10-Q 1 form10q.htm INDEPENDENT BANK CORPORATION 10-Q 9-30-2014
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, 2014

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)

230 West Main Street, P.O. Box 491, Ionia, Michigan  48846
(Address of principal executive offices)

(616) 527-5820
(Registrant's telephone number, including area code)

NONE
Former name, address and fiscal year, if changed since last report.

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  x      NO  o
 
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 x           NO o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or smaller reporting company.
Large accelerated filer ¨  Accelerated filer ¨  Non-accelerated filer ¨  Smaller reporting company x
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o       NO x
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common stock, no par value
  
22,952,199
Class
  
Outstanding at November 5, 2014
 
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

INDEX

   
Number(s)
PART I -
Financial Information
  
Item 1.
 3
  4
  5
  6
  7
 
8-65
Item 2.
66-94
Item 3.
95
Item 4.
95
     
PART II -
Other Information
  
Item 1A
96
Item 2.
96
Item 6.
96-97

1
FORWARD-LOOKING STATEMENTS

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

· economic, market, operational, liquidity, credit, and interest rate risks associated with our business;
· economic conditions generally and in the financial services industry, particularly economic conditions within Michigan and the regional and local real estate markets in which our bank operates;
· the failure of assumptions underlying the establishment of, and provisions made to, our allowance for loan losses;
· the failure of assumptions underlying our estimate of probable incurred losses from vehicle service contract payment plan counterparty contingencies, including our assumptions regarding future cancellations of vehicle service contracts, the value to us of collateral that may be available to recover funds due from our counterparties, and our ability to enforce the contractual obligations of our counterparties to pay amounts owing to us;
· increased competition in the financial services industry, either nationally or regionally;
· our ability to achieve loan and deposit growth;
· volatility and direction of market interest rates;
· the continued services of our management team; and
· implementation of new legislation, which may have significant effects on us and the financial services industry.

This list provides examples of factors that could affect the results described by forward-looking statements contained in this report, but the list is not intended to be all inclusive.  The risk factors disclosed in Part I – Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, 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 that our management believes could materially affect the results described by forward-looking statements in this report.  However, those risks may not be the only risks we face.  Our results of operations, cash flows, financial position, and prospects could also be materially and adversely affected by additional factors that are not presently known to us, that we currently consider to be immaterial, or that develop after the date of this report.  We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this report are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.
2
Part I - Item 1.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition

   
September 30,
2014
    
December 31,
2013
  
   
(unaudited)
  
   
(In thousands, except share amounts)
  
Assets
  
Cash and due from banks
  
$
48,259
    
$
48,156
  
Interest bearing deposits and repurchase agreement
    
17,229
      
70,925
  
Cash and Cash Equivalents
    
65,488
      
119,081
  
Interest bearing deposits - time
    
14,604
      
17,999
  
Trading securities
    
530
      
498
  
Securities available for sale
    
533,166
      
462,481
  
Federal Home Loan Bank and Federal Reserve Bank stock, at cost
    
23,344
      
23,419
  
Loans held for sale, carried at fair value
    
22,837
      
20,390
  
Loans
                
Commercial
    
672,087
      
635,234
  
Mortgage
    
473,541
      
486,633
  
Installment
    
208,161
      
192,065
  
Payment plan receivables
    
44,995
      
60,638
  
Total Loans
    
1,398,784
      
1,374,570
  
Allowance for loan losses
    
(27,508
)
    
(32,325
)
Net Loans
    
1,371,276
      
1,342,245
  
Other real estate and repossessed assets
    
9,375
      
18,282
  
Property and equipment, net
    
46,226
      
48,594
  
Bank-owned life insurance
    
53,275
      
52,253
  
Deferred tax assets, net
    
50,332
      
57,550
  
Capitalized mortgage loan servicing rights
    
13,180
      
13,710
  
Vehicle service contract counterparty receivables, net
    
6,823
      
7,716
  
Other intangibles
    
2,761
      
3,163
  
Accrued income and other assets
    
26,640
      
22,562
  
Total Assets
  
$
2,239,857
    
$
2,209,943
  
                 
Liabilities and Shareholders’ Equity
  
Deposits
                
Non-interest bearing
  
$
562,862
    
$
518,658
  
Savings and interest-bearing checking
    
925,390
      
910,352
  
Reciprocal
    
52,133
      
83,527
  
Retail time
    
342,274
      
358,800
  
Brokered time
    
13,236
      
13,469
  
Total Deposits
    
1,895,895
      
1,884,806
  
Other borrowings
    
26,228
      
17,188
  
Subordinated debentures
    
40,723
      
40,723
  
Vehicle service contract counterparty payables
    
2,788
      
4,089
  
Accrued expenses and other liabilities
    
27,156
      
31,556
  
Total Liabilities
    
1,992,790
      
1,978,362
  
                 
Shareholders’ Equity
                
Preferred stock, no par value, 200,000 shares authorized;  none issued or outstanding
    
-
      
-
  
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding:
22,946,066 shares at September 30, 2014 and 22,819,136 shares at December 31, 2013
    
352,129
      
351,173
  
Accumulated deficit
    
(98,979
)
    
(110,347
)
Accumulated other comprehensive loss
    
(6,083
)
    
(9,245
)
Total Shareholders’ Equity
    
247,067
      
231,581
  
Total Liabilities and Shareholders’ Equity
  
$
2,239,857
    
$
2,209,943
  

See notes to interim condensed consolidated financial statements (unaudited)
 
3
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations

   
Three months ended September 30,
    
Nine months ended September 30,
  
   
2014
    
2013
    
2014
    
2013
  
Interest Income
  
(unaudited - In thousands)
  
Interest and fees on loans
  
$
17,818
    
$
20,083
    
$
54,179
    
$
61,096
  
Interest on securities
                                
Taxable
    
1,644
      
1,109
      
4,623
      
2,772
  
Tax-exempt
    
281
      
282
      
830
      
762
  
Other investments
    
325
      
310
      
1,076
      
966
  
Total Interest Income
    
20,068
      
21,784
      
60,708
      
65,596
  
Interest Expense
                                
Deposits
    
1,236
      
1,371
      
3,789
      
4,363
  
Other borrowings
    
649
      
884
      
1,720
      
2,625
  
Total Interest Expense
    
1,885
      
2,255
      
5,509
      
6,988
  
Net Interest Income
    
18,183
      
19,529
      
55,199
      
58,608
  
Provision for loan losses
    
(632
)
    
(355
)
    
(2,049
)
    
(3,153
)
Net Interest Income After Provision for Loan Losses
    
18,815
      
19,884
      
57,248
      
61,761
  
Non-interest Income
                                
Service charges on deposit accounts
    
3,579
      
3,614
      
10,166
      
10,603
  
Interchange income
    
1,984
      
1,852
      
5,992
      
5,542
  
Net gains (losses) on assets
                                
Mortgage loans
    
1,490
      
1,570
      
4,139
      
8,415
  
Securities
    
168
      
14
      
334
      
205
  
Other than temporary impairment loss on securities
                                
Total impairment loss
    
(9
)
    
-
      
(9
)
    
(26
)
Loss recognized in other comprehensive loss
    
-
      
-
      
-
      
-
  
Net impairment loss recognized in earnings
    
(9
)
    
-
      
(9
)
    
(26
)
Mortgage loan servicing
    
932
      
338
      
1,389
      
2,614
  
Title insurance fees
    
243
      
409
      
734
      
1,261
  
Increase in fair value of U.S. Treasury warrant
    
-
      
-
      
-
      
(1,025
)
Other
    
2,156
      
2,040
      
6,829
      
6,327
  
Total Non-interest Income
    
10,543
      
9,837
      
29,574
      
33,916
  
Non-Interest Expense
                                
Compensation and employee benefits
    
11,718
      
12,591
      
34,774
      
35,613
  
Occupancy, net
    
2,079
      
2,017
      
6,715
      
6,588
  
Data processing
    
1,790
      
2,090
      
5,653
      
6,048
  
Loan and collection
    
1,391
      
1,584
      
4,283
      
5,512
  
Furniture, fixtures and equipment
    
1,005
      
1,051
      
3,127
      
3,171
  
Communications
    
712
      
695
      
2,212
      
2,205
  
Advertising
    
427
      
652
      
1,547
      
1,881
  
Legal and professional
    
559
      
487
      
1,380
      
1,843
  
FDIC deposit insurance
    
396
      
685
      
1,235
      
2,026
  
Interchange expense
    
368
      
410
      
1,112
      
1,238
  
Credit card and bank service fees
    
226
      
310
      
734
      
975
  
Vehicle service contract counterparty contingencies
    
28
      
149
      
169
      
3,403
  
Costs (recoveries) related to unfunded lending commitments
    
12
      
(86
)
    
27
      
(57
)
Provision for loss reimbursement on sold loans
    
-
      
1,417
      
(466
)
    
2,436
  
Net (gains) losses on other real estate and repossessed assets
    
(285
)
    
119
      
(410
)
    
1,091
  
Other
    
1,658
      
1,763
      
4,952
      
5,176
  
Total Non-interest Expense
    
22,084
      
25,934
      
67,044
      
79,149
  
Income Before Income Tax
    
7,274
      
3,787
      
19,778
      
16,528
  
Income tax expense (benefit)
    
2,345
      
282
      
5,659
      
(56,172
)
Net Income
  
$
4,929
    
$
3,505
    
$
14,119
    
$
72,700
  
Preferred stock dividends and discount accretion
    
-
      
(749
)
    
-
      
(3,001
)
Preferred stock discount
    
-
      
7,554
      
-
      
7,554
  
Net Income Applicable to Common Stock
  
$
4,929
    
$
10,310
    
$
14,119
    
$
77,253
  
Net Income Per Common Share
                                
Basic
  
$
0.21
    
$
0.73
    
$
0.62
    
$
7.03
  
Diluted
  
$
0.21
    
$
0.17
    
$
0.60
    
$
3.40
  
Dividends Per Common Share
                                
Declared
  
$
0.06
    
$
-
    
$
0.12
    
$
-
  
Paid
  
$
0.06
    
$
-
    
$
0.12
    
$
-
  

See notes to interim condensed consolidated financial statements (unaudited)
 
4
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income

   
Three months ended
September 30,
    
Nine months ended
September 30,
  
   
2014
    
2013
    
2014
    
2013
  
   
(unaudited)
    
(unaudited)
  
   
(In thousands)
    
(In thousands)
  
                 
Net income
  
$
4,929
    
$
3,505
    
$
14,119
    
$
72,700
  
Other comprehensive income, before tax
                                
Available for sale securities
                                
Unrealized gain (loss) arising during period
    
253
      
(2,910
)
    
4,262
      
(4,399
)
Change in unrealized losses for which a portion of other than temporary impairment has been recognized in earnings
    
94
      
(108
)
    
432
      
183
  
Reclassification adjustment for other than temporary impairment included in earnings
    
9
      
-
      
9
      
26
  
Reclassification adjustments for gains included in earnings
    
(121
)
    
-
      
(123
)
    
(8
)
Unrealized gains (losses) recognized in other comprehensive income on available for sale securities
    
235
      
(3,018
)
    
4,580
      
(4,198
)
Income tax expense (benefit)
    
82
      
(1,056
)
    
1,603
      
(1,469
)
Unrealized gains (losses) recognized in other comprehensive income on available for sale securities, net of tax
    
153
      
(1,962
)
    
2,977
      
(2,729
)
Derivative instruments
                                
Unrealized loss arising during period
    
-
      
-
      
-
      
(38
)
Reclassification adjustment for expense recognized in earnings
    
-
      
-
      
-
      
208
  
Reclassification adjustment for accretion on settled derivatives
    
95
      
95
      
285
      
95
  
Unrealized gains recognized in other comprehensive income on derivative instruments
    
95
      
95
      
285
      
265
  
Income tax expense (benefit)
    
33
      
33
      
100
      
(1,352
)
Unrealized gains recognized in other comprehensive income on derivative instruments,
net of tax
    
62
      
62
      
185
      
1,617
  
Other comprehensive income (loss)
    
215
      
(1,900
)
    
3,162
      
(1,112
)
Comprehensive income
  
$
5,144
    
$
1,605
    
$
17,281
    
$
71,588
  
 
See notes to interim condensed consolidated financial statements (unaudited)
 
5
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows

   
Nine months ended September 30,
  
   
2014
    
2013
  
   
(unaudited - In thousands)
  
Net Income
  
$
14,119
    
$
72,700
  
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
                
Proceeds from sales of loans held for sale
    
160,102
      
346,206
  
Disbursements for loans held for sale
    
(158,410
)
    
(317,926
)
Provision for loan losses
    
(2,049
)
    
(3,153
)
Deferred federal income tax expense (benefit)
    
7,218
      
(58,807
)
Deferred loan fees and costs
    
(846
)
    
(28
)
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans
    
1,856
      
(2,168
)
Net gains on mortgage loans
    
(4,139
)
    
(8,415
)
Net gains on securities
    
(334
)
    
(205
)
Securities impairment recognized in earnings
    
9
      
26
  
Net (gains) losses on other real estate and repossessed assets
    
(410
)
    
1,091
  
Vehicle service contract counterparty contingencies
    
169
      
3,403
  
Share based compensation
    
891
      
1,002
  
(Increase) decrease in accrued income and other assets
    
(6,034
)
    
8,572
  
Decrease in accrued expenses and other liabilities
    
(5,874
)
    
(947
)
Total Adjustments
    
(7,851
)
    
(31,349
)
Net Cash From Operating Activities
    
6,268
      
41,351
  
Cash Flow used in Investing Activities
                
Proceeds from the sale of securities available for sale
    
7,630
      
2,940
  
Proceeds from the maturity of securities available for sale
    
48,624
      
25,975
  
Principal payments received on securities available for sale
    
62,400
      
28,766
  
Purchases of securities available for sale
    
(184,726
)
    
(266,974
)
Purchases of interest bearing deposits
    
(750
)
    
(16,419
)
Proceeds from the maturity of interest bearing deposits
    
4,050
      
-
  
Purchase of Federal Reserve Bank Stock
    
(151
)
    
(658
)
Redemption of Federal Reserve Bank Stock
    
226
      
-
  
Net (increase) decrease in portfolio loans (loans originated, net of principal payments)
    
(23,447
)
    
30,255
  
Net proceeds from the sale of watch, substandard and non-performing loans
    
-
      
6,721
  
Net cash from branch sale
    
-
      
3,292
  
Proceeds from the collection of vehicle service contract counterparty receivables
    
366
      
6,351
  
Proceeds from the sale of other real estate and repossessed assets
    
12,435
      
11,659
  
Capital expenditures
    
(2,660
)
    
(5,940
)
Net Cash used in Investing Activities
    
(76,003
)
    
(174,032
)
Cash Flow from Financing Activities
                
Net increase in total deposits
    
11,089
      
69,781
  
Net increase (decrease) in other borrowings
    
13,649
      
(2
)
Proceeds from Federal Home Loan Bank advances
    
-
      
100
  
Payments of Federal Home Loan Bank advances
    
(4,609
)
    
(441
)
Net decrease in vehicle service contract counterparty payables
    
(1,301
)
    
(2,226
)
Dividends paid
    
(2,752
)
    
-
  
Share based compensation withholding obligation
    
-
      
(513
)
Redemption of convertible preferred stock and common stock warrant
    
-
      
(81,000
)
Proceeds from issuance of common stock
    
66
      
98,145
  
Net Cash from Financing Activities
    
16,142
      
83,844
  
Net decrease in Cash and Cash Equivalents
    
(53,593
)
    
(48,837
)
Cash and Cash Equivalents at Beginning of Period
    
119,081
      
179,782
  
Cash and Cash Equivalents at End of Period
  
$
65,488
    
$
130,945
  
Cash paid during the period for
                
Interest
  
$
5,450
    
$
13,853
  
Income taxes
    
116
      
42
  
Transfers to other real estate and repossessed assets
    
3,118
      
3,254
  
Transfer of payment plan receivables to vehicle service contract counterparty receivables
    
105
      
995
  
Purchase of securities available for sale not yet settled
    
1,827
      
3,816
  

See notes to interim condensed consolidated financial statements (unaudited)
 
6
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity

   
Nine months ended
September 30,
  
   
2014
    
2013
  
   
(unaudited)
  
   
(In thousands)
  
         
Balance at beginning of period
  
$
231,581
    
$
134,975
  
Net income
    
14,119
      
72,700
  
Cash dividends declared
    
(2,752
)
    
-
  
Issuance of common stock
    
66
      
99,065
  
Share based compensation
    
891
      
1,002
  
Share based compensation withholding obligation
    
-
      
(513
)
Redemption of convertible preferred stock and common stock warrant
    
-
      
(81,000
)
Common stock warrant
    
-
      
1,484
  
Net change in accumulated other comprehensive loss, net of related tax effect
    
3,162
      
(1,112
)
Balance at end of period
  
$
247,067
    
$
226,601
  

See notes to interim condensed consolidated financial statements (unaudited)
 
7
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, 2013 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, 2014 and December 31, 2013, and the results of operations for the three and nine-month periods ended September 30, 2014 and 2013.  The results of operations for the three and nine-month periods ended September 30, 2014, 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 assessment for other than temporary impairment (“OTTI”) on investment securities,  the determination of the allowance for loan losses, the determination of vehicle service contract counterparty contingencies, the valuation of originated mortgage loan servicing rights and the valuation of deferred tax assets.  Refer to our 2013 Annual Report on Form 10-K for a disclosure of our accounting policies.

2.
New Accounting Standards

In July, 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, “Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”.  This ASU amends existing guidance so that an unrecognized tax benefit, or a portion thereof, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability.  This amended guidance became effective for us on January 1, 2014 and did not have a material impact on our consolidated operating results or financial condition.

In May, 2014 the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this ASU specifies the accounting for some costs to obtain or fulfill a contract with a customer.  This amended guidance is effective for us on January 1, 2017 and is not expected to have a material impact on our consolidated operating results or financial condition.
 
8
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

3.
Securities

Securities available for sale consist of the following:

   
Amortized
    
Unrealized
      
   
Cost
    
Gains
    
Losses
    
Fair Value
  
   
(In thousands)
  
September 30, 2014
                
U.S. agency
  
$
35,295
    
$
199
    
$
90
    
$
35,404
  
U.S. agency residential mortgage-backed
    
257,235
      
1,689
      
745
      
258,179
  
U.S. agency commercial mortgage-backed
    
26,317
      
47
      
93
      
26,271
  
Private label residential mortgage-backed
    
6,505
      
211
      
137
      
6,579
  
Other asset backed
    
35,523
      
76
      
55
      
35,544
  
Obligations of states and political subdivisions
    
146,985
      
778
      
2,002
      
145,761
  
Corporate
    
22,743
      
135
      
69
      
22,809
  
Trust preferred
    
2,908
      
-
      
289
      
2,619
  
Total
  
$
533,511
    
$
3,135
    
$
3,480
    
$
533,166
  
                                 
December 31, 2013
                                
U.S. agency
  
$
32,106
    
$
44
    
$
342
    
$
31,808
  
U.S. agency residential mortgage-backed
    
202,649
      
1,343
      
532
      
203,460
  
Private label residential mortgage-backed
    
7,294
      
112
      
618
      
6,788
  
Other asset backed
    
45,369
      
10
      
194
      
45,185
  
Obligations of states and political subdivisions
    
157,966
      
496
      
4,784
      
153,678
  
Corporate
    
19,120
      
43
      
26
      
19,137
  
Trust preferred
    
2,902
      
-
      
477
      
2,425
  
Total
  
$
467,406
    
$
2,048
    
$
6,973
    
$
462,481
  
 
9
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

   
Less Than Twelve Months
    
Twelve Months or More
    
Total
  
   
Fair Value
    
Unrealized
Losses
    
Fair Value
    
Unrealized
Losses
    
Fair Value
    
Unrealized
Losses
  
   
(In thousands)
  
                         
September 30, 2014
                        
U.S. agency
  
$
12,500
    
$
86
    
$
4,996
    
$
4
    
$
17,496
    
$
90
  
U.S. agency residential mortgage-backed
    
95,482
      
615
      
13,937
      
130
      
109,419
      
745
  
U.S. agency commercial mortgage-backed
    
18,201
      
93
      
-
      
-
      
18,201
      
93
  
Private label residential mortgage-backed
    
-
      
-
      
4,493
      
137
      
4,493
      
137
  
Other asset backed
     6,670       38       8,384       17       15,054       55  
Obligations of states and political subdivisions
    
41,725
      
1,129
      
27,213
      
873
      
68,938
      
2,002
  
Corporate
    
4,658
      
69
      
-
      
-
      
4,658
      
69
  
Trust preferred
    
-
      
-
      
2,619
      
289
      
2,619
      
289
  
Total
  
$
179,236
    
$
2,030
    
$
61,642
    
$
1,450
    
$
240,878
    
$
3,480
  
                                                 
December 31, 2013
                                                
U.S. agency
  
$
16,715
    
$
342
    
$
-
    
$
-
    
$
16,715
    
$
342
  
U.S. agency residential mortgage-backed
    
78,256
      
532
      
-
      
-
      
78,256
      
532
  
Private label residential mortgage-backed
    
407
      
6
      
4,602
      
612
      
5,009
      
618
  
Other asset backed
    
33,862
      
194
      
-
      
-
      
33,862
      
194
  
Obligations of states and political subdivisions
    
103,942
      
4,645
      
4,805
      
139
      
108,747
      
4,784
  
Corporate
    
7,105
      
26
      
-
      
-
      
7,105
      
26
  
Trust preferred
    
-
      
-
      
2,425
      
477
      
2,425
      
477
  
Total
  
$
240,287
    
$
5,745
    
$
11,832
    
$
1,228
    
$
252,119
    
$
6,973
  
 
Our portfolio of available-for-sale securities 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 or loss.
 
10
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, 2014 we had 13 U.S. agency, 71 U.S. agency residential mortgage-backed and 17 U.S. agency commercial mortgage-backed securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to rises in term interest rates 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 residential mortgage backed securities — at September 30, 2014 we had four of this type of security whose fair value is less than amortized cost. Two of the four issues are rated by a major rating agency as investment grade while the other two are below investment grade. One of these bonds has impairment in excess of 10% and all four of these holdings have been impaired for more than 12 months.  The unrealized losses are largely attributable to credit spread widening on these securities since their acquisition.

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

All private label residential mortgage-backed securities are reviewed for OTTI utilizing a cash flow projection. The cash flow analysis forecasts cash flow from the underlying loans in each transaction and then applies these cash flows to the bonds in the securitization.  Our cash flow analysis forecasts complete recovery of our cost basis for three of the four securities whose fair value is less than amortized cost while the fourth security had credit related OTTI and is discussed in further detail 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, 2014 we had 11 other asset backed securities whose fair value is less than amortized cost. The unrealized losses are primarily due to widening discount margins.  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, 2014 we had 84 municipal securities whose fair value is less than amortized cost.  The unrealized losses are primarily due to increases in interest rates since acquisition.  As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Corporate — at September 30, 2014 we had four corporate securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening.  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.
 
11
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Trust preferred securities — at September 30, 2014 we had three trust preferred securities whose fair value is less than amortized cost. All of our trust preferred securities are single issue securities issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities over the past several years has suffered from credit spread widening fueled by uncertainty regarding potential losses of financial companies and repricing of risk related to these hybrid capital securities.

One of the three securities is rated by two major rating agencies as investment grade, while one (a Bank of America issuance) is rated below investment grade by two major rating agencies and the other one is non-rated. The non-rated issue is a relatively small bank and was never rated. The issuer of this non-rated trust preferred security, which had a total amortized cost of $1.0 million and total fair value of $0.9 million as of September 30, 2014, continues to have satisfactory credit metrics and make interest payments.

The following table breaks out our trust preferred securities in further detail as of September 30, 2014 and December 31, 2013:

   
September 30, 2014
    
December 31, 2013
  
   
Fair
Value
    
Net
Unrealized
Loss
    
Fair
Value
    
Net
Unrealized
Loss
  
   
(In thousands)
  
                 
Trust preferred securities
                
Rated issues
  
$
1,750
    
$
(158
)
  
$
1,600
    
$
(302
)
Unrated issues
    
869
      
(131
)
    
825
      
(175
)
 
As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

We recorded $0.009 million of credit related OTTI charges in earnings on securities available for sale during the three and nine month periods ended September 30, 2014.  We recorded zero and $0.026 million of credit related OTTI charges during the three and nine month periods ended September 30, 2013, respectively.
 
12
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

At September 30, 2014 three private label residential mortgage-backed securities had credit related OTTI and are summarized as follows:

   
Senior
Security
    
Super
Senior
Security
    
Senior
Support
Security
    
Total
  
   
(In thousands)
  
                 
As of September 30, 2014
                
Fair value
  
$
2,332
    
$
1,646
    
$
97
    
$
4,075
  
Amortized cost
    
2,364
      
1,533
      
-
      
3,897
  
Non-credit unrealized loss
    
32
      
-
      
-
      
32
  
Unrealized gain
    
-
      
113
      
97
      
210
  
Cumulative credit related OTTI
    
757
      
457
      
380
      
1,594
  
 
Credit related OTTI recognized in our Condensed Consolidated Statements of Operations
                                
For the three months ended September 30,
                                
2014
  
$
9
    
$
-
    
$
-
    
$
9
  
2013
    
-
      
-
      
-
      
-
  
For the nine months ended September 30,
                                
2014
    
9
      
-
      
-
      
9
  
2013
    
26
      
-
      
-
      
26
  

Each of these securities is receiving principal and interest payments similar to principal reductions in the underlying collateral.  Two of these securities have unrealized gains and one has an unrealized loss at September 30, 2014.  Prior to the second quarter of 2013 all three of these securities had an unrealized loss.  The original amortized cost for each of these securities has been permanently adjusted downward for previously recorded credit related OTTI.  The unrealized loss (based on original amortized cost) for two of these securities is now less than previously recorded credit related OTTI amounts.  The remaining non-credit related unrealized loss in the senior security is attributed to other factors and is reflected in other comprehensive income during those same periods.

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

   
Three months ended
September 30,
    
Nine months ended
September 30,
  
   
2014
    
2013
    
2014
    
2013
  
   
(In thousands)
  
Balance at beginning of period
  
$
1,835
    
$
1,835
    
$
1,835
    
$
1,809
  
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
    
9
      
-
      
9
      
26
  
Balance at end of period
  
$
1,844
    
$
1,835
    
$
1,844
    
$
1,835
  
 
13
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The amortized cost and fair value of securities available for sale at September 30, 2014, by contractual maturity, follow:

   
Amortized
Cost
    
Fair
Value
  
   
(In thousands)
  
Maturing within one year
  
$
22,140
    
$
22,199
  
Maturing after one year but within five years
    
66,461
      
66,755
  
Maturing after five years but within ten years
    
49,180
      
49,325
  
Maturing after ten years
    
70,150
      
68,314
  
     
207,931
      
206,593
  
U.S. agency residential mortgage-backed
    
257,235
      
258,179
  
U.S. agency commercial mortgage-backed
    
26,317
      
26,271
  
Private label residential mortgage-backed
    
6,505
      
6,579
  
Other asset backed
    
35,523
      
35,544
  
Total
  
$
533,511
    
$
533,166
  
 
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
  
   
Proceeds
    
Gains (1)
    
Losses (2)
  
   
(In thousands)
  
2014
  
$
7,630
    
$
123
    
$
-
  
2013
    
2,940
      
15
      
7
  
 
(1) Gains in 2014 exclude $0.179 million of unrealized gain related to a U.S. Treasury short position.
(2) Losses in 2014 and 2013 exclude $0.009 million and $0.026 million, respectively of credit related OTTI recognized in earnings.
 
During 2014 and 2013 our trading securities consisted of various preferred stocks.  During the first nine months of 2014 and 2013 we recognized gains on trading securities of $0.032 million and $0.197 million, respectively that are included in net gains (losses) on securities in the Condensed Consolidated Statements of Operations.  Both of these amounts relate to gains recognized on trading securities still held at each respective period end.
 
14
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 loss experience, current economic conditions and other pertinent factors.

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

   
Commercial
    
Mortgage
    
Installment
    
Payment
Plan
Receivables
    
Unallocated
    
Total
  
   
(In thousands)
  
2014
                        
Balance at beginning of period
  
$
5,175
    
$
15,542
    
$
1,988
    
$
80
    
$
5,412
    
$
28,197
  
Additions (deductions)
                                                
Provision for loan losses
    
(601
)
    
(9
)
    
32
      
(8
)
    
(46
)
    
(632
)
Recoveries credited to allowance
    
999
      
197
      
283
      
-
      
-
      
1,479
  
Loans charged against the allowance
    
(385
)
    
(729
)
    
(422
)
    
-
      
-
      
(1,536
)
Balance at end of period
  
$
5,188
    
$
15,001
    
$
1,881
    
$
72
    
$
5,366
    
$
27,508
  
                                                 
2013
                                                
Balance at beginning of period
  
$
8,236
    
$
18,659
    
$
2,996
    
$
125
    
$
6,770
    
$
36,786
  
Additions (deductions)
                                                
Provision for loan losses
    
(709
)
    
712
      
105
      
(37
)
    
(426
)
    
(355
)
Recoveries credited to allowance
    
878
      
343
      
244
      
19
      
-
      
1,484
  
Loans charged against the allowance
    
(1,450
)
    
(1,497
)
    
(534
)
    
3
      
-
      
(3,478
)
Balance at end of period
  
$
6,955
    
$
18,217
    
$
2,811
    
$
110
    
$
6,344
    
$
34,437
  
 
15
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
    
Payment
Plan
Receivables
    
Unallocated
    
Total
  
   
(In thousands)
  
2014
                        
Balance at beginning of period
  
$
6,827
    
$
17,195
    
$
2,246
    
$
97
    
$
5,960
    
$
32,325
  
Additions (deductions)
                                                
Provision for loan losses
    
(1,164
)
    
(395
)
    
132
      
(28
)
    
(594
)
    
(2,049
)
Recoveries credited to allowance
    
3,492
      
1,055
      
886
      
5
      
-
      
5,438
  
Loans charged against the allowance
    
(3,967
)
    
(2,854
)
    
(1,383
)
    
(2
)
    
-
      
(8,206
)
Balance at end of period
  
$
5,188
    
$
15,001
    
$
1,881
    
$
72
    
$
5,366
    
$
27,508
  
                                                 
2013
                                                
Balance at beginning of period
  
$
11,402
    
$
21,447
    
$
3,378
    
$
144
    
$
7,904
    
$
44,275
  
Additions (deductions)
                                                
Provision for loan losses
    
(2,385
)
    
224
      
621
      
(53
)
    
(1,560
)
    
(3,153
)
Recoveries credited to allowance
    
4,595
      
1,415
      
836
      
47
      
-
      
6,893
  
Loans charged against the allowance
    
(6,657
)
    
(4,869
)
    
(2,024
)
    
(28
)
    
-
      
(13,578
)
Balance at end of period
  
$
6,955
    
$
18,217
    
$
2,811
    
$
110
    
$
6,344
    
$
34,437
  
 
16
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
    
Payment
Plan
Receivables
    
Unallocated
    
Total
  
   
(In thousands)
  
September 30, 2014
                        
Allowance for loan losses:
                        
Individually evaluated for impairment
  
$
2,587
    
$
9,622
    
$
686
    
$
-
    
$
-
    
$
12,895
  
Collectively evaluated for impairment
    
2,601
      
5,379
      
1,195
      
72
      
5,366
      
14,613
  
Total ending allowance balance
  
$
5,188
    
$
15,001
    
$
1,881
    
$
72
    
$
5,366
    
$
27,508
  
                                                 
Loans
                                                
Individually evaluated for impairment
  
$
35,280
    
$
74,690
    
$
6,814
    
$
-
            
$
116,784
  
Collectively evaluated for impairment
    
638,315
      
401,054
      
202,002
      
44,995
              
1,286,366
  
Total loans recorded investment
    
673,595
      
475,744
      
208,816
      
44,995
              
1,403,150
  
Accrued interest included in recorded investment
    
1,508
      
2,203
      
655
      
-
              
4,366
  
Total loans
  
$
672,087
    
$
473,541
    
$
208,161
    
$
44,995
            
$
1,398,784
  
                                                 
December 31, 2013
                                                
Allowance for loan losses:
                                                
Individually evaluated for impairment
  
$
3,878
    
$
10,488
    
$
792
    
$
-
    
$
-
    
$
15,158
  
Collectively evaluated for impairment
    
2,949
      
6,707
      
1,454
      
97
      
5,960
      
17,167
  
Total ending allowance balance
  
$
6,827
    
$
17,195
    
$
2,246
    
$
97
    
$
5,960
    
$
32,325
  
                                                 
Loans
                                                
Individually evaluated for impairment
  
$
40,623
    
$
78,022
    
$
7,068
    
$
-
            
$
125,713
  
Collectively evaluated for impairment
    
596,235
      
410,887
      
185,676
      
60,638
              
1,253,436
  
Total loans recorded investment
    
636,858
      
488,909
      
192,744
      
60,638
              
1,379,149
  
Accrued interest included in recorded investment
    
1,624
      
2,276
      
679
      
-
              
4,579
  
Total loans
  
$
635,234
    
$
486,633
    
$
192,065
    
$
60,638
            
$
1,374,570
  
 
17
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

   
90+ and
Still
Accruing
    
Non-
Accrual
    
Total Non-
Performing
Loans
  
   
(In thousands)
  
September 30, 2014
            
Commercial
            
Income producing - real estate
  
$
-
    
$
1,339
    
$
1,339
  
Land, land development and construction - real estate
    
-
      
732
      
732
  
Commercial and industrial
    
-
      
2,350
      
2,350
  
Mortgage
    
.
                  
1-4 family
    
-
      
6,902
      
6,902
  
Resort lending
    
-
      
3,491
      
3,491
  
Home equity - 1st lien
    
-
      
415
      
415
  
Home equity - 2nd lien
    
-
      
635
      
635
  
Installment
                        
Home equity - 1st lien
    
-
      
660
      
660
  
Home equity - 2nd lien
    
-
      
518
      
518
  
Loans not secured by real estate
    
-
      
488
      
488
  
Other
    
-
      
3
      
3
  
Payment plan receivables
                        
Full refund
    
-
      
6
      
6
  
Partial refund
    
-
      
1
      
1
  
Other
    
-
      
3
      
3
  
Total recorded investment
  
$
-
    
$
17,543
    
$
17,543
  
Accrued interest included in recorded investment
  
$
-
    
$
-
    
$
-
  
December 31, 2013
                        
Commercial
                        
Income producing - real estate
  
$
-
    
$
1,899
    
$
1,899
  
Land, land development and construction - real estate
    
-
      
1,036
      
1,036
  
Commercial and industrial
    
-
      
2,434
      
2,434
  
Mortgage
                        
1-4 family
    
-
      
6,594
      
6,594
  
Resort lending
    
-
      
2,668
      
2,668
  
Home equity - 1st lien
    
-
      
415
      
415
  
Home equity - 2nd lien
    
-
      
689
      
689
  
Installment
                        
Home equity - 1st lien
    
-
      
938
      
938
  
Home equity - 2nd lien
    
-
      
571
      
571
  
Loans not secured by real estate
    
-
      
638
      
638
  
Other
    
-
      
-
      
-
  
Payment plan receivables
                        
Full refund
    
-
      
20
      
20
  
Partial refund
    
-
      
3
      
3
  
Other
    
-
      
-
      
-
  
Total recorded investment
  
$
-
    
$
17,905
    
$
17,905
  
Accrued interest included in recorded investment
  
$
-
    
$
-
    
$
-
  
 
18
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

An aging analysis of loans by class follows:

   
Loans Past Due
    
Loans not
    
Total
  
   
30-59 days
    
60-89 days
    
90+ days
    
Total
    
Past Due
    
Loans
  
   
(In thousands)
  
September 30, 2014
                        
Commercial
                        
Income producing - real estate
  
$
426
    
$
77
    
$
824
    
$
1,327
    
$
244,505
    
$
245,832
  
Land, land development and construction - real estate
    
130
      
-
      
230
      
360
      
33,057
      
33,417
  
Commercial and industrial
    
881
      
118
      
1,877
      
2,876
      
391,470
      
394,346
  
Mortgage
                                                
1-4 family
    
2,234
      
1,456
      
6,902
      
10,592
      
266,890
      
277,482
  
Resort lending
    
598
      
447
      
3,491
      
4,536
      
129,866
      
134,402
  
Home equity - 1st lien
    
144
      
-
      
415
      
559
      
19,472
      
20,031
  
Home equity - 2nd lien
    
426
      
95
      
635
      
1,156
      
42,673
      
43,829
  
Installment
                                                
Home equity - 1st lien
    
509
      
64
      
660
      
1,233
      
22,160
      
23,393
  
Home equity - 2nd lien
    
347
      
115
      
518
      
980
      
30,307
      
31,287
  
Loans not secured by real estate
    
487
      
170
      
488
      
1,145
      
150,487
      
151,632
  
Other
    
6
      
51
      
3
      
60
      
2,444
      
2,504
  
Payment plan receivables
                                                
Full refund
    
843
      
306
      
6
      
1,155
      
32,138
      
33,293