increase of $16.7$9.3 million, or 25.4%11.2% from 2017.2018.  This increase primarily reflects a $433.5$336.8 million increase in average interest-earning assets as well asthat was partially offset by a 21three basis point increasedecrease in our net interest margin.

Interest and fees on loans include $0.4 million and $1.1 million for the third quarter and first nine months of 20182019, respectively, and include $0.6 million and $1.2 million for the third quarter and first nine months of 2018, respectively, of accretion of the discount recorded on loans acquired in the Merger.

The increase in average interest-earning assets primarily reflects loan growth utilizing funds from increases in deposits and borrowed funds as well as the impact of the Merger.Merger (for the year-to-date comparative periods).  The increasedecrease in the net interest margin reflects a change in the miximpact of average-interest earning assets (higher percentage of loans), increases in short-termlower market interest rates and the impacta flattening of the Merger. yield curve during 2019.

Our net interest income is also adversely impacted by our level of non-accrual loans.  In the third quarter and first nine months of 20182019 non-accrual loans averaged $9.2$6.9 million and $8.1 million, respectively, compared to $8.6$9.2 million and $9.7$8.1 million, respectively for the same periods in 2017.2018.  In addition, in the third quarter and first nine months of 20182019 we had net (charge-offs)/recoveries of $(0.01)$0.23 million and $0.35$0.66 million, respectively, of unpaid interest on loans placed on or taken off non-accrual during each period or on loans previously charged-off compared to net (charge-offs)/recoveries of $0.28$(0.01) million and $0.90$0.35 million, respectively, during the same periods in 2017.2018.

6870
Average Balances and Tax Equivalent Rates

 
Three Months Ended
September 30,
    
Three Months Ended
September 30,
   


2018

2017
2019
  
2018
 
Average
Balance
  Interest  
Rate (2)
  
Average
Balance
  Interest  
Rate (2)
 
Average
Balance
  Interest  
Rate (2)
  
Average
Balance
  Interest  
Rate (2)
 (Dollars in thousands)  
(Dollars in thousands)
 
Assets                                    
Taxable loans $2,543,712  $30,936   4.84% $1,908,497  $21,801   4.55% $2,779,132  $34,151  4.89% $2,543,712  $30,936  4.84%
Tax-exempt loans (1)
  6,590   81   4.88   3,138   47   5.94  7,412  94  5.03  6,590  81  4.88 
Taxable securities  379,985   2,737   2.88   474,901   2,765   2.33  371,157  2,771  2.99  379,985  2,737  2.88 
Tax-exempt securities (1)
  62,964   518   3.29   90,645   783   3.46  52,098  400  3.07  62,964  518  3.29 
Interest bearing cash  27,477   66   0.95   29,336   63   0.85  56,923  229  1.60  27,477  66  0.95 
Other investments  17,493   237   5.38   15,543   200   5.11   18,359   266  5.75   17,493   237  5.38 
Interest Earning Assets  3,038,221   34,575   4.53   2,522,060   25,659   4.05  3,285,081   37,911  4.60  3,038,221   34,575  4.53 
Cash and due from banks  35,874           33,019          34,598        35,874       
Other assets, net  173,508           142,283           163,617         173,508       
Total Assets $3,247,603          $2,697,362          $3,483,296        $3,247,603       
                                          
Liabilities                                          
Savings and interest-bearing checking
 $1,241,868   1,223   0.39  $1,048,289   408   0.15 
Savings and interest- bearing checking
 $1,487,820  2,818  0.75  $1,241,868  1,223  0.39 
Time deposits  664,098   2,753   1.64   531,226   1,425   1.06  658,426  3,418  2.06  664,098  2,753  1.64 
Other borrowings  80,939   779   3.82   85,219   626   2.91   72,887   703  3.83   80,939   779  3.82 
Interest Bearing Liabilities  1,986,905   4,755   0.95   1,664,734   2,459   0.59  2,219,133   6,939  1.24  1,986,905   4,755  0.95 
Non-interest bearing deposits  884,003           736,291          877,088        884,003       
Other liabilities  34,697           31,263          49,913        34,697       
Shareholders’ equity  341,998           265,074           337,162         341,998       
Total liabilities and shareholders’ equity
 $3,247,603          $2,697,362          $3,483,296        $3,247,603       
                                          
Net Interest Income     $29,820          $23,200         $30,972        $29,820    
                                          
Net Interest Income as a Percent of Average Interest Earning Assets
          3.91%          3.66%        3.76%        3.91%

(1)
Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21% in 2018 and 35% in 2017..
(2)
Annualized

6971
Average Balances and Tax Equivalent Rates

 
Nine Months Ended
September 30,
 
 2018  2017  
Nine Months Ended
September 30,
 
 
Average
Balance
  Interest  
Rate (2)
  
Average
Balance
  Interest  
Rate (2)
  2019  2018 
 (Dollars in thousands)  
Average
Balance
  Interest  
Rate (2)
  
Average
Balance
  Interest  
Rate (2)
 
Assets                   (Dollars in thousands) 
Taxable loans $2,350,883  $83,881   4.77% $1,792,381  $61,544   4.59% $2,695,435  $100,513  4.98% $2,350,883  $83,881  4.77%
Tax-exempt loans (1)
  5,221   185   4.74   3,410   145   5.69  7,856  291  4.95  5,221  185  4.74 
Taxable securities  400,957   8,092   2.69   499,886   8,300   2.21  384,291  8,811  3.06  400,957  8,092  2.69 
Tax-exempt securities (1)
  70,155   1,680   3.19   85,853   2,264   3.52  52,794  1,275  3.22  70,155  1,680  3.19 
Interest bearing cash  29,502   214   0.97   42,610   229   0.72  51,260  655  1.71  29,502  214  0.97 
Other investments  16,457   684   5.56   15,543   638   5.49   18,359   794  5.78   16,457   684  5.56 
Interest Earning Assets  2,873,175   94,736   4.40   2,439,683   73,120   4.00  3,209,995   112,339  4.67  2,873,175   94,736  4.40 
Cash and due from banks  33,204           32,492          34,032        33,204       
Other assets, net  159,844           146,753           166,037         159,844       
Total Assets $3,066,223          $2,618,928          $3,410,064        $3,066,223       
                                          
Liabilities                                          
Savings and interest- bearing checking $1,193,388   2,785   0.31  $1,051,395   1,007   0.13  $1,421,114  7,787  0.73  $1,193,388  2,785  0.31 
Time deposits  611,103   6,687   1.46   494,219   3,747   1.01  670,479  10,151  2.02  611,103  6,687  1.46 
Other borrowings  82,253   2,267   3.68   66,392   1,659   3.34   72,233   2,211  4.09   82,253   2,267  3.68 
Interest Bearing Liabilities  1,886,744   11,739   0.83   1,612,006   6,413   0.53  2,163,826   20,149  1.24  1,886,744   11,739  0.83 
Non-interest bearing deposits  833,283           717,589          862,929        833,283       
Other liabilities  32,177           30,372          44,323        32,177       
Shareholders’ equity  314,019           258,961           338,986         314,019       
Total liabilities and shareholders’ equity $3,066,223          $2,618,928          $3,410,064        $3,066,223       
                                          
Net Interest Income     $82,997          $66,707         $92,190        $82,997    
                                          
Net Interest Income as a Percent of Average Interest Earning Assets          3.86%          3.65%        3.83%        3.86%

(1)
Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21% in 2018 and 35% in 2017..
(2)
Annualized

7072
Reconciliation of Non-GAAP Financial Measures

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 2018  2017  2018  2017  2019  2018  2019  2018 
 (Dollars in thousands)  (Dollars in thousands) 
Net Interest Margin, Fully Taxable Equivalent ("FTE")
            
Net Interest Margin, Fully Taxable Equivalent (“FTE”)
            
                        
Net interest income $29,697  $22,912  $82,613  $65,870  
$
30,872
  
$
29,697
  
$
91,871
  
$
82,613
 
Add: taxable equivalent adjustment  123   288   384   837   
100
   
123
   
319
   
384
 
Net interest income - taxable equivalent $29,820  $23,200  $82,997  $66,707  
$
30,972
  
$
29,820
  
$
92,190
  
$
82,997
 
Net interest margin (GAAP) (1)
  3.88%  3.60%  3.84%  3.61%  
3.74
%
  
3.88
%
  
3.82
%
  
3.84
%
Net interest margin (FTE) (1)
  3.91%  3.66%  3.86%  3.65%  
3.76
%
  
3.91
%
  
3.83
%
  
3.86
%

(1)Annualized
(1) Annualized.

Provision for loan losses.  The provision for loan losses was a credit of $0.1$0.3 million and an expense $0.6$0.1 million during the three months ended September 30, 20182019 and 2017,2018, respectively. During the nine-month periods ended September 30, 20182019 and 2017,2018, the provision was an expense of $0.9$1.0 million and $0.8$0.9 million, respectively. The provision reflects our assessment of the allowance for loan losses taking into consideration factors such as loan growth, loan mix, levels of non-performing and classified loans and loan net charge-offs.  While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors.  See “Portfolio Loans and asset quality” for a discussion of the various components of the allowance for loan losses and their impact on the provision for loan losses in the third quarter and first nine months of 2018.2019.

Non-interest income.  Non-interest income is a significant element in assessing our results of operations. Non-interest income totaled $11.8$12.3 million during the third quarter of 20182019 compared to $10.3$11.8 million in 2017.2018.  For the first nine months of 20182019 non-interest income totaled $35.9$32.1 million compared to $31.1$35.9 million for the first nine months of 2017.  We adopted Financial Accounting Standards Board Accounting Standards Update 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) on January 1, 2018, using the modified retrospective method.  Although ASU 2014-09 did not have any impact on our January 1, 2018 shareholders’ equity or third quarter and year-to-date 2018 net income, it did result in a classification change in non-interest income and non-interest expense as compared to the prior year period.  Specifically, in the third quarter and first nine months of 2018, interchange income and interchange expense each increased by $0.4 million and $1.1 million, respectively, due to classification changes under ASU 2014-09 (also see notes #2 and #17 to the Condensed Consolidated Financial Statements included within this report).2018.

7173
The components of non-interest income are as follows:

Non-Interest Income

 
Three months ended
September 30,
  
Nine months ended
September 30,
  
Three months ended
September 30,
  
Nine months ended
September 30,
 

 2018  2017  2018  2017  2019  2018  2019   2018 

 (In thousands)  (In thousands) 
Service charges on deposit accounts $3,166  $3,281  $9,166  $9,465  $2,883  $3,166  $8,323  $9,166 
Interchange income  2,486   1,942   7,236   5,869  2,785  2,486  7,744  7,236 
Net gains (losses) on assets:                            
Mortgage loans  2,745   2,971   8,571   8,886  5,677  2,745  13,590  8,571 
Securities  93   69   (71)  62  --  93  304  (71)
Mortgage loan servicing, net  1,212   1   4,668   668  (1,562) 1,212  (4,684) 4,668 
Investment and insurance commissions  513   606   1,434   1,541  450  513  1,197  1,434 
Bank owned life insurance  237   283   713   776  301  237  813  713 
Other  1,384   1,151   4,147   3,822   1,741   1,384   4,852   4,147 
Total non-interest income $11,836  $10,304  $35,864  $31,089  $12,275  $11,836  $32,139  $35,864 

Service charges on deposit accounts decreased on both a comparative quarterly and year-to-date basis in 20182019 as compared to 2017.2018.  These decreases were principally due to lower service charges on commercial accounts (due primarily to higher earnings credits) and a decrease in non-sufficient funds occurrences.

Interchange income increased on both a comparative quarterly and year-to-date basis in 20182019 as compared to 20172018 due primarily to an increase in debit card transaction volume as well as the aforementioned impacttiming of ASU 2014-09.the receipt of a volume incentive from our debit card brand partner.  In 2019 this volume incentive ($0.2 million) was received in the third quarter; however, in 2018, the comparable volume incentive was not received until the fourth quarter.

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

Mortgage Loan Activity

 
Three months ended
September 30,
  
Nine months ended
September 30,
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
 2018  2017  2018  2017  2019  2018  2019  2018 
 (Dollars in thousands)  (Dollars in thousands) 
Mortgage loans originated $231,849  $264,177  $617,080  $657,345  
$
329,461
  
$
231,849
  
$
708,621
  
$
617,080
 
Mortgage loans sold  148,730   120,981   370,372   305,386  
204,058
  
148,730
  
490,219
  
370,372
 
Net gains on mortgage loans  2,745   2,971   8,571   8,886  
5,677
  
2,745
  
13,590
  
8,571
 
Net gains as a percent of mortgage loans sold (“Loan Sales Margin”)
  1.85%  2.46%  2.31%  2.91% 
2.78
%
 
1.85
%
 
2.77
%
 
2.31
%
Fair value adjustments included in the Loan Sales Margin
  (0.26)  (0.22)  0.10   0.08  
0.22
  
(0.26
)
 
0.48
  
0.10
 

The decreaseincrease in mortgage loans originated is due primarily to higherlower interest rates suppressingspurring higher mortgage loan refinance volumes. Mortgage loans sold increased due to a higher mix of salable loans in our origination volumes. Netvolumes, the rise in mortgage loan refinance activity and some portfolio mortgage loan sales that were completed during 2019. These factors resulted in net gains on mortgage loans decreasedincreasing in 20182019 as compared to 2017 due to a lower Loan Sales Margin as discussed below.2018.

7274
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 the aforementioned fair value accounting adjustments, the Loan Sales Margin would have been 2.11%2.56% and 2.68%2.11% in the third quarters of 20182019 and 2017,2018, respectively and 2.21%2.29% and 2.83%2.21% for the comparative 20182019 and 20172018 year-to-date periods, respectively.  The decreaseincrease in the Loan Sales Margin (excluding fair value adjustments) in 20182019 was generally due to a narrowingwidening of primary-to-secondary market pricing spreads due to competitive factors throughout the mortgage banking industry (generally higher(lower mortgage loan interest rates and a declinean increase in refinance volume). The changes in the fair value accounting adjustments are primarily due to changes in the amount of commitments to originate mortgage loans for sale.

Net gains (losses) on securities were relatively nominal for allthe comparative quarterly periods.  We recorded a net gain of $0.3 million and a net loss of $0.1 million on securities for the periods presented.first nine months of 2019 and 2018, respectively.  We recorded no net impairment losses in either 20182019 or 20172018 for other than temporary impairment of securities available for sale.  (See “Securities.”)See “Securities” below and note #3 to the Condensed Consolidated Financial Statements.

Mortgage loan servicing, net, generated a loss of $1.6 million and income of $1.2 million and $0.001 million in the third quarters of 20182019 and 2017,2018, respectively. For the first nine months of 2018,2019, mortgage loan servicing, net, generated incomea loss of $4.7 million as compared to income of $0.7$4.7 million in 2017.2018. The significant variances in mortgage loan servicing, net are primarily due to changes in the fair value of capitalized mortgage loan servicing rights associated with changes in mortgage loan interest rates (a decline in 2019 as compared to an increase in 2018) and expected future prepayment levels.  This activity is summarized in the following table:

 Three Months Ended  Nine Months Ended  Three Months Ended  Nine Months Ended 
 9/30/2018  9/30/2017  9/30/2018  9/30/2017  9/30/2019  9/30/2018  9/30/2019  9/30/2018 
Mortgage loan servicing, net: (In thousands)  (In thousands) 
Revenue, net $1,410  $1,091  $3,974  $3,253  
$
1,583
  
$
1,410
  
$
4,574
  
$
3,974
 
Fair value change due to price  610   (572)  2,586   (1,075) 
(2,163
)
 
610
  
(7,036
)
 
2,586
 
Fair value change due to pay-downs  (808)  (518)  (1,892)  (1,510)  
(982
)
 
(808
)
 
(2,222
)
 
(1,892
)
Total $1,212  $1  $4,668  $668  
$
(1,562
)
 
$
1,212
  
$
(4,684
)
 
$
4,668
 

7375
Activity related to capitalized mortgage loan servicing rights is as follows:

Capitalized Mortgage Loan Servicing Rights
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2019  2018  2019  2018 
  (In thousands) 
Balance at beginning of period 
$
17,894
  
$
21,848
  
$
21,400
  
$
15,699
 
Servicing rights acquired  
-
   
-
   
-
   
3,047
 
Originated servicing rights capitalized  
2,157
   
1,501
   
4,764
   
3,711
 
Change in fair value  
(3,145
)
  
(198
)
  
(9,258
)
  
694
 
Balance at end of period 
$
16,906
  
$
23,151
  
$
16,906
  
$
23,151
 

  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2018  2017  2018  2017 
  (In thousands) 
Balance at beginning of period $21,848  $14,515  $15,699  $13,671 
Change in accounting  -   -   -   542 
Balance at beginning of period, as adjusted  21,848   14,515   15,699   14,213 
Servicing rights acquired  -   -   3,047   - 
Originated servicing rights capitalized  1,501   1,250   3,711   3,047 
Change in fair value  (198)  (1,090)  694   (2,585)
Balance at end of period $23,151  $14,675  $23,151  $14,675 

At September 30, 20182019 we were servicing approximately $2.28$2.48 billion in mortgage loans for others on which servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 4.20%4.25% and a weighted average service fee of approximately 25.8 basis points. Capitalized mortgage loan servicing rights at September 30, 20182019 totaled $23.2$16.9 million, representing approximately 101.468.2 basis points on the related amount of mortgage loans serviced for others.

Investment and insurance commissions represent revenues generated on the sale or management of investments and insurance for our customers.  These revenues were relatively comparable on a quarterly basis, but declined on both a quarterly and year-to-date basis in 20182019 as compared to 20172018.  The year-to-date decline in 2019 was primarily due primarily to reduced product sales.slower sales in the first quarter of 2019, principally reflecting market volatility and uncertainty.

Income from bank owned life insurance declined(“BOLI”) increased on both a comparative quarterly and year-to-date basis in 20182019 compared to 20172018 reflecting a lowerhigher crediting rate on our cash surrender value. Our BOLI separate account is primarily invested in agency mortgage-backed securities and managed by PIMCO.securities. The crediting rate (on which the earnings are based) reflects the performance of the separate account.  The total cash surrender value of our bank owned life insuranceBOLI was $54.8$55.4 million and $54.6$55.1 million at September 30, 20182019 and December 31, 2017,2018, respectively.

Other non-interest income increased on both a comparative quarterly and year-to-date basis in 20182019 compared to 2017,2018, due primarily to increases in a variety of categories including:fees on interest rate swaps, merchant processing, and credit card related fees and earnings from limited partnerships (small business investment company and community/housing related investment funds).cards. The year-to-date increase in 2019 compared to 2018 is also due to $0.38 million of recoveries recorded in the first quarter of 2019 on TCSB loans that had been charged-off prior to the Merger.

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

Non-interest expense increased by $4.1$1.1 million to $26.7$27.8 million and by $11.7$1.8 million to $80.6$82.4 million during the three- and nine-month periods ended September 30, 2018,2019, respectively, compared to the same periods in 2017.  Many of our components of non-interest expense increased in 2018 due to the TCSB Merger.2018.

7476
The components of non-interest expense are as follows:

Non-Interest Expense

 
Three months ended
September 30,
  
Nine months ended
September 30,
 
 
Three months ended
September 30,
  
Nine months ended
September 30,
  2019  2018  2019  2018 
 2018  2017  2018  2017  (In thousands) 
 (In thousands)             
Compensation $9,582  $8,494  $28,086  $26,872  $10,327  $9,582  $30,993  $28,086 
Performance-based compensation  3,305   2,688   9,238   6,819  3,214  3,305  7,730  9,238 
Payroll taxes and employee benefits  3,282   2,395   9,182   7,413   3,132   3,282   10,232   9,182 
Compensation and employee benefits  16,169   13,577   46,506   41,104  16,673  16,169  48,955  46,506 
Occupancy, net  2,233   1,970   6,667   6,032  2,161  2,233  6,797  6,667 
Data processing  2,051   1,796   6,180   5,670  2,282  2,051  6,597  6,180 
Merger related expenses  98   10   3,354   10 
Furniture, fixtures and equipment  1,043   961   3,029   2,943  1,023  1,043  3,058  3,029 
Interchange expense 891  715  2,332  1,974 
Communications  727   685   2,111   2,046  733  727  2,219  2,111 
Interchange expense  715   294   1,974   869 
Loan and collection  531   481   1,900   1,564  714  531  1,976  1,900 
Advertising  594   526   1,578   1,551  636  594  1,935  1,578 
Legal and professional  477   540   1,311   1,366  541  477  1,281  1,311 
Amortization of intangible assets 272  295  817  676 
FDIC deposit insurance  270   208   750   608  13  270  723  750 
Amortization of intangible assets  295   87   676   260 
Supplies  173   176   516   507  163  173  474  516 
Costs (recoveries) related to unfunded lending commitments 154  71  341  (6)
Credit card and bank service fees  108   105   310   432  100  108  300  310 
Provision for loss reimbursement on sold loans  47   15   78   66  33  47  179  78 
Costs (recoveries) related to unfunded lending commitments  71   92   (6)  332 
Net (gains) losses on other real estate and repossessed assets  (325)  30   (619)  132  52  (325) (27) (619)
Merger related expenses --  98  --  3,354 
Other  1,463   1,063   4,321   3,454   1,407   1,463   4,473   4,321 
Total non-interest expense $26,740  $22,616  $80,636  $68,946  $27,848  $26,740  $82,430  $80,636 

Compensation and employee benefits expenses, in total, increased $2.6$0.5 million on a quarterly comparative basis and increased $5.4$2.4 million for the first nine months of 20182019 compared to the same periods in 2017.2018.

Compensation expense increased by $1.1$0.7 million and $1.2$2.9 million in the third quarter and first nine months of 2018,2019, respectively, compared to the same periods in 2017.2018.  The third quarterquarterly and year-over-year increases wereyear-to-date comparative increase in 2019 is primarily due to salary increases that were predominantly effective on January 1, 2019 and growth in the TCSB Merger as well as annual compensation increases instituted atnumber of full-time equivalent employees.  The year-to-date comparative increase in 2019 also reflects the startimpact of the year.  The increase on a year to date comparative basis was reduced because the first quarter of 2017 included some one-time compensation costs related to the expansion of our mortgage banking operations as well as a reduction in personnel associated with the sale of our payment plan processing business (Mepco Finance Corporation) in May 2017.Merger.

Performance-based compensation increaseddecreased by $0.6$0.1 million and $2.4$1.5 million in the third quarter and first nine months of 2018,2019, respectively, versus the same periods in 2017,2018, due primarily to relative comparative changes in the accrual for anticipated incentive compensation based on our estimated full-year performance as compared to goals.  In addition, we introduced a new incentive compensation plan for hourly employees in 2018 that increased performance-based compensation.

7577
Payroll taxes and employee benefits decreased by $0.2 million and increased by $0.9 million and $1.8$1.1 million in the third quarter and first nine months of 2018,2019, respectively, compared to the same periods in 2017,2018.  The quarterly comparative decrease is due primarily to a decline in health care costs.  The year-to-date comparative increase is due primarily to increases in payroll taxes (due to the aforementioned increases in compensation), higher health care costs (due to increased claims in 2018 somethe first six months of which may be reimbursed prior to year end from a stop-loss reinsurance policy)2019), payroll taxes and higher 401(k) plan costs (due to an increase in the employer match percentage).workers’ compensation insurance costs.

Occupancy, net, increased by $0.3 millionfurniture, fixtures and $0.6 millionequipment, communications, legal and professional, supplies, and credit card and bank service fees expenses were all relatively unchanged on a comparative quarterly and year-to-date basis in the third quarter and first nine months of 2018, respectively,2019 as compared to the same periods in 2017, principally due to additional locations acquired in the TCSB Merger and additional loan production offices opened during 2017.2018.

Data processing expenses increased by $0.3 million and $0.5 million for the third quarter and first nine months of 2018, respectively, compared to the same periods in 2017. The third quarter and year-to-date 2018 increases are primarily due to the TCSB Merger.  We completed the conversion of TCSB loan and deposit accounts onto our core systems in June 2018.

Merger related expenses totaled $0.1 million and $3.4 million for the third quarter and first nine months of 2018, respectively.  These expenses include our investment banking fees, certain accounting and legal costs, various contract termination fees, data processing conversion costs, payments made on officer change-in-control contracts, and employee severance costs.  We do not expect to have any remaining TCSB Merger related expenses after the third quarter of 2018.

Furniture, fixtures and equipment, communications, advertising, legal and professional and supplies expenses were relatively comparable on both a comparative quarterly and year-to-date basis in 20182019 as compared to 2017.2018.  These increases were due primarily to several new products or services implemented in 2019 as well as increases in mobile-banking related costs (due to higher usage) and certain software licensing costs (due principally to more users).

Interchange expense primarily represents our third-party cost to process debit card transactions.  This cost increased in 20182019 on both a comparative quarterly and year-to-date basis as compared to 2018 due primarily principally to the impact of the implementation of ASU 2014-09 on January 1, 2018.  Prior to the first quarter of 2018, certain processing costs were being netted against interchange income.  As described above, under ASU 2014-09 these costs are no longer being netted against interchange income but instead are being reported as part of interchange expense.an increase in transaction volume.

Loan and collection expenses reflect costs related to new lending activity as well as the management and collection of non-performing loans and other problem credits.  The year-to-date comparative increase isincreased expenses in 2019 as compared to 2018 primarily because the first quarter of 2017 included a $0.2 million reimbursementreflects lower recoveries of previously incurred collection expenses related to the resolutionon non-performing and payoff of a non-accrual loan.previously charged-off loans.

FDIC deposit insurance expenseTotal advertising expenses increased in 20182019 on both a comparative quarterly and year-to-date basis as compared to 2018 due primarily to ouran increase in total assets.outdoor (billboard) advertising.

The amortization of intangible assets relates to the TCSB Merger and prior branch acquisitions and the amortization of the deposit customer relationship value, including core deposit value, which was acquired in connection with those acquisitions. We had remaining unamortized intangible assets of $6.7$5.6 million and $1.6$6.4 million at September 30, 20182019 and December 31, 2017,2018, respectively. See note #7 to the Condensed Consolidated Financial Statements for a schedule of future amortization of intangible assets.

FDIC deposit insurance expense decreased in 2019 on a comparative quarterly basis and was relatively unchanged on a year-to-date basis. This quarterly decrease is related to the use of our Small Bank Assessment Credit (the “Assessment Credit”).  After the application of the Assessment Credit against the Company’s June 30, 2019 FDIC deposit insurance expense billing, approximately $0.4 million of Assessment Credit remains available to offset future expense.  Absent the use of the Assessment Credit, FDIC deposit insurance expense would be higher in 2019 due primarily to growth in our total assets.

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

7678
Credit card and bank service fees decreased in 2018 on a comparative year-to-date basis primarily due to the sale of our payment plan processing business in May 2017.

The provision for loss reimbursement on sold loans was an expense of $0.03 million and $0.18 million in the third quarter and first nine months of 2019, respectively, compared to an expense of $0.05 million and $0.08 million in the third quarter and first nine months of 2018, respectively, compared to an expense of $0.02 million and $0.07 million in the third quarter and first nine months of 2017, respectively. This provision represents our estimate of incurred losses related to mortgage loans that we have sold to investors (primarily Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Bank of Indianapolis).  The small expense provisions in 20182019 and 20172018 are primarily due to growth in the balance of loans serviced for investors.  Since we sell mortgage loans without recourse, loss reimbursements only occur in those instances where we have breached a representation or warranty or other contractual requirement related to the loan sale.  The reserve for loss reimbursements on sold mortgage loans totaled $0.85 million and $0.67$0.78 million at September 30, 20182019 and December 31, 2017,2018, respectively. This reserve is included in accrued expenses and other liabilities in our Condensed Consolidated Statements of Financial Condition.

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

Net (gains) losses on other real estate and repossessed assets primarily represent the gain or loss on the sale or additional write downs on these assets subsequent to the transfer of the asset from our loan portfolio. This transfer occurs at the time we acquire the collateral that secured the loan. At the time of acquisition, the other real estate or repossessed asset is valued at fair value, less estimated costs to sell, which becomes the new basis for the asset. Any write-downs at the time of acquisition are charged to the allowance for loan losses.  The gains in 2018 were primarily related to the sale of several residential properties.

Merger related expenses totaled $0.1 million and $3.4 million for the third quarter and first nine months of 2018, respectively.  These expenses included our investment banking fees, certain accounting and legal costs, various contract termination fees, data processing conversion costs, payments made on officer change-in-control contracts, and employee severance costs.

Other non-interest expenses increasedwere relatively unchanged in 20182019 on both a comparative quarterly basis and increased on a year-to-date basis as compared to 2018 due primarily to increasesan increase in several categories of expenses (directors’ fees, travel and entertainment, certain state franchise taxes, and deposit account/debit card fraud).fraud costs.

Income tax expense.  We recorded an income tax expense of $3.1 million and $8.0 million in the third quarter and the first nine months of 2019, respectively. This compares to an income tax expense of $2.9 million and $7.0 million in the third quarter and the first nine months of 2018, respectively. This compares to an income tax expense of $3.2 million and $8.4 million in the third quarter and the first nine months of 2017, respectively. As described earlier under “Recent Developments” our statutory federal corporate income tax rate was reduced to 21% (from 35%) effective on January 1, 2018.

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 September 30, 20182019 and 20172018 and at December 31, 2017,2018, that the realization of substantially all of our deferred tax assets continues to be more likely than not.

7779
Financial Condition

Summary.  Our total assets increased by $507.8$197.6 million during the first nine months of 2018 reflecting the TCSB Merger and organic loan growth.  The total assets, loans and deposits acquired in the TCSB Merger were approximately $343.5 million, $295.8 million (including $1.3 million of loans held for sale) and $287.7 million, respectively.

2019.  Loans, excluding loans held for sale ("(“Portfolio Loans"Loans”), totaled $2.56$2.72 billion at September 30, 2018,2019, an increase of $543.8$139.9 million, or 26.9%5.4%, from December 31, 2017.2018.  (See "Portfolio“Portfolio Loans and asset quality."”)

Deposits totaled $2.80$3.05 billion at September 30, 2018,2019, compared to $2.40$2.91 billion at December 31, 2017.2018.  The $398.1$138.9 million increase in total deposits during the period is due primarily due to the TCSB Merger and growth in reciprocal deposits and brokered time deposits.

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

Securities
       
  
 Unrealized     
  
Amortized
Cost
 Gains
  Losses 
Fair
Value
 
  (In thousands) 
Securities available for sale             
September 30, 2018 $443,744  $1,602  $8,389  $436,957 
December 31, 2017  523,520   3,197   3,792   522,925 
Securities
     Unrealized    
  
Amortized
Cost
  Gains  Losses  
Fair
Value
 
  (In thousands) 
Securities available for sale            
September 30, 2019 $434,231  $6,106  $745  $439,592 
December 31, 2018  433,224   1,520   6,818   427,926 

Securities available for sale declined $86.0increased $11.7 million during the first nine months of 2018 primarily to fund growth in Portfolio Loans.2019.  Our portfolio of securities available for sale is reviewed quarterly for impairment in value. In performing this review, management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. For securities that do not meet these recovery criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income (loss).  We recorded no impairment losses related to other than temporary impairment on securities available for sale in either of the first nine months of 20182019 or 2017.2018.

7880
Sales of securities were as follows (See “Non-interest income.”):

 
Nine months ended
September 30,
  
Nine months ended
September 30,
 
 2018  2017  2019  2018 
 (In thousands)  (In thousands) 
          
Proceeds (1) $31,445  $9,594  
$
44,305
  
$
31,445
 
              
Gross gains (2) $225  $125  
$
169
  
$
225
 
Gross losses  (126)  -  
(32
)
 
(126
)
Net impairment charges  -   -  
--
  
-
 
Fair value adjustments  (170)  (63)
  
167
   
(170
)
Net gains (losses) $(71) $62  
$
304
  
$
(71
)


(1)2017 includes $0.760 million for trades that did not settle until after September 30, 2017.

(2)2018 gains include $0.144 million from the sale of 1,000 VISA Class B shares.

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.  In March 2018 and July 2018, we sold $16.5 million and $11.1 million, respectively of single-family residential fixed and adjustable rate mortgage loans servicing retained to another financial institution.  These mortgage loans were all on properties located in Ohio and were sold primarily for asset/liability management purposes.

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

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

7981
A summary of our Portfolio Loans follows:

 
September 30,
2018
  
December 31,
2017
  
September 30,
2019
  
December 31,
2018
 
 (In thousands)  (In thousands) 
Real estate(1)            
Residential first mortgages $815,202  $672,592  
$
821,531
  
$
811,719
 
Residential home equity and other junior mortgages  175,426   136,560  
173,099
  
177,574
 
Construction and land development  171,546   143,188  
220,822
  
180,286
 
Other(2)  701,711   538,880  
721,042
  
707,347
 
Consumer  377,451   291,091  
451,025
  
379,607
 
Commercial  314,848   231,786  
330,073
  
319,058
 
Agricultural  6,394   4,720   
4,854
   
6,929
 
Total loans $2,562,578  $2,018,817  
$
2,722,446
  
$
2,582,520
 

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

Non-performing assets(1)
      
  
September 30,
2018
  
December 31,
2017
 
  (Dollars in thousands) 
Non-accrual loans $9,343  $8,184 
Loans 90 days or more past due and still accruing interest  --   -- 
Total non-performing loans  9,343   8,184 
Other real estate and repossessed assets  1,445   1,643 
Total non-performing assets $10,788  $9,827 
As a percent of Portfolio Loans        
Non-performing loans  0.36%  0.41%
Allowance for loan losses  0.95   1.12 
Non-performing assets to total assets  0.33   0.35 
Allowance for loan losses as a percent of non-performing loans  261.17   275.99 
Non-performing assets(1)

  
September 30,
2019
  
December 31,
2018
 
  (Dollars in thousands) 
Non-accrual loans $7,124  $9,029 
Loans 90 days or more past due and still accruing interest
  --   5 
Less - government guaranteed loans  (475)  (460)
Total non-performing loans  6,649   8,574 
Other real estate and repossessed assets  1,789   1,299 
Total non-performing assets $8,438  $9,873 
As a percent of Portfolio Loans        
Non-performing loans  0.24%  0.33%
Allowance for loan losses  0.96   0.96 
Non-performing assets to total assets  0.24   0.29 
Allowance for loan losses as a percent of non-performing loans
  393.26   290.27 


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

8082
Troubled debt restructurings ("TDR"(“TDR”)
  September 30, 2019 
  Commercial  
Retail (1)
  Total 
  (In thousands) 
Performing TDR’s
 
$
6,947
  
$
40,873
  
$
47,820
 
Non-performing TDR’s (2)
  
46
   
2,357
(3) 
  
2,403
 
Total 
$
6,993
  
$
43,230
  
$
50,223
 

  September 30, 2018 
  Commercial  Retail (1)  Total 
  (In thousands) 
Performing TDR's $6,904  $49,397  $56,301 
Non-performing TDR's(2)  212   2,799
(3) 
  3,011 
Total $7,116  $52,196  $59,312 
  December 31, 2018 
  Commercial  
Retail (1)
  Total 
  (In thousands) 
Performing TDR’s
 
$
6,460
  
$
46,627
  
$
53,087
 
Non-performing TDR’s (2)
  
74
   
2,884
(3) 
  
2,958
 
Total 
$
6,534
  
$
49,511
  
$
56,045
 

  December 31, 2017 
  Commercial  Retail (1)  Total 
  (In thousands) 
Performing TDR's $7,748  $52,367  $60,115 
Non-performing TDR's(2)  323   4,506
(3) 
  4,829 
Total $8,071  $56,873  $64,944 

(1)
Retail loans include mortgage and installment portfolioloan segments.
(2)
Included in non-performing loansassets 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 increaseddecreased by $1.2$1.9 million during the first nine months of 20182019 due principally to an increasea decline in non-performing commercial and mortgage loans. The increaseThis decline primarily reflects reduced levels of new loan defaults as well as loan charge-offs, pay-offs, negotiated transactions, and the migration of loans into other real estate. In general, stable economic conditions in our market areas, as well as our collection and resolution efforts, have resulted in a downward trend in non-performing loans.  However, we are still experiencing some loan defaults, particularly related to commercial loans primarily reflects one relationship moving into non-accrual in the second quarter of 2018.  Because of our collateral position, we do not expect any loss from the resolution of this loan relationship.secured by income-producing property and mortgage loans secured by resort/vacation property.

Non-performing loans exclude performing loans that are classified as troubled debt restructurings (“TDRs”). Performing TDRs totaled $56.3$47.8 million, or 2.2%1.8% of total Portfolio Loans, and $60.1$53.1 million, or 3.0%2.1% of total Portfolio Loans, at September 30, 20182019 and December 31, 2017,2018, respectively. The decrease in the amount of performing TDRs in the first nine months of 20182019 primarily reflects pay downs and payoffs.

Other real estate and repossessed assets totaled $1.4$1.8 million and $1.6$1.3 million at September 30, 20182019 and December 31, 2017,2018, respectively. This increase is primarily due to the addition of a $0.6 million commercial office building located in Grand Rapids, Michigan during the second quarter of 2019.

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

8183
We had loan net recoveries in both the first nine months of 2019 and 2018 due primarily to recoveries on previously charged-off commercial loans.  The following tables reflect activity in and the allocation of the allowance for loan losses (“AFLL”).

Allowance for loan losses

  
Nine months ended
September 30,
 
  2019  2018 
  
Loans
  
Unfunded
Commitments
  Loans  
Unfunded
Commitments
 
  (Dollars in thousands) 
Balance at beginning of period $24,888  $1,296  $22,587  $1,125 
Additions (deductions)                
Provision for loan losses  1,045   -   912   - 
Recoveries credited to allowance  3,109   -   3,768   - 
Loans charged against the allowance  (2,894)  -   (2,866)  - 
Additions included in non-interest expense  -   341   -   (6)
Balance at end of period $26,148  $1,637  $24,401  $1,119 
                 
Net loans charged against the allowance to average Portfolio Loans
  (0.01)%      (0.04)%    
  
Nine months ended
September 30,
 
  2018  2017 
  Loans  
Unfunded
Commitments
  Loans  
Unfunded
Commitments
 
  (Dollars in thousands) 
Balance at beginning of period $22,587  $1,125  $20,234  $650 
Additions (deductions)                
Provision for loan losses  912   -   806   - 
Recoveries credited to allowance  3,768   -   2,998   - 
Loans charged against the allowance  (2,866)  -   (2,560)  - 
Additions included in non-interest expense  -   (6)  -   332 
Balance at end of period $24,401  $1,119  $21,478  $982 
                 
Net loans charged against the allowance to average Portfolio Loans  (0.04)%      (0.03)%    

Allocation of the Allowance for Loan Losses

 
September 30,
2018
  
December 31,
2017
  
September 30,
2019
  
December 31,
2018
 
 (In thousands)  (In thousands) 
Specific allocations $6,102  $6,839  $5,779  $6,310 
Other adversely rated commercial loans  1,883   1,228  3,022  1,861 
Historical loss allocations  7,665   7,125  8,752  7,792 
Additional allocations based on subjective factors  8,751   7,395   8,595  8,925 
Total $24,401  $22,587  $26,148  $24,888 

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

8284
The first AFLL element (specific allocations) reflects our estimate of probable incurred losses based upon our systematic review of specific loans. These estimates are based upon a number of factors, such as payment history, financial condition of the borrower, discounted collateral exposure and discounted cash flow analysis. Impaired commercial, mortgage and installment loans are allocated AFLL amounts using this first element. The second AFLL element (other adversely rated commercial loans) reflects the application of our commercial loan rating system. This rating system is similar to those employed by state and federal banking regulators. Commercial loans that are rated below a certain predetermined classification are assigned a loss allocation factor for each loan classification category that is based upon a historical analysis of both the probability of default and the expected loss rate (“loss given default”). The lower the rating assigned to a loan or category, the greater the allocation percentage that is applied. The third AFLL element (historical loss allocations) is determined by assigning allocations to higher rated (“non-watch credit”) commercial loans using a probability of default and loss given default similar to the second AFLL element and to homogenous mortgage and installment loan groups based upon borrower credit score and portfolio segment.  For homogenous mortgage and installment loans a probability of default for each homogenous pool is calculated by way of credit score migration.  Historical loss data for each homogenous pool coupled with the associated probability of default is utilized to calculate an expected loss allocation rate.  The fourth AFLL element (additional allocations based on subjective factors) is based on factors that cannot be associated with a specific credit or loan category and reflects our attempt to ensure that the overall AFLL appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses. We consider a number of subjective factors when determining this fourth element, including local and general economic business factors and trends, portfolio concentrations and changes in the size, mix and the general terms of the overall loan portfolio.

No allowance for loan losses was brought forward on any of the TCSB acquired loans as any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition date. An allowance for loan losses will be established for any subsequent credit deterioration or adverse changes in expected cash flows.

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

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

The allowance for loan lossesAFLL increased $1.8$1.3 million to $24.4$26.1 million at September 30, 20182019 from $22.6$24.9 million at December 31, 20172018 and was equal to 0.95% (1.06% when excluding TCSB acquired loans)0.96% of total Portfolio Loans at both September 30, 2018 compared to 1.12% at2019 and December 31, 2017.2018, respectively.

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

Two of the four components of the allowance for loan lossesAFLL outlined above increased induring the first nine months of 2018.2019. The allowance for loan lossesAFLL related to specific loans decreased $0.7$0.5 million in 2018during the first nine months of 2019 due primarily to a $4.9 million decline in the balanceamount of individually impaired loans and charge-offs.such loans.  The allowance for loan lossesAFLL related to other adversely rated commercial loans increased $0.7$1.2 million in 2018during the first nine months of 2019, primarily due to an increase in the balance of such loans included in this component to $37.5$67.2 million at September 30, 20182019 from $27.2$44.7 million at December 31, 20172018.  The increase in other adversely rated commercial loans was primarily in early watch credit categories and $23.2 million at September 30, 2017.these loans are largely performing.  We do not believe that we will experience any significant loan losses as a result of this rise in other adversely rated commercial loans.  The allowance for loan lossesAFLL related to historical losses increased $0.5$1.0 million during 2018 due principally to loan growth.  The allowance for loan losses related to subjective factors increased $1.4 million during 2018 primarily due to loan growth.

Three of the four components of the allowance for loan losses outlined above also increased in the first nine months of 2017.  The allowance for loan losses related to specific loans decreased $2.1 million in 2017 due primarily to a decline in2019, and the balance of individually impaired loans as well as charge-offs.  In particular, we received a full payoff in March 2017 on a commercial loan that had a specific reserve of $1.2 million at December 31, 2016. The allowance for loan losses related to other adversely rated commercial loans increased $0.3 million in 2017 primarily due to an increase in the balance of such loans included in this component to $23.2 million at September 30, 2017 from $11.8 million at December 31, 2016. The allowance for loan losses related to historical losses increased $1.6 million during 2017 due principally to slight upward adjustments in our probability of default and expected loss rates for commercial loans, an additional component of approximately $0.6 million added for loans secured by commercial real estate due primarily to emerging risks in this sector (such as retail store closings and potential overdevelopment in certain markets) and loan growth. We also extended our historical lookback period to be more representative of the probability of default and account for infrequent migration events and extremely low levels of watch credits.  The allowance for loan lossesAFLL related to subjective factors increased $1.4decreased $0.3 million during 2017 primarilythe first nine months of 2019, due in part to the classification shifts discussed above, as well as loan growth.growth, for the AFLL related to historical losses.

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

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

Deposits totaled $2.80$3.05 billion and $2.40$2.91 billion at September 30, 20182019 and December 31, 2017,2018, respectively.  The $398.1$138.9 million increase in deposits induring the first nine months of 20182019 is primarily due to the TCSB Merger and growth in reciprocal deposits and brokered time deposits.  Reciprocal deposits totaled $92.6$416.2 million and $51.0$182.1 million at September 30, 20182019 and December 31, 2017,2018, respectively.  These deposits represent demand, money market and time deposits from our customers that have been placed through Promontory Interfinancial Network’s Insured Cash Sweep® service and Certificate of Deposit Account Registry Service®.  These services allow our customers to access multi-million dollar FDIC deposit insurance on deposit balances greater than the standard FDIC insurance maximum.  The significant increase in reciprocal deposits is due in part to an automated sweep product that we introduced in mid-2018 as well as the marketing and sales efforts of our treasury management team.

We cannot be sure that we will be able to maintain our current level of core deposits. In particular, those deposits that are uninsured may be susceptible to outflow. At September 30, 2018,2019, we had approximately $650.0$554.3 million of uninsured deposits. A reduction in core deposits would likely increase our need to rely on wholesale funding sources.

We have also implemented strategies that incorporate using federal funds purchased, other borrowings and brokered time depositsBrokered 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 federal funds purchased and advances from the FHLB and federal funds sold, totaled $79.7$64.0 million and $54.6$25.7 million at September 30, 20182019 and December 31, 2017,2018, respectively.

As described above, we utilize wholesale funding, including federal funds purchased, FHLB borrowings and brokered time depositsBrokered CDs to augment our core deposits and fund a portion of our assets. At September 30, 2018,2019, our use of such wholesale funding sources (including reciprocal deposits) amounted to approximately $380.4$679.9 million, or 13.2%21.8% of total funding (deposits and totalall borrowings, excluding subordinated debentures). Because wholesale funding sources are affected by general market conditions, the availability of such funding may be dependent on the confidence these sources have in our financial condition and operations. The continued availability to us of these funding sources is not certain, and Brokered CDs may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity may be constrained if we are unable to renew our wholesale funding sources or if adequate financing is not available in the future at acceptable rates of interest or at all.  Our financial performance could also be affected if we are unable to maintain our access to funding sources or if we are required to rely more heavily on more expensive funding sources. In such case, our net interest income and results of operations could be adversely affected.

We historically employed derivative financial instruments to manage our exposure to changes in interest rates.  During the first nine months of 20182019 and 2017,2018, we entered into $16.6$55.4 million and $14.6$16.6 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 $0.4$0.7 million and $0.2$0.4 million of fee income related to these transactions during the first nine months of 20182019 and 2017,2018, respectively. See note #6 to the Condensed Consolidated Financial Statements included within this report for more information on our derivative financial instruments.

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

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

At September 30, 2018,2019, we had $506.9$508.1 million of time deposits that mature in the next 12 months. Historically, a majority of these maturing time deposits are renewed by our customers. Additionally, $2.14$2.43 billion of our deposits at September 30, 2018,2019, were in account types from which the customer could withdraw the funds on demand. Changes in the balances of deposits that can be withdrawn upon demand are usually predictable and the total balances of these accounts have generally grown or have been stable over time as a result of our marketing and promotional activities. However, there can be no assurance that historical patterns of renewing time deposits or overall growth or stability in deposits will continue in the future.

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

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

We also believe that the available cash on hand at the parent company (including time deposits) of approximately $33.0$16.3 million as of September 30, 20182019 provides sufficient liquidity resources at the parent company to meet operating expenses, to make interest payments on the subordinated debentures, and to pay aprojected cash dividenddividends on our common stock for the foreseeable future.stock.

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

Capitalization
  
September 30,
2019
  
December 31,
2018
 
  (In thousands) 
Subordinated debentures
 
$
39,439
  
$
39,388
 
Amount not qualifying as regulatory capital
  
(1,224
)
  
(1,224
)
Amount qualifying as regulatory capital  
38,215
   
38,164
 
Shareholders’ equity
        
Common stock  
351,839
   
377,372
 
Accumulated deficit  
(8,221
)
  
(28,270
)
Accumulated other comprehensive loss  
(3,373
)
  
(10,108
)
Total shareholders’ equity  
340,245
   
338,994
 
Total capitalization 
$
378,460
  
$
377,158
 

  
September 30,
2018
  
December 31,
2017
 
  (In thousands) 
Subordinated debentures $39,371  $35,569 
Amount not qualifying as regulatory capital  (1,224)  (1,069)
Amount qualifying as regulatory capital  38,147   34,500 
Shareholders’ equity        
Common stock  389,689   324,986 
Accumulated deficit  (34,596)  (54,054)
Accumulated other comprehensive loss  (9,889)  (5,999)
Total shareholders’ equity  345,204   264,933 
Total capitalization $383,351  $299,433 

We currently have four special purpose entities with $38.1$38.2 million of outstanding cumulative trust preferred securities.securities as of September 30, 2019.  These special purpose entities issued common securities and provided cash to our parent company that in turn issued subordinated debentures to these special purpose entities equal to the trust preferred securities and common securities. The subordinated debentures represent the sole asset of the special purpose entities. The common securities and subordinated debentures are included in our Condensed Consolidated Statements of Financial Condition.

As part of the TCSB Merger we acquired TCSB Statutory Trust I (a statutory business trust formed solely to issue capital securities) and assumed approximately $5.2 million of subordinated debentures that had a fair value of approximately $3.8 million on April 1, 2018.  The trust preferred securities issued by TCSB Statutory Trust I mature in March 2035.  The discount recorded on these subordinated debentures is being accreted over their remaining life.
88

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 September 30, 20182019 and December 31, 2017. Although the Dodd-Frank Act further limited Tier 1 treatment for trust preferred securities, those new limits did not apply to our outstanding trust preferred securities.  Further, the New Capital Rules grandfathered the treatment of our trust preferred securities as qualifying regulatory capital.2018.

Common shareholders’ equity increased to $345.2$340.2 million at September 30, 20182019, from $264.9$339.0 million at December 31, 20172018, due primarily to shares issued in the TCSB Merger and our net income that was partially offset by an increaseand a decrease in our accumulated other comprehensive loss that were partially offset by share repurchases and by dividends that we paid.cash dividend payments. Our tangible common equity (“TCE”) totaled $310.2$306.3 million and $263.3$304.3 million, respectively, at those same dates. Our ratio of TCE to tangible assets was 9.51%8.71% and 9.45%9.17% at September 30, 20182019, and December 31, 2017,2018, respectively.  TCE and the ratio of TCE to tangible assets are non-GAAP measures.  TCE represents total common equity less goodwill and other intangible assets.

In JanuaryDecember 2018, our Board of Directors authorized a 2019 share repurchase plan.  Under the terms of the 2018original 2019 share repurchase plan, we arewere authorized to buy back up to 5% of our outstanding common stock.  ThisIn June 2019, our Board of Directors supplemented the 2019 share repurchase plan and authorized the repurchase of up to 300,000 additional common shares. The 2019 share repurchase plan is authorized to last through December 31, 2018.  We did not repurchase any shares during2019.  During the first nine months of 2018.2019, the Company repurchased 1,204,688 shares at a weighted average purchase price of $21.82 per share (including 25,000 shares at a weighted average purchase price of $20.09 per share in the third quarter of 2019).

We pay a quarterly cash dividend on our common stock.  These dividends totaled $0.18 per share in each of the first, second and third quarters of 2019 and $0.15 per share and $0.10 per share in each of the thirdcomparable quarters of 2018 and 2017, respectively.in 2018.    We generally favor a dividend payout ratio between 30% and 50% of net income.

As of September 30, 20182019 and December 31, 2017,2018, our Bank (and holding company) continued to meet the requirements to be considered “well-capitalized” under federal regulatory standards (also see note #10 to the Condensed Consolidated Financial Statements included within this report).

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

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

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

88
Changes in Market Value of Portfolio Equity and Net Interest IncomeCHANGES 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
  
Market
Value of
Portfolio
Equity(1)
  
Percent
Change
  
Net
Interest
Income(2)
  
Percent
Change
 
 (Dollars in thousands)  (Dollars in thousands) 
September 30, 2018            
September 30, 2019            
200 basis point rise $474,800   (4.33)% $123,700   2.66% 
$
447,100
  
1.02
%
 
$
125,300
  
1.54
%
100 basis point rise  489,900   (1.29)  122,700   1.83  
455,900
  
3.00
  
124,800
  
1.13
 
Base-rate scenario  496,300   -   120,500   -  
442,600
  
-
  
123,400
  
-
 
100 basis point decline  486,100   (2.06)  117,700   (2.32) 
387,700
  
(12.40
)
 
119,500
  
(3.16
)
                            
December 31, 2017                
December 31, 2018            
200 basis point rise $409,200   (1.23)% $99,100   2.27% 
$
481,100
  
(3.37
)%
 
$
126,200
  
3.27
%
100 basis point rise  417,100   0.68   98,600   1.75  
495,400
  
(0.50
)
 
124,800
  
2.13
 
Base-rate scenario  414,300   -   96,900   -  
497,900
  
-
  
122,200
  
-
 
100 basis point decline  386,400   (6.73)  91,600   (5.47) 
482,800
  
(3.03
)
 
119,600
  
(2.13
)

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

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

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

We utilize fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. FASB ASC topic 820 differentiates between those assets and liabilities required to be carried at fair value at every reporting period (“recurring”) and those assets and liabilities that are only required to be adjusted to fair value under certain circumstances (“nonrecurring”). Certain equity securities (at December 31, 2018), securities available for sale, loans held for sale, 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 marketfair 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.

8990
Litigation Matters

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

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

 Critical Accounting Policies

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for the AFLL and capitalized mortgage loan servicing rights and income taxes 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, 2017.2018.

9091
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 September 30, 2018,2019, have concluded that, as of such date, our disclosure controls and procedures were effective.

(b)
Changes in Internal Controls.

During the quarter ended September 30, 2018,2019, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

9192
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, 2017.2018.

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

The Company maintains a Deferred Compensation and Stock Purchase Plan for Non-Employee Directors (the "Plan"“Plan”) pursuant to which non-employee directors can elect to receive shares of the Company'sCompany’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 third quarter of 2018,2019, the Company issued 587722 shares of common stock to non-employee directors on a current basis and 1,4552,065 shares of common stock to the trust for distribution to directors on a deferred basis.  TheThese shares were issued on July 2, 2018,1, 2019 representing aggregate fees of $0.06 million. The shares on a current basis were issued at a price of $25.50$21.79 per share and the shares on a deferred basis were issued at a price of $19.61 per share, representing aggregate fees90% of $0.05 million.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'sCompany’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 September 30, 2018:2019:

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
 
July 2018  -  $-   -   1,066,693 
August 2018  101   25.05   -   1,066,693 
September 2018  -   -   -   1,066,693 
Total  101  $25.05   -   1,066,693 
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
 
July 2019  --  $--   --   299,298 
August 2019  25,919   20.09   25,000   274,298 
September 2019  --   --   --   274,298 
Total  25,919  $20.09   25,000   274,298 

(1)Represents
August includes 919 shares 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.stock as well as satisfy tax withholding obligations and stock option exercise price resulting from the exercise of stock options.

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Item 6.
Exhibits

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

 
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).
 
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).
 
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).
 
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.INS101.INS Instance Document
 
101.SCH101.SCH XBRL Taxonomy Extension Schema Document
 
101.CAL101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
 
101.DEF101.DEF XBRL Taxonomy Extension Definition Linkbase Document
 
101.LAB101.LAB XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

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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
November 2, 20181, 2019 
By
/s/ Robert N. Shuster
    Robert N. Shuster, Principal Financial Officer
     
Date
November 2, 20181, 2019 
By
/s/ James J. Twarozynski
    James J. Twarozynski, Principal Accounting Officer


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