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, 2018March 31, 2019

Commission file number   0-7818

INDEPENDENT BANK CORPORATION
(Exact name of registrant as specified in its charter)

Michigan 38-2032782
(State or jurisdiction of Incorporation or Organization) (I.R.S. (I.R.S. Employer Identification Number)

4200 East Beltline, Grand Rapids, Michigan  49525
(Address of principal executive offices)

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

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

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES ☒    NO  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES ☒    NO  ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, smaller reporting company or an emerging growth company.
Large accelerated filer ☐ Accelerated filer  ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company  ☐
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, 23,472,914 as of May 1, 2019.

Securities registered pursuant to Section 12(b) of the Act:

Title of each ClassTrading Symbol
Name of each exchange on which registered
Common stock, no par value 24,105,586
ClassIBCP
 Outstanding at November 1, 2018The Nasdaq Stock Market LLC



INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

INDEX

INDEX

Number(s)
PART I -
Financial Information
Number(s)
Item 1.3
 4
 5
 6
 7
 8-658-56
Item 2.66-9057-77
Item 3.9178
Item 4.9178
   
PART II -
Other Information
 
Item 1A9279
Item 2.9279
Item 6.9380

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.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition

 
September 30,
2018
  
December 31,
2017
  
March 31,
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  $33,247  $23,350 
Interest bearing deposits  17,990   17,744   38,376   46,894 
Cash and Cash Equivalents  53,170   54,738   71,623   70,244 
Interest bearing deposits - time  593   2,739   496   595 
Equity securities at fair value  285   -   -   393 
Trading securities  -   455 
Securities available for sale  436,957   522,925   461,531   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   43,098   44,753 
Loans held for sale, carried at lower of cost or fair value  -   41,471 
Loans                
Commercial  1,112,101   853,260   1,168,404   1,144,481 
Mortgage  1,056,482   849,530   1,043,745   1,042,890 
Installment  393,995   316,027   406,646   395,149 
Total Loans  2,562,578   2,018,817   2,618,795   2,582,520 
Allowance for loan losses  (24,401)  (22,587)  (25,254)  (24,888)
Net Loans  2,538,177   1,996,230   2,593,541   2,557,632 
Other real estate and repossessed assets  1,445   1,643 
Other real estate and repossessed assets, net  1,338   1,299 
Property and equipment, net  39,012   39,149   37,985   38,777 
Bank-owned life insurance  54,811   54,572   55,310   55,068 
Deferred tax assets, net  8,449   15,089   2,866   5,779 
Capitalized mortgage loan servicing rights  23,151   15,699   19,909   21,400 
Other intangibles  6,709   1,586   6,143   6,415 
Goodwill  28,300   -   28,300   28,300 
Accrued income and other assets  46,385   29,551   43,107   34,870 
Total Assets $3,297,124  $2,789,355  $3,383,606  $3,353,281 
                
Liabilities and Shareholders' Equity 
Liabilities and Shareholders’ EquityLiabilities and Shareholders’ Equity 
Deposits                
Non-interest bearing $880,932  $768,333  $858,261  $879,549 
Savings and interest-bearing checking  1,217,939   1,064,391   1,207,965   1,194,865 
Reciprocal  92,635   50,979   267,178   182,072 
Time  399,110   374,872   388,729   385,981 
Brokered time  208,027   141,959   212,092   270,961 
Total Deposits  2,798,643   2,400,534   2,934,225   2,913,428 
Other borrowings  79,688   54,600   25,714   25,700 
Subordinated debentures  39,371   35,569   39,405   39,388 
Accrued expenses and other liabilities  34,218   33,719   39,536   35,771 
Total Liabilities  2,951,920   2,524,422   3,038,880   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: 23,560,179 shares at March 31, 2019 and 23,579,725 shares at December 31, 2018  374,678   377,372 
Accumulated deficit  (34,596)  (54,054)  (23,135)  (28,270)
Accumulated other comprehensive loss  (9,889)  (5,999)  (6,817)  (10,108)
Total Shareholders’ Equity  345,204   264,933   344,726   338,994 
Total Liabilities and Shareholders’ Equity $3,297,124  $2,789,355  $3,383,606  $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,
 
 2018  2017  2018  2017  
Three months ended
March 31,
 
 (unaudited)  (unaudited)  2019  2018 
 (In thousands, except per share amounts)  (unaudited) 
       
(In thousands, except
per share amounts)
 
Interest Income                  
Interest and fees on loans $31,000  $21,831  $84,027  $61,638  $32,681  $23,353 
Interest on securities                        
Taxable  2,737   2,765   8,092   8,300   3,006   2,635 
Tax-exempt  412   512   1,335   1,478   374   479 
Other investments  303   263   898   867   575   330 
Total Interest Income  34,452   25,371   94,352   72,283   36,636   26,797 
Interest Expense                        
Deposits  3,976   1,833   9,472   4,754   5,681   2,287 
Other borrowings and subordinated debentures  779   626   2,267   1,659   712   574 
Total Interest Expense  4,755   2,459   11,739   6,413   6,393   2,861 
Net Interest Income  29,697   22,912   82,613   65,870   30,243   23,936 
Provision for loan losses  (53)  582   912   806   664   315 
Net Interest Income After Provision for Loan Losses  29,750   22,330   81,701   65,064   29,579   23,621 
Non-interest Income                        
Service charges on deposit accounts  3,166   3,281   9,166   9,465   2,640   2,905 
Interchange income  2,486   1,942   7,236   5,869   2,355   2,246 
Net gains (losses) on assets                        
Mortgage loans  2,745   2,971   8,571   8,886   3,611   2,571 
Securities  93   69   (71)  62   304   (173)
Mortgage loan servicing, net  1,212   1   4,668   668   (1,215)  2,221 
Other  2,134   2,040   6,294   6,139   2,264   1,943 
Total Non-interest Income  11,836   10,304   35,864   31,089   9,959   11,713 
Non-interest Expense                        
Compensation and employee benefits  16,169   13,577   46,506   41,104   16,351   14,468 
Occupancy, net  2,233   1,970   6,667   6,032   2,505   2,264 
Data processing  2,051   1,796   6,180   5,670   2,144   1,878 
Merger related expenses  98   10   3,354   10 
Furniture, fixtures and equipment  1,043   961   3,029   2,943   1,029   967 
Communications  727   685   2,111   2,046   769   680 
Interchange expense  715   294   1,974   869   688   598 
Loan and collection  531   481   1,900   1,564   634   677 
Advertising  594   526   1,578   1,551   672   441 
Legal and professional  477   540   1,311   1,366   369   378 
FDIC deposit insurance  270   208   750   608   368   230 
Merger related expenses  -   174 
Other  1,832   1,568   5,276   5,183   2,461   1,380 
Total Non-interest Expense  26,740   22,616   80,636   68,946   27,990   24,135 
Income Before Income Tax  14,846   10,018   36,929   27,207   11,548   11,199 
Income tax expense  2,921   3,159   7,026   8,443   2,167   2,038 
Net Income $11,925  $6,859  $29,903  $18,764  $9,381  $9,161 
Net Income Per Common Share                        
Basic $0.49  $0.32  $1.29  $0.88  $0.40  $0.43 
Diluted $0.49  $0.32  $1.27  $0.87  $0.39  $0.42 
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
March 31,
 
 (unaudited)  2019  2018 
 (In thousands)  
(unaudited –
In thousands)
 
                  
Net income $11,925  $6,859  $29,903  $18,764  $9,381  $9,161 
Other comprehensive income (loss)                        
Securities available for sale                        
Unrealized gains (losses) arising during period  (1,157)  20   (6,220)  7,738   5,364   (3,865)
Change in unrealized gains (losses) for which a portion of other than temporary impairment has been recognized in earnings
  (14)  126   (17)  211   (2)  (1)
Reclassification adjustments for (gains) losses included in earnings  -   (8)  45   (125)  (137)  19 
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale
  (1,171)  138   (6,192)  7,824   5,225   (3,847)
Income tax expense (benefit)  (246)  48   (1,300)  2,738   1,097   (808)
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale, net of tax
  (925)  90   (4,892)  5,086   4,128   (3,039)
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  (912)  684 
Reclassification adjustment for (income) expense recognized in earnings  (149)  (6)
Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments
  (1,061)  678 
Income tax expense (benefit)  (224)  142 
Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments, net of tax
  (837)  536 
Other comprehensive income (loss)  (675)  155   (3,890)  5,151   3,291   (2,503)
Comprehensive income $11,250  $7,014  $26,013  $23,915  $12,672  $6,658 

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,  Three months ended March 31, 
 2018  2017  2019  2018 
 (unaudited - In thousands)  (unaudited - In thousands) 
Net Income $29,903  $18,764  $9,381  $9,161 
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   87,496   92,607 
Disbursements for loans held for sale  (343,462)  (316,338)  (82,230)  (84,748)
Provision for loan losses  912   806   664   315 
Deferred income tax expense  6,972   7,422   2,039   2,039 
Deferred loan fees and costs  (3,681)  (4,588)  (111)  (638)
Net depreciation, amortization of intangible assets and premiums and accretion of discounts on securities, loans and interest bearing deposits - time  4,560   5,079   1,479   1,819 
Net gains on mortgage loans  (8,571)  (8,886)  (3,611)  (2,571)
Net losses on securities  71   (62)
Net (gains) losses on securities  (304)  173 
Share based compensation  1,293   1,342   420   407 
Increase in accrued income and other assets  (16,925)  (12,748)  (8,107)  (5,965)
Increase (decrease) in accrued expenses and other liabilities  (1,930)  2,274   2,455   (5,711)
Total Adjustments  (9,275)  (12,140)  750   (2,273)
Net Cash From Operating Activities  20,628   6,624   10,131   6,888 
Cash Flow Used in Investing Activities                
Proceeds from the sale of securities available for sale  31,445   8,834   42,236   22,277 
Proceeds from maturities, prepayments and calls of securities available for sale  125,275   143,953   32,533   34,067 
Purchases of securities available for sale  (71,067)  (84,080)  (71,693)  (23,637)
Proceeds from the sale of interest bearing deposits - time  2,474   - 
Proceeds from the maturity of interest bearing deposits - time  3,728   2,100   100   1,000 
Purchase of Federal Reserve Bank stock  (2,034)  - 
Net increase in portfolio loans (loans originated, net of principal payments)  (272,084)  (326,089)  (65,653)  (68,611)
Proceeds from the sale of portfolio loans  27,577   -   40,630   16,460 
Acquisition of TCSB Bancorp Inc., less cash received  23,516   - 
Cash received from the sale of Mepco Finance Corporation assets, net  -   33,446 
Proceeds from bank-owned life insurance  474   523   -   474 
Proceeds from the sale of other real estate and repossessed assets  1,777   4,111   167   608 
Capital expenditures  (2,812)  (2,592)  (511)  (921)
Net Cash Used in Investing Activities  (131,731)  (219,794)  (22,191)  (18,283)
Cash Flow From Financing Activities        
Cash Flow From (Used in) Financing Activities        
Net increase in total deposits  110,400   118,042   20,797   29,867 
Net increase in other borrowings  18,903   3,003 
Net increase (decrease) in other borrowings  2   (6,753)
Proceeds from Federal Home Loan Bank Advances  1,202,000   461,000   -   40,000 
Payments of Federal Home Loan Bank Advances  (1,210,197)  (397,587)  -   (60,000)
Dividends paid  (10,446)  (6,400)  (4,246)  (3,206)
Proceeds from issuance of common stock  202   57   282   13 
Repurchase of common stock  (2,530)  - 
Share based compensation withholding obligation  (1,327)  (536)  (866)  (888)
Net Cash From Financing Activities  109,535   177,579 
Net Decrease in Cash and Cash Equivalents  (1,568)  (35,591)
Net Cash From (Used in) Financing Activities  13,439   (967)
Net Increase (Decrease) in Cash and Cash Equivalents  1,379   (12,362)
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  $71,623  $42,376 
Cash paid during the period for                
Interest $11,168  $6,240  $6,253  $2,656 
Income taxes  120   988   -   - 
Operating leases
  563
   -
 
Transfers to other real estate and repossessed assets  960   1,389   325   322 
Transfer of loans to held for sale  27,577   - 
Purchase of securities available for sale not yet settled  1,000   1,765   1,500   3,220 
Sale of securities available for sale not yet settled  -   760 
Securitization of portfolio loans  29,790   - 
Right of use assets obtained in exchange for lease obligations  7,703   - 

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 January 1, 2019 $377,372  $(28,270) $(10,108) $338,994 
Net income, three months ended March 31, 2019  -   9,381   -   9,381 
Cash dividends declared, $.18 per share  -   (4,246)  -   (4,246)
Repurchase of 115,787 shares of common stock  (2,530)  -   -   (2,530)
Issuance of 68,399 shares of common stock  282   -   -   282 
Share based compensation (issuance of 84,128 shares of common stock)  420   -   -   420 
Share based compensation withholding obligation (withholding of 56,286 shares of common stock)  (866)  -   -   (866)
Other comprehensive income  -   -   3,291   3,291 
Balances at March 31, 2019 $374,678  $(23,135) $(6,817) $344,726 
                 
Balances at January 1, 2018 $324,986  $(54,054) $(5,999) $264,933 
Net income, three months ended March 31, 2018  -   9,161   -   9,161 
Cash dividends declared, $.15 per share  -   (3,206)  -   (3,206)
Issuance of 3,800 shares of common stock  13   -   -   13 
Share based compensation (issuance of 74,475 shares of common stock)  407   -   -   407 
Share based compensation withholding obligation (withholding of 37,328 shares of common stock)  (888)  -   -   (888)
Other comprehensive loss  -   -   (2,503)  (2,503)
Balances at March 31, 2018 $324,518  $(48,099) $(8,502) $267,917 

See notes to interim condensed consolidated financial statements (unaudited)

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.
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, 2018March 31, 2019 and December 31, 2017,2018, and the results of operations for the three and nine-monthmonth periods ended September 30, 2018March 31, 2019 and 2017.2018.  The results of operations for the three and nine-month periodsmonth period ended September 30, 2018,March 31, 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.
2.   New Accounting Standards

In FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 is effective for us on January 1, 2019 and is not expected to have a material impact on our consolidated operating results or financial condition.  Based on a review of our operating leases that we currently have in place we do not expect a material change in the recognition, measurement and presentation of lease expense or impact on cash flow.  While the primary impact will be the recognition of certain operating leases on our Condensed Consolidated Statements of Financial Condition this impact is not expected to be material.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”.  This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.  This ASU will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For securities available for sale, allowances will be recorded rather than reducing the carrying amount as is done under the current other-than-temporary impairment model. This ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. This amended guidance is effective for us on January 1, 2020.  We began evaluating this ASU in 2016 and have formed a committee that includes personnel from various areas of Independentthe Bank (the “Bank”) that meets regularly to discuss the implementation of the ASU. We have completed historical data validation and are currently in the process of gathering data and reviewing credit loss estimation methodologies and have engaged third party resources that will assist us in the implementation of this ASU.  While weperforming test calculations. We have not yet determined what the impact will be on our consolidated operating results or financial condition, which will be impacted by several variables, including the economic environment and forecast at adoption. Though, by the nature of the implementation of an expected loss model compared to an incurred loss approach, we would expectanticipate our allowance for loan losses (“AFLL”) to increase under this ASU. The Bank expects to begin full parallel runs mid-2019, with a goal of providing an estimated impact range in our 2019 second quarter Form 10-Q.

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

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.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”.  This ASU amends existing guidance related to the accounting for leases. These amendments, among other things, require lessees to account for most leases on the balance sheet while recognizing expense on the income statement in a manner similar to existing guidance.  For lessors the guidance modifies the classification criteria and the accounting for sales-type and direct finance leases. This amended guidance was effective for us on January 1, 2019 and did not have a material impact on our consolidated operating results or financial condition.  Based on our operating leases that we currently have in place we do not expect a material change in the recognition, measurement and presentation of lease expense or impact on cash flow.  The primary impact was the recognition of certain operating leases on our Condensed Consolidated Statements of Financial Condition which resulted in the recording of right of use (“ROU”) assets and offsetting lease liabilities each totaling approximately $7.7 million at January 1, 2019.  See note #16.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities”.  This new ASU amends the hedge accounting model in Topic 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness.  This amended guidance 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.
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            
March 31, 2019            
U.S. agency $20,769  $-  $346  $20,423  $18,143  $57  $71  $18,129 
U.S. agency residential mortgage-backed  126,851   802   2,592   125,061   141,886   1,067   915   142,038 
U.S. agency commercial mortgage-backed  6,039   -   224   5,815   11,418   10   115   11,313 
Private label mortgage-backed  29,340   369   736   28,973   32,984   355   247   33,092 
Other asset backed  78,567   147   188   78,526   110,372   115   197   110,290 
Obligations of states and political subdivisions  143,138   219   3,703   139,654   108,749   707   1,071   108,385 
Corporate  35,017   65   512   34,570   34,048   444   112   34,380 
Trust preferred  1,963   -   38   1,925   1,964   -   81   1,883 
Foreign government  2,060   -   50   2,010   2,040   -   19   2,021 
Total $443,744  $1,602  $8,389  $436,957  $461,604  $2,755  $2,828  $461,531 
                                
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                  
U.S. agency $11,938  $239  $8,485  $107  $20,423  $346 
U.S. agency residential mortgage-backed
  28,672   765   40,857   1,827   69,529   2,592 
U.S. agency commercial mortgage-backed
  1,358   12   4,391   212   5,749   224 
Private label mortgage- backed
  10,209   295   8,473   441   18,682   736 
Other asset backed  30,663   92   11,226   96   41,889   188 
Obligations of states and political subdivisions
  59,590   1,157   57,509   2,546   117,099   3,703 
Corporate  20,853   361   5,726   151   26,579   512 
Trust preferred  -   -   925   38   925   38 
Foreign government  -   -   2,010   50   2,010   50 
Total $163,283  $2,921  $139,602  $5,468  $302,885  $8,389 
                        
December 31, 2017                        
March 31, 2019                  
U.S. agency $5,466  $26  $5,735  $41  $11,201  $67  $96  $1  $10,904  $70  $11,000  $71 
U.S. agency residential mortgage-backed
  22,198   229   40,698   754   62,896   983   5,232   10   50,813   905   56,045   915 
U.S. agency commercial mortgage-backed
  2,181   34   3,994   136   6,175   170   2,215   1   5,434   114   7,649   115 
Private label mortgage-backed
  11,390   92   4,396   238   15,786   330   10,468   12   14,496   235   24,964   247 
Other asset backed  20,352   40   16,648   75   37,000   115   40,490   128   10,619   69   51,109   197 
Obligations of states and political subdivisions
  76,574   936   28,246   947   104,820   1,883   2,173   2   65,191   1,069   67,364   1,071 
Corporate  14,440   33   3,943   57   18,383   90   1,795   6   8,376   106   10,171   112 
Trust preferred  -   -   2,802   127   2,802   127   963   37   920   44   1,883   81 
Foreign government  489   10   1,571   17   2,060   27   -   -   2,021   19   2,021   19 
Total $153,090  $1,400  $108,033  $2,392  $261,123  $3,792  $63,432  $197  $168,774  $2,631  $232,206  $2,828 
                        
December 31, 2018                        
U.S. agency $7,150  $46  $11,945  $147  $19,095  $193 
U.S. agency residential mortgage-backed  18,374   180   48,184   1,663   66,558   1,843 
U.S. agency commercial mortgage-backed  566   3   5,094   181   5,660   184 
Private label mortgage-backed  8,273   57   16,145   580   24,418   637 
Other asset backed  53,043   160   10,235   88   63,278   248 
Obligations of states and political subdivisions  25,423   262   80,701   2,684   106,124   2,946 
Corporate  17,758   343   9,222   243   26,980   586 
Trust preferred  939   61   880   84   1,819   145 
Foreign government  -   -   2,014   36   2,014   36 
Total $131,526  $1,112  $184,420  $5,706  $315,946  $6,818 

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

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

U.S. agency, U.S. agency residential mortgage-backed securities and U.S. agency commercial mortgage backed securities — at September 30, 2018,March 31, 2019, we had 5138 U.S. agency, 133120 U.S. agency residential mortgage-backed and 15 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,March 31, 2019, we had 2731 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(including two of the three securities 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,March 31, 2019, we had 7285 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,March 31, 2019, we had 393212 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,March 31, 2019, we had 3213 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,March 31, 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 $0.96 million as of March 31, 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.

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

Foreign government — at September 30, 2018,March 31, 2019, we had two foreign government 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.

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,March 31, 2019 and 2018, and 2017, respectively.

At September 30, 2018,March 31, 2019, three private label mortgage-backed securities had credit related OTTI and are summarized as follows:

 
Senior
Security
  
Super
Senior
Security
  
Senior
Support
Security
  Total  
Senior
Security
  
Super
Senior
Security
  
Senior
Support
Security
  Total 
 (In thousands)  (In thousands) 
                        
Fair value $842  $808  $32  $1,682  $756  $714  $19  $1,489 
Amortized cost  698   633   -   1,331   629   546   -   1,175 
Non-credit unrealized loss  -   -   -   -   -   -   -   - 
Unrealized gain  144   175   32   351   127   168   19   314 
Cumulative credit related OTTI  757   457   380   1,594   757   457   380   1,594 

Each of these securities is receiving principal and interest payments similar to principal reductions in the underlying collateral. All three of these securities have unrealized gains at September 30, 2018.March 31, 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,
 
  2018  2017  2018  2017 
  (In thousands)  (In thousands) 
Balance at beginning of period $1,594  $1,594  $1,594  $1,594 
Additions to credit losses on securities for which no previous OTTI was recognized
  -   -   -   - 
Increases to credit losses on securities for which OTTI was previously recognized
  -   -   -   - 
Balance at end of period $1,594  $1,594  $1,594  $1,594 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
  
Three months ended
March 31,
 
  2019  2018 
  (In thousands) 
Balance at beginning of period $1,594  $1,594 
Additions to credit losses on securities for which no previous OTTI was recognized
  -   - 
Increases to credit losses on securities for which OTTI was previously recognized
  -   - 
Balance at end of period $1,594  $1,594 

The amortized cost and fair value of securities available for sale at September 30, 2018,March 31, 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  $10,674  $10,664 
Maturing after one year but within five years  79,683   78,634   60,499   60,455 
Maturing after five years but within ten years  62,609   60,979   52,841   52,862 
Maturing after ten years  46,142   44,475   40,930   40,817 
  202,947   198,582   164,944   164,798 
U.S. agency residential mortgage-backed  126,851   125,061   141,886   142,038 
U.S. agency commercial mortgage-backed  6,039   5,815   11,418   11,313 
Private label mortgage-backed  29,340   28,973   32,984   33,092 
Other asset backed  78,567   78,526   110,372   110,290 
Total $443,744  $436,957  $461,604  $461,531 

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 ninethree month periods ending September 30,March 31, follows:

     Realized 
  Proceeds (1)  Gains (2)  Losses 
  (In thousands) 
2018 $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 Class B shares.
     Realized 
  Proceeds  Gains  Losses 
  (In thousands) 
2019 $42,236  $169  $32 
2018  22,277   76   95 

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 ninethree months ended September 30,March 31, 2019 and 2018 and 2017 we recognized lossesgains (losses) on these preferred stocks of $0.170$0.167 million and $0.063$(0.154) million, respectively, that are included in net gains (losses) on securities in the Condensed Consolidated Statements of Operations.  These amountsZero and $(0.154) million of these gains (losses) during the three months ended March 31, 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.
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 
  (In thousands) 
2018               
Balance at beginning of period $6,073  $8,296  $848  $8,287  $23,504 
Additions (deductions)                    
Provision for loan losses  (907)  415   (25)  464   (53)
Recoveries credited to the allowance
  1,418   192   298   -   1,908 
Loans charged against the allowance
  (225)  (448)  (285)  -   (958)
Balance at end of period $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 

An analysis of the allowance for loan losses by portfolio segment for the nine months ended September 30,March 31, 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  420   573   523   (852)  664 
Recoveries credited to the allowance  127   224   217   -   568 
Loans charged against the allowance  (119)  (363)  (384)  -   (866)
Balance at end of period $7,518  $8,412  $1,251  $8,073  $25,254 
 (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   (135)  147   69   234   315 
Recoveries credited to the allowance  2,458   549   761   -   3,768   606   180   228   -   1,014 
Loans charged against the allowance  (290)  (1,605)  (971)  -   (2,866)  (40)  (439)  (366)  -   (845)
Balance at end of period $6,359  $8,455  $836  $8,751  $24,401  $6,026  $8,621  $795  $7,629  $23,071 
                    
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 

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               
March 31, 2019               
Allowance for loan losses:               
Individually evaluated for impairment
 $727  $5,155  $220  $-  $6,102  $1,204  $5,159  $323  $-  $6,686 
Collectively evaluated for impairment
  5,632   3,300   616   8,751   18,299   6,314   3,253   928   8,073   18,568 
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 $7,518  $8,412  $1,251  $8,073  $25,254 
                                        
Loans                                        
Individually evaluated for impairment
 $9,714  $48,815  $3,630      $62,159  $7,928  $46,315  $3,523      $57,766 
Collectively evaluated for impairment
  1,103,860   1,011,276   391,093       2,506,229   1,162,376   1,001,146   403,881       2,567,403 
Loans acquired with deteriorated credit quality
  1,653   557   355       2,565   1,537   546   326       2,409 
Total loans recorded investment
  1,115,227   1,060,648   395,078       2,570,953   1,171,841   1,048,007   407,730       2,627,578 
Accrued interest included in recorded investment
  3,126   4,166   1,083       8,375   3,437   4,262   1,084       8,783 
Total loans $1,112,101  $1,056,482  $393,995      $2,562,578  $1,168,404  $1,043,745  $406,646      $2,618,795 
                                        
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 

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         
March 31, 2019         
Commercial                  
Income producing - real estate $-  $-  $-  $-  $-  $- 
Land, land development and construction - real estate  -   2,402   2,402   -   -   - 
Commercial and industrial  -   380   380   -   1,705   1,705 
Mortgage                        
1-4 family  -   4,159   4,159   -   4,878   4,878 
Resort lending  -   969   969   -   508   508 
Home equity - 1st lien  -   324   324   -   157   157 
Home equity - 2nd lien  -   353   353   -   573   573 
Installment                        
Home equity - 1st lien  -   225   225   -   219   219 
Home equity - 2nd lien  -   246   246   -   234   234 
Boat lending  -   64   64   -   359   359 
Recreational vehicle lending  -   8   8   -   6   6 
Other  -   213   213   -   210   210 
Total recorded investment $-  $9,343  $9,343  $-  $8,849  $8,849 
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   -   2,220   2,220 
Mortgage                        
1-4 family  -   5,130   5,130   5   4,695   4,700 
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  $9,029  $9,034 
Accrued interest included in recorded investment
 $-  $-  $-  $-  $-  $- 

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

An aging analysis of loans by class follows:

 Loans Past Due

Loans not
Past Due


Total
Loans

 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                  
March 31, 2019                  
Commercial                                    
Income producing - real estate $-  $32  $-  $32  $378,201  $378,233  $-  $-  $-  $-  $398,191  $398,191 
Land, land development and construction - real estate
  -   -   2,402   2,402   61,760   64,162   -   -   -   -   84,861   84,861 
Commercial and industrial  881   25   51   957   671,875   672,832   40   -   5   45   688,744   688,789 
Mortgage                                                
1-4 family  2,146   687   4,344   7,177   844,584   851,761   3,295   833   5,058   9,186   803,882   813,068 
Resort lending  418   -   969   1,387   83,420   84,807   321   84   508   913   77,315   78,228 
Home equity - 1st lien  81   15   324   420   40,312   40,732   99   17   157   273   36,966   37,239 
Home equity - 2nd lien  364   209   353   926   82,422   83,348   228   95   573   896   118,576   119,472 
Installment                                                
Home equity - 1st lien  285   44   225   554   7,738   8,292   36   2   219   257   6,631   6,888 
Home equity - 2nd lien  190   45   246   481   7,099   7,580   150   -   234   384   6,043   6,427 
Boat lending  153   16   64   233   169,925   170,158   206   19   359   584   175,005   175,589 
Recreational vehicle lending  46   30   8   84   123,199   123,283   76   -   6   82   130,016   130,098 
Other  145   140   213   498   85,267   85,765   183   101   210   494   88,234   88,728 
Total recorded investment $4,709  $1,243  $9,199  $15,151  $2,555,802  $2,570,953  $4,634  $1,151  $7,329  $13,114  $2,614,464  $2,627,578 
Accrued interest included in recorded investment
 $53  $21  $-  $74  $8,301  $8,375  $63  $19  $-  $82  $8,701  $8,783 
                        
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 

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

Impaired loans are as follows:

 
September 30,
2018
  
December 31,
2017
  
March 31,
2019
  
December 31,
2018
 
Impaired loans with no allocated allowance for loan losses (In thousands)  (In thousands) 
TDR $347  $349 
Troubled debt restructurings (“TDR”) $317  $- 
Non - TDR  2,402   175   798   - 
Impaired loans with an allocated allowance for loan losses                
TDR - allowance based on collateral  2,366   2,482   2,103   2,787 
TDR - allowance based on present value cash flow  56,599   62,113   50,940   53,258 
Non - TDR - allowance based on collateral  168   148   3,353   2,145 
Total impaired loans $61,882  $65,267  $57,511  $58,190 
                
Amount of allowance for loan losses allocated                
TDR - allowance based on collateral $692  $684  $472  $769 
TDR - allowance based on present value cash flow  5,335   6,089   4,944   4,849 
Non - TDR - allowance based on collateral  75   66   1,270   692 
Total amount of allowance for loan losses allocated $6,102  $6,839  $6,686  $6,310 

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

Impaired loans by class  are as follows:

 September 30, 2018  December 31, 2017  March 31, 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   -   -   -   -   -   -   -   -   -   - 
Commercial and industrial  347   347   -   524   549   -   -   -   -   -   -   - 
Mortgage                                                
1-4 family  2   447   -   2   469   -   355   670   -   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  -   -   -   -   -   -   -   18   -   -   -   - 
Boat lending  -   5   -   -   -   -   -   5   -   -   5   - 
Recreational vehicle lending  -   -   -   -   -   -   -   -   -   -   -   - 
Other  -   16   -   -   -   -   -   15   -   -   15   - 
  2,752   3,341   -   527   1,087   -   355   708   -   4   616   - 
With an allowance for loan losses recorded:                                                
Commercial                                                
Income producing - real estate  4,829   4,808   307   5,195   5,347   347   4,720   4,712   423   4,770   4,758   303 
Land, land development & construction-real estate  152   152   4   166   194   9   290   288   31   290   289   35 
Commercial and industrial  1,984   2,133   416   2,535   2,651   481   2,918   3,175   750   3,637   3,735   967 
Mortgage                                                
1-4 family  34,656   36,169   3,126   36,848   38,480   3,454   32,317   34,514   3,648   32,842   34,427   2,859 
Resort lending  13,934   13,972   2,017   15,978   16,046   2,210   12,967   13,179   1,366   13,328   13,354   1,927 
Home equity - 1st lien  66   65   3   173   236   43   118   119   23   65   64   4 
Home equity - 2nd lien  157   156   9   178   213   18   558   573   122   156   155   9 
Installment                                                
Home equity - 1st lien  1,520   1,640   97   1,667   1,804   108   1,387   1,568   101   1,440   1,524   89 
Home equity - 2nd lien  1,626   1,644   93   1,793   1,805   140   1,472   1,479   107   1,471   1,491   92 
Boat lending  -   -   -   1   5   1   101   166   36   -   -   - 
Recreational vehicle lending  81   81   4   90   90   5   82   90   7   79   79   4 
Other  402   428   26   393   418   23   481   538   72   379   406   21 
  59,407   61,248   6,102   65,017   67,289   6,839   57,411   60,401   6,686   58,457   60,282   6,310 
Total                                                
Commercial                                                
Income producing - real estate  4,829   4,808   307   5,195   5,347   347   4,720   4,712   423   4,770   4,758   303 
Land, land development & construction-real estate  2,554   2,554   4   166   194   9   290   288   31   290   289   35 
Commercial and industrial  2,331   2,480   416   3,059   3,200   481   2,918   3,175   750   3,637   3,735   967 
Mortgage                                                
1-4 family  34,658   36,616   3,126   36,850   38,949   3,454   32,672   35,184   3,648   32,845   34,901   2,859 
Resort lending  13,934   13,972   2,017   15,978   16,046   2,210   12,967   13,179   1,366   13,328   13,354   1,927 
Home equity - 1st lien  66   65   3   173   236   43   118   119   23   65   64   4 
Home equity - 2nd lien  157   190   9   178   213   18   558   573   122   156   155   9 
Installment                                                
Home equity - 1st lien  1,521   1,730   97   1,668   1,873   108   1,387   1,568   101   1,441   1,646   89 
Home equity - 2nd lien  1,626   1,644   93   1,793   1,805   140   1,472   1,497   107   1,471   1,491   92 
Boat lending  -   5   -   1   5   1   101   171   36   -   5   - 
Recreational vehicle lending  81   81   4   90   90   5   82   90   7   79   79   4 
Other  402   444   26   393   418   23   481   553   72   379   421   21 
Total $62,159  $64,589  $6,102  $65,544  $68,376  $6,839  $57,766  $61,109  $6,686  $58,461  $60,898  $6,310 
                                                
Accrued interest included in recorded investment $277          $277          $255          $271         

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

Average recorded investment in and interest income earned on impaired loans by class for the three month periods ending September 30,March 31, 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   -   -   -   -   -   -   - 
Commercial and industrial  425   7   445   8   -   -   520   4 
Mortgage                                
1-4 family  121   9   127   7   179   -   19   6 
Resort lending  -   -   -   -   -   -   -   - 
Home equity - 1st lien  -   -   -   -   -   -   -   - 
Home equity - 2nd lien  -   -   -   -   -   -   -   - 
Installment                                
Home equity - 1st lien  1   1   1   1   1   -   1   2 
Home equity - 2nd lien  -   -   -   -   -   -   -   - 
Boat lending  -   -   -   -   -   -   -   - 
Recreational vehicle lending  -   -   -   -   -   -   -   - 
Other  -   -   -   1   -   -   -   - 
  2,949   17   573   17   180   -   540   12 
With an allowance for loan losses recorded:                                
Commercial                                
Income producing - real estate  4,968   64   7,311   91   4,745   65   5,187   68 
Land, land development & construction-real estate  153   3   171   2   290   2   161   2 
Commercial and industrial  2,264   24   2,878   26   3,278   20   2,517   32 
Mortgage                                
1-4 family  34,731   458   38,533   462   32,580   446   36,367   458 
Resort lending  14,276   161   16,175   153   13,148   175   15,779   164 
Home equity - 1st lien  67   1   201   1   92   1   164   2 
Home equity - 2nd lien  157   2   180   2   357   3   178   2 
Installment                                
Home equity - 1st lien  1,545   27   1,808   40   1,414   24   1,645   29 
Home equity - 2nd lien  1,679   24   2,058   26   1,472   22   1,777   27 
Boat lending  1   -   1   -   51   -   1   - 
Recreational vehicle lending  83   1   98   1   81   1   89   1 
Other  406   5   361   6   430   6   406   6 
  60,330   770   69,775   810   57,938   765   64,271   791 
Total                                
Commercial                                
Income producing - real estate  4,968   64   7,311   91   4,745   65   5,187   68 
Land, land development & construction-real estate  2,555   3   171   2   290   2   161   2 
Commercial and industrial  2,689   31   3,323   34   3,278   20   3,037   36 
Mortgage                                
1-4 family  34,852   467   38,660   469   32,759   446   36,386   464 
Resort lending  14,276   161   16,175   153   13,148   175   15,779   164 
Home equity - 1st lien  67   1   201   1   92   1   164   2 
Home equity - 2nd lien  157   2   180   2   357   3   178   2 
Installment                                
Home equity - 1st lien  1,546   28   1,809   41   1,415   24   1,646   31 
Home equity - 2nd lien  1,679   24   2,058   26   1,472   22   1,777   27 
Boat lending  1   -   1   -   51   -   1   - 
Recreational vehicle lending  83   1   98   1   81   1   89   1 
Other  406   5   361   7   430   6   406   6 
Total $63,279  $787  $70,348  $827  $58,118  $765  $64,811  $803 

2221

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 
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance for loan losses recorded: (In thousands) 
Commercial            
Income producing - real estate $-  $-  $222  $- 
Land, land development & construction-real estate  1,201   -   8   - 
Commercial and industrial  472   20   808   16 
Mortgage                
1-4 family  70   18   64   16 
Resort lending  -   -   -   - 
Home equity - 1st lien  -   -   -   - 
Home equity - 2nd lien  -   -   -   - 
Installment                
Home equity - 1st lien  1   5   1   4 
Home equity - 2nd lien  -   -   -   - 
Boat lending  -   -   -   - 
Recreational vehicle lending  -   -   -   - 
Other  -   1   -   1 
   1,744   44   1,103   37 
With an allowance for loan losses recorded:                
Commercial                
Income producing - real estate  5,077   202   7,525   300 
Land, land development & construction-real estate  157   7   187   6 
Commercial and industrial  2,391   90   3,488   98 
Mortgage                
1-4 family  35,549   1,347   39,716   1,420 
Resort lending  15,027   475   16,485   464 
Home equity - 1st lien  115   4   218   5 
Home equity - 2nd lien  167   5   217   5 
Installment                
Home equity - 1st lien  1,595   81   1,874   107 
Home equity - 2nd lien  1,728   76   2,210   96 
Boat lending  1   -   1   - 
Recreational vehicle lending  86   3   103   4 
Other  406   18   373   19 
   62,299   2,308   72,397   2,524 
Total                
Commercial                
Income producing - real estate  5,077   202   7,747   300 
Land, land development & construction-real estate  1,358   7   195   6 
Commercial and industrial  2,863   110   4,296   114 
Mortgage                
1-4 family  35,619   1,365   39,780   1,436 
Resort lending  15,027   475   16,485   464 
Home equity - 1st lien  115   4   218   5 
Home equity - 2nd lien  167   5   217   5 
Installment                
Home equity - 1st lien  1,596   86   1,875   111 
Home equity - 2nd lien  1,728   76   2,210   96 
Boat lending  1   -   1   - 
Recreational vehicle lending  86   3   103   4 
Other  406   19   373   20 
Total $64,043  $2,352  $73,500  $2,561 

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 follow:
TDRs follow: 
  March 31, 2019 
  Commercial  Retail (1)    Total 
  
   (In thousands)       
Performing TDRs $6,209  $44,427    $50,636 
Non-performing TDRs(2)  67   2,657  
(3) 
  2,724 
Total $6,276  $47,084    $53,360 
               
  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 

  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 
  Commercial  Retail (1)  Total 
  (In thousands) 
Performing TDRs $7,748  $52,367  $60,115 
Non-performing TDRs(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 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$5.4 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, 2018March 31, 2019 and December 31, 2017,2018, respectively.

During the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans generally included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

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

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

Loans that have been classified as troubled debt restructurings during the three-month periods ended September 30March 31 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  1   49   49 
Mortgage            
1-4 family  1   281   281 
Resort lending  -   -   - 
Home equity - 1st lien  -   -   - 
Home equity - 2nd lien  -   -   - 
Installment            
Home equity - 1st lien  1   24   25 
Home equity - 2nd lien  1   36   36 
Boat lending  -   -   - 
Recreational vehicle lending  -   -   - 
Other  -   -   - 
Total  4  $390  $391 
 (Dollars in thousands)             
2018                     
Commercial                     
Income producing - real estate  -  $-  $-   1  $67  $67 
Land, land development & construction-real estate  -   -   -   -   -   - 
Commercial and industrial  1   24   24   3   434   434 
Mortgage                        
1-4 family  3   609   609   3   228   211 
Resort lending  1   115   114   -   -   - 
Home equity - 1st lien  -   -   -   -   -   - 
Home equity - 2nd lien  -   -   -   -   -   - 
Installment                        
Home equity - 1st lien  1   15   15   3   98   99 
Home equity - 2nd lien  1   20   21   1   61   61 
Boat lending  -   -   -   -   -   - 
Recreational vehicle lending  -   -   -   -   -   - 
Other  -   -   -   1   35   32 
Total  7  $783  $783   12  $923  $904 
            
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 

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

Loans that have been classified asThe troubled debt restructurings duringdescribed above for 2019 increased the nine-month periods ended September 30 follow:

  
Number of
Contracts
  
Pre-modification
Recorded
Balance
  
Post-modification
Recorded
Balance
 
  (Dollars in thousands) 
2018         
Commercial         
Income producing - real estate  1  $67  $67 
Land, land development & construction-real estate  -   -   - 
Commercial and industrial  6   611   611 
Mortgage            
1-4 family  7   903   889 
Resort lending  1   115   114 
Home equity - 1st lien  -   -   - 
Home equity - 2nd lien  -   -   - 
Installment            
Home equity - 1st lien  6   203   205 
Home equity - 2nd lien  3   113   114 
Boat lending  -   -   - 
Recreational vehicle lending  -   -   - 
Other  2   76   73 
Total  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 

Theallowance for loan losses by $0.01 million and resulted in zero charge offs while the troubled debt restructurings described above for 2018 decreased the allowance for loan losses by $0.01$0.03 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.

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.offs.

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,March 31, 2019 and 2018.

Six commercial 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.
23

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

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.

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               
March 31, 2019               
Income producing - real estate $374,965  $3,060  $208  $-  $378,233  $383,117  $14,603  $471  $-  $398,191 
Land, land development and construction - real estate
  55,126   6,623   11   2,402   64,162   78,062   6,790   9   -   84,861 
Commercial and industrial  634,763   27,174   10,515   380   672,832   646,199   36,246   4,639   1,705   688,789 
Total $1,064,854  $36,857  $10,734  $2,782  $1,115,227  $1,107,378  $57,639  $5,119  $1,705  $1,171,841 
Accrued interest included in total $2,869  $146  $111  $-  $3,126  $3,207  $215  $15  $-  $3,437 
                                        
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   631,248   35,469   5,577   2,367   674,661 
Total $822,561  $29,704  $2,649  $646  $855,560  $1,082,510  $57,184  $5,777  $2,421  $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.

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                
March 31, 2019                
800 and above  $110,400  $12,423  $7,872  $12,318  $143,013   $89,359  $10,921  $6,788  $11,435  $118,503 
750-799   358,072   32,498   15,037   30,573   436,180    365,405   34,625   15,976   53,549   469,555 
700-749   211,575   21,239   9,562   21,561   263,937    199,489   16,177   9,063   35,201   259,930 
650-699   104,395   9,271   3,222   9,539   126,427    93,517   9,853   3,673   12,091   119,134 
600-649   30,578   4,142   569   2,884   38,173    34,459   2,926   811   4,041   42,237 
550-599   13,491   1,220   503   1,261   16,475    12,701   1,673   425   1,329   16,128 
500-549   7,641   822   228   1,205   9,896    8,341   105   408   887   9,741 
Under 500   1,702   84   86   190   2,062    2,575   141   95   380   3,191 
Unknown   13,907   3,108   3,653   3,817   24,485    7,222   1,807   -   559   9,588 
Total  $851,761  $84,807  $40,732  $83,348  $1,060,648   $813,068  $78,228  $37,239  $119,472  $1,048,007 
Accrued interest included in total  $3,161  $360  $206  $439  $4,166   $3,220  $386  $177  $479  $4,262 
                                          
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.

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                   
March 31, 2019                   
800 and above  $651  $264  $25,231  $22,621  $6,223  $54,990   $477  $222  $22,262  $21,759  $6,234  $50,954 
750-799   1,899   1,519   95,664   72,298   32,094   203,474    1,385   1,517   103,947   76,235   31,782   214,866 
700-749   1,471   1,806   36,743   22,996   23,917   86,933    1,505   1,534   36,372   25,628   24,671   89,710 
650-699   1,608   1,627   8,760   4,093   10,002   26,090    1,419   1,126   10,298   4,858   9,861   27,562 
600-649   1,174   1,065   2,064   778   2,504   7,585    965   1,210   1,595   960   2,602   7,332 
550-599   1,065   850   410   334   961   3,620    719   542   611   436   768   3,076 
500-549   305   132   340   76   433   1,286    369   215   233   216   602   1,635 
Under 500   87   172   43   21   152   475    49   6   256   6   149   466 
Unknown   32   145   903   66   9,479   10,625    -   55   15   -   12,059   12,129 
Total  $8,292  $7,580  $170,158  $123,283  $85,765  $395,078   $6,888  $6,427  $175,589  $130,098  $88,728  $407,730 
Accrued interest included in total  $33  $27  $431  $319  $273  $1,083   $26  $21  $437  $333  $267  $1,084 
                                                  
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 September 30, 2018both March 31, 2019 and December 31, 2017, respectively.2018.  Retail mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements totaled $0.4$0.1 million and $0.8$0.3 million at September 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.

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

In March and July 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.million.  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.

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
  
March 31,
2019
  
December 31,
2018
 
 (In thousands)  (In thousands) 
Commercial $1,653  $-  $1,537  $1,609 
Mortgage  557   -   546   555 
Installment  355   -   326   349 
Total carrying amount  2,565   -   2,409   2,513 
Allowance for loan losses  -   -   -   - 
Carrying amount, net of allowance for loan losses $2,565  $-  $2,409  $2,513 

The accretable difference on PCI loans is the difference between the expected cash flows and the net present value of expected cash flows with such difference accreted into earnings using the effective yield method over the term of the loans. Accretion recorded as loan interest income totaled $0.03$0.04 million and $0.07 millionzero during the three and nine months ended September 30,March 31, 2019 and 2018, respectively.  Accretable yield of PCI loans, or income expected to be collected follows:

 
Three months ended
September 30,
  
Nine months ended
September 30,
  
Three months ended
March 31,
 
 2018  2017  2018  2017  2019  2018 
 (unaudited)  (unaudited)  (unaudited) 
 (In thousands)  (In thousands)  (In thousands) 
                  
Balance at beginning of period $533  $-  $-  $-  $462  $- 
New loans purchased  -   -   568   -   -   - 
Accretion of income  (32)  -   (67)  -   (39)  - 
Reclassification from (to) nonaccretable difference  -   -   -   -   365   - 
Displosals/other adjustments  -   -   -   -   -   - 
Balance at end of period $501  $-  $501  $-  $788  $- 

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.

5.
5.   Shareholders’ Equity and Earnings Per Common Share

On January 22,December 18, 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.  We expect to accomplish the 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 three month periods ended March 31, 2019 and 2018 repurchases were made through open market transactions and totaled 115,787 and zero shares of common stock, during the nine months ended September 30, 2018.respectively for an aggregate purchase price of $2.5 million and zero, respectively.

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
March 31,
 
 2018  2017  2018  2017  2019  2018 
 (In thousands, except per share data)  
(In thousands, except
per share data)
 
Net income $11,925  $6,859  $29,903  $18,764  $9,381  $9,161 
                        
Weighted average shares outstanding (1)  24,149   21,334   23,218   21,325   23,588   21,365 
Effect of stock options  182   138   180   144   127   135 
Stock units for deferred compensation plan for non-employee directors
  129   121   126   120   130   125 
Performance share units  55   59   52   57   40   49 
Weighted average shares outstanding for calculation of diluted earnings per share
  24,515   21,652   23,576   21,646   23,885   21,674 
                        
Net income per common share                        
Basic (1) $0.49  $0.32  $1.29  $0.88  $0.40  $0.43 
Diluted $0.49  $0.32  $1.27  $0.87  $0.39  $0.42 

(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 both the three and nine month periods ended September 30, 2018March 31, 2019 and 2017, respectively.2018.

6.
6.Derivative Financial Instruments

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

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

Our derivative financial instruments according to the type of hedge in which they are designated follows:


  September 30, 2018
 March 31, 2019 
Notional
Amount
  
Average
Maturity
(years)
  
Fair
Value
 
Notional
Amount
  
Average
Maturity
(years)
  
Fair
Value
 
 (Dollars in thousands)  (Dollars in thousands) 
Cash flow hedge designation                  
Pay-fixed interest rate swap agreements $25,000   2.8  $581  $25,000   2.3  $122 
Interest rate cap agreements  130,000   3.6   3,391   150,000   3.3   1,255 
 $155,000   3.5  $3,972 
Total $175,000   3.2  $1,377 
                        
                        
No hedge designation                        
Rate-lock mortgage loan commitments $44,609   0.1  $884  $47,345   0.1  $1,316 
Mandatory commitments to sell mortgage loans  65,633   0.1   182   69,762   0.1   (209)
Pay-fixed interest rate swap agreements - commercial  88,657   5.7   2,242   97,083   5.3   (742)
Pay-variable interest rate swap agreements - commercial  88,657   5.7   (2,242)  97,083   5.3   742 
Purchased options  3,119   2.8   178   3,095   2.3   202 
Written options  3,119   2.8   (178)  3,035   2.3   (200)
Total $293,794   3.5  $1,066  $317,403   3.3  $1,109 



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 

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$2.6 million at September 30, 2018March 31, 2019 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$0.47 million, of unrealized gains on Cash Flow Hedges at September 30, 2018March 31, 2019 will be reclassified to earnings over the next twelve months.  To the extent that the Cash Flow Hedges are not effective, the ineffective portion of the Cash Flow Hedges is immediately recognized in interest expense.  The maximum term of the Cash Flow Hedge at September 30, 2018March 31, 2019 is 5.04.5 years.

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

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

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.

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

Fair Values of Derivative Instruments

 Asset Derivatives Liability Derivatives 
 
March 31,
2019
 
December 31,
2018
 
March 31,
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 agreementsOther assets $122 Other assets $280 Other liabilities $- Other liabilities $- 
Interest rate cap agreementsOther assets  1,255 Other assets  2,245 Other liabilities  - Other liabilities  - 
    1,377    2,525    -    - 
Derivatives not designated as hedging instruments                    
Rate-lock mortgage loan commitmentsOther assets  1,316 Other assets  687 Other liabilities  - Other liabilities  - 
Mandatory commitments to sell mortgage loansOther assets  - Other assets  - Other liabilities  209 Other liabilities  383 
Pay-fixed interest rate swap agreements -commercialOther assets  534 Other assets  1,116 Other liabilities  1,276 Other liabilities  711 
Pay-variable interest rate swap agreements -commercialOther assets  1,276 Other assets  711 Other liabilities  534 Other liabilities  1,116 
Purchased optionsOther assets  202  Other assets  116 Other liabilities  - Other liabilities  - 
Written optionsOther assets  - Other assets  - Other liabilities  200 Other liabilities  116 
    3,328    2,630    2,219    2,326 
Total derivatives  $4,705   $5,155   $2,219   $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 

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,


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)

2018  20172018  20172018  2017
 
(In thousands) 







 




        
Cash Flow Hedges
  
 
    
 


           
Interest rate cap agreements

$297

$-
Interest expense

$67

$-
Interest expense $-  $- 
Pay-fixed interest rate swap agreements


92
 
95 Interest expense 
6
 
(5)
Interest expense
  16   5 
Total
$389
 $95  
$73
 $(5)  $16  $5 
 

 
 
 
 

 
 
           
No hedge designation



 
 
 

 
 
           
Rate-lock mortgage loan commitments


 
 
 
 

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




 
 
 

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


 
 
 
 

 
 
  
Interest income
  407   52 
Pay-variable interest rate swap agreements - commercial


 
 
 
 

 
 
  
Interest income
  (407)  (52)
Purchased options

 
 
 
  
 
 
  
Interest expense
  (45)  5 
Written options

 
 
 
 

 
 
  
Interest expense
  45   (5)
Total

 
 
 
 

 
 
  
 $97  $(311)

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

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

Nine Month Periods Ended September 30,
Three Month Periods Ended March 31,Three Month Periods Ended March 31, 


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 (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 (Loss)
 Recognized
 in Income (1)
 
Gain (Loss)
Recognized
in Income (1)
 
2018
 20172018

20172018
 2017 2019  2018  2019  2018  2019  2018 
 (In thousands)  (In thousands) 
Cash Flow Hedges                                        
                    
Interest rate cap agreements
 $1,054  $- 
Interest expense
 $119  $- 
Interest expense
 $-  $-  $(785) $513 Interest expense $118  $7 Interest expense $-  $- 
Pay-fixed interest rate swap agreements
  346   95 
Interest expense
  13   (5)
Interest expense
  4   5   (127)  171 Interest expense  31   (1)Interest expense  -   12 
Total $1,400  $95   $132  $(5)  $4  $5  $(912) $684   $149  $6   $-  $12 
                          
No hedge designation                         No hedge designation                       
Rate-lock mortgage loan commitments
                 
Net gains on mortgage loans
 $354  $123                  Net gains on mortgage loans $629  $428 
Mandatory commitments to sell mortgage loans
                Net gains on mortgage loans  145   (604)                Net gains on mortgage loans  174   (160)
Pay-fixed interest rate swap agreements - commercial
                 
Interest income
  1,950   (197)
Pay-variable interest rate swap agreements - commercial
                 Interest income  (1,950)  197 
Pay-fixed interest rate swap agreements -commercial                 Interest income  (1,147)  1,056 
Pay-variable interest rate swap agreements -commercial                 Interest income  1,147   (1,056)
Purchased options                 
Interest expense
  (144)  39                  Interest expense  86   (93)
Written options                 
Interest expense
  144   (39)                 Interest expense  (84)  93 
Total                 
 $499  $(481)                                 $805  $268 

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

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

7.   Intangible AssetsGoodwill and Other Intangibles

The following table summarizes intangible assets, net of amortization:



September 30, 2018

December 31, 2017
 March 31, 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  $5,773  $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, 2018March 31, 2019 follows:

  (In thousands) 
    
Balance at beginning of year $- 
Acquired during the year  28,300 
Balance at end of the period $28,300 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
  (In thousands) 
    
Nine months ending December 31, 2019 $817 
2020  1,020 
2021  970 
2022  785 
2023  547 
2024 and thereafter  2,004 
Total $6,143 

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.March 31, 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.March 31, 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 ninethree month periods ended September 30,March 31, 2019 and 2018, and 2017, pursuant to our long-term incentive plan, we granted 0.05 million and 0.04 million shares of restricted stock, during each period,respectively and 0.02 million and 0.02 million performance stock units (“PSU”), during each periodrespectively to certain officers.  No long term incentive grants were made during the three months ended September 30, 2018 and 2017.  Except for 0.002 million shares of restricted stock issued during each three month period in 2019 and 2018 that vest ratably over three years, the shares of restricted stock and PSUs cliff vest after a period of three years.  The performance feature of the PSUs is based on a comparison of our total shareholder return over the three year period starting on the grant date to the total shareholder return over that period for a banking index of our peers.

Our directors may elect to receive a portion of their quarterly cash retainer fees in the form of common stock (either on a current basis or on a deferred basis pursuant to the non-employee director stock purchase plan referenced above). Shares equal in value to that portion of each director’s fees that he or she has elected to receive in stock are issued each quarter and vest immediately.  WeDuring the three month periods ended March 31, 2019 and 2018 we issued 0.0070.003 million shares and 0.0060.002 million shares, during the nine months ended September 30, 2018 and 2017, respectively and expensed their value during those same periods.

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

Total compensation expense recognized for grants pursuant to our long-term incentive plan was $0.4 million during each three month period ended March 31, 2019 and $1.1 million during the three and nine month periods ended September 30, 2018, respectively, and was $0.4 million and $1.2 million during the same periods in 2017, respectively.2018.  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, respectively and $0.1 million and $0.4 million for the same periods in 2017.each period. Total expense recognized for non-employee director share based payments was $0.05 million and $0.16 million during each of the three and nine month periods ended September 30, 2018, respectively,March 31, 2019 and was $0.05 million and $0.12 million during the same periods in 2017, respectively.2018. The corresponding tax benefit relating to this expense was $0.01 million and $0.03 million for the three and nine month periods ended September 30, 2018, respectively and $0.02 million and $0.04 million during the same periods in 2017.each period.

At September 30, 2018,March 31, 2019, the total expected compensation cost related to non-vested restricted stock and PSUs not yet recognized was $2.4$3.1 million.  The weighted-average period over which this amount will be recognized is 2.02.2 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  (68,399)  10.16       
Forfeited  -           
Expired  (558)  22.35       
Outstanding at March 31, 2019  142,464  $4.66   3.8  $2,401 
                 
Vested and expected to vest at                
March 31, 2019  142,464  $4.66   3.8  $2,401 
Exercisable at March 31, 2019  142,464  $4.66   3.8  $2,401 

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

 
Number
of Shares
  
Weighted-
Average
Grant Date
Fair Value
  
Number
of Shares
  
Weighted-
Average
Grant Date
Fair Value
 
Outstanding at January 1, 2018  290,527  $15.88 
Outstanding at January 1, 2019  258,419  $19.00 
Granted  73,406   23.62   74,732   23.07 
Vested  (96,255)  13.17   (85,788)  14.55 
Forfeited  (8,259)  18.53   (10,780)  22.94 
Outstanding at September 30, 2018  259,419  $19.00 
Outstanding at March 31, 2019  236,583  $21.73 

A summary of weighted-average assumptions used in the Black-Scholes option pricing model for the issue of stockCertain information regarding options relating to the acquisition of TCSB (see note #16)exercised during the second quarter of 2018periods 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.
  
Three Months Ended
March 31,
 
  2019  2018 
       
Intrinsic value $836  $78 
Cash proceeds received $695  $13 
Tax benefit realized $176  $16 

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

Certain information regarding options exercised during the periods follows:

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

9.   Income Tax

Income tax expense was $2.9$2.2 million and $3.2$2.0 million during the three month periods ended September 30,March 31, 2019 and 2018, and 2017, respectively and $7.0 million and $8.4 million during the nine months ended September 30, 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 threefirst quarters of 2019 and nine month periods ending September 30, 2018 each include reductions of $0.01$0.2 million and $0.33 million, respectively, of income tax expense related to 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 2017 were $0.02 million and $0.23 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 both September 30,March 31, 2019 and 2018, and 2017, that the realization of substantially all of our deferred tax assets continues to be more likely than not.

At both September 30, 2018March 31, 2019 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.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,March 31, 2019, the Bank had positive undivided profits of $27.2$28.5 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, 2018March 31, 2019 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.

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                  
March 31, 2019                  
Total capital to risk-weighted assets                                    
Consolidated $373,748   14.57% $205,173   8.00% NA  NA  $376,194   14.29% $210,568   8.00% NA  NA 
Independent Bank  337,905   13.18   205,044   8.00  $256,305   10.00%  340,950   12.96   210,464   8.00  $263,079   10.00%
                                                
Tier 1 capital to risk-weighted assets                                                
Consolidated $348,228   13.58% $153,880   6.00% NA  NA  $349,484   13.28% $157,926   6.00% NA  NA 
Independent Bank  312,385   12.19   153,783   6.00  $205,044   8.00%  314,240   11.94   157,848   6.00  $210,464   8.00%
                                                
Common equity tier 1 capital to risk-weighted assets                                                
Consolidated $310,081   12.09% $115,410   4.50% NA  NA  $311,303   11.83% $118,445   4.50% NA  NA 
Independent Bank  312,385   12.19   115,337   4.50  $166,598   6.50%  314,240   11.94   118,386   4.50  $171,002   6.50%
                                                
Tier 1 capital to average assets                                                
Consolidated $348,228   10.84% $128,543   4.00% NA  NA  $349,484   10.51% $133,025   4.00% NA  NA 
Independent Bank  312,385   9.73   128,376   4.00  $160,469   5.00%  314,240   9.46   132,924   4.00  $166,154   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%
                        
(1) These ratios do not reflect a capital conservation buffer of 2.50% and 1.875% at March 31, 2019 and December31, 2018, respectfully.
NA - Not applicable

NA - Not applicable
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
 
March 31,
2019
  
December 31,
2018
  
March 31,
2019
  
December 31,
2018
 
 (In thousands)  (In thousands) 
Total shareholders' equity $345,204  $264,933  $343,351  $269,481 

                
Total shareholders’ equity $344,726  $338,994  $347,663  $341,496 
Add (deduct)
                                
Accumulated other comprehensive loss for regulatory purposes
  4,092   201   4,092   201   1,020   4,311   1,020   4,311 
Goodwill and other intangibles  (35,009)  (1,269)  (35,009)  (1,269)  (34,443)  (34,715)  (34,443)  (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   311,303   307,255   314,240   311,043 
Qualifying trust preferred securities  38,147   34,500   -   -   38,181   38,164   -   - 
Disallowed deferred tax assets  -   (1,983)  -   -   -   -   -   - 
Tier 1 capital  348,228   288,451   312,385   266,476   349,484   345,419   314,240   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   26,710   26,184   26,710   26,184 
Total risk-based capital $373,748  $312,163  $337,905  $290,188  $376,194  $371,603  $340,950  $337,227 

11.
Fair Value Disclosures


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

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

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

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

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

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

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

Securities:  Where quoted market prices are available in an active market, securities (equity securities at fair value 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 saleThe fair value of mortgage loans held for sale, carried at fair value is based on agency cash window loan pricing for comparable assets (recurring Level 2) and the fair value of mortgage loans held for sale, carried at the lower of cost or fair value (at December 31, 2018) is based on a quoted sales price (non-recurring Level 1).

Impaired loans with specific loss allocations based on collateral valueFrom 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, 2018March 31, 2019 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 estateAt 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.

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.

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

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

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



 
Fair Value
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:            
March 31, 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   -  $18,129  $-  $18,129  $- 
U.S. agency residential mortgage-backed  125,061   -   125,061   -   142,038   -   142,038   - 
U.S. agency commercial mortgage-backed  5,815   -   5,815   -   11,313   -   11,313   - 
Private label mortgage-backed  28,973   -   28,973   -   33,092   -   33,092   - 
Other asset backed  78,526   -   78,526   -   110,290   -   110,290   - 
Obligations of states and political subdivisions  139,654   -   139,654   -   108,385   -   108,385   - 
Corporate  34,570   -   34,570   -   34,380   -   34,380   - 
Trust preferred  1,925   -   1,925   -   1,883   -   1,883   - 
Foreign government  2,010   -   2,010   -   2,021   -   2,021   - 
Loans held for sale  41,325   -   41,325   - 
Loans held for sale, carried at fair value  43,098   -   43,098   - 
Capitalized mortgage loan servicing rights  23,151   -   -   23,151   19,909   -   -   19,909 
Derivatives (1)  7,734   -   7,734   -   4,705   -   4,705   - 
Liabilities                                
Derivatives (2)  2,696   -   2,696   -   2,219   -   2,219   - 
                                
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   213   -   -   213 
Land, land development & construction-real estate  106   -   -   106 
Commercial and industrial  944   -   -   944   1,335   -   -   1,335 
Mortgage                                
1-4 family  334   -   -   334   1,271   -   -   1,271 
Resort lending  264   -   -   264   325   -   -   325 
Home equity - 1st lien  35   -   -   35 
Home equity - 2nd lien  185   -   -   185 
Installment                
Home equity - 1st lien  40   -   -   40 
Home equity - 2nd lien  40   -   -   40 
Boat lending  65   -   -   65 
Recreational vehicle lending  4   -   -   4 
Other  95   -   -   95 
Other real estate (4)                                
Mortgage                                
1-4 family  94   -   -   94   129   -   -   129 
Resort lending  1   -   -   1 
Home equity - 2nd lien  59   -   -   59 

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

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


Fair Value
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:                                
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)
(1)Included in accrued income and other assets
(2)
(2)Included in accrued expenses and other liabilities
(3)
(3)Only includes impaired loans with specific loss allocations based on collateral value.
(4)
(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 ninethree months ended September 30, 2018March 31, 2019 and 2017.2018.

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

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



Changes in Fair Values for the 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 Three-Month Periods
Ended March 31 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  -   96   -   96 
Capitalized mortgage loan servicing rights  -   -   (2,691)  (2,691)
 (In thousands)                 
2018                            
Equity securities at fair value $(170) $-  $-  $(170) $(154) $-  $-  $(154)
Loans held for sale  -   (120)  -   (120)  -   (153)  -   (153)
Capitalized mortgage loan servicing rights  -   -   694   694   -   -   1,029   1,029 
     ��          
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,March 31, 2019 and 2018 and 2017 relating to assets measured at fair value on a non-recurring basis:

Loans which are measured for impairment using the fair value of collateral for collateral dependent loans had a carrying amount of $3.7 million, which is net of a valuation allowance of $1.7 million at March 31, 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 an expense of $0.5 million and $0.1 million during the three month periods ended March 31, 2019 and 2018, respectively.
Other real estate, which is measured using the fair value of the property, had a carrying amount of $0.2 million which is net of a valuation allowance of $0.3 million at March 31, 2019, and a carrying amount of $0.2 million, which is net of a valuation allowance of $0.1 million, at December 31, 2018. An additional charge relating to other real estate measured at fair value of $0.12 million and $0.02 million was included in our results of operations during the three month periods ended March 31, 2019 and 2018, respectively.

·
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.

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
March 31,
 

 2018  2017  2018  2017  2019  2018 
 (In thousands)  (In thousands)  (In thousands) 
Beginning balance $21,848  $14,515  $15,699  $-  $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)  (2,691)  1,029 
Included in other comprehensive income (loss)  -   -   -   -   -   - 
Purchases, issuances, settlements, maturities and calls  1,501   1,250   6,758   3,047   1,200   1,055 
Transfers in and/or out of Level 3  -   -   -   -   -   - 
Ending balance $23,151  $14,675  $23,151  $14,675  $19,909  $17,783 

                
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)
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 March 31 $(2,691) $1,029 

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


 
Asset
Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 Range  
Weighted
Average
 
  (In thousands)          
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)         
March 31, 2019            
Capitalized mortgage loan servicing rights
 $19,909 Present value of net Discount rate 10.00% to 13.00%  10.14%
       servicing revenue Cost to service $66 to $217  $80 
         Ancillary income 20 to 36   23 
         Float rate  2.29%  2.29%
                
December 31, 2018               
Capitalized mortgage loan servicing rights
 $21,400 Present value of net Discount rate 10.00% to 13.00%  10.15%
     servicing revenue Cost to service $68 to $216  $81 
         Ancillary income 20 to 36   23 
         Float rate  2.57%  2.57%

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

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


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

                   
September 30, 2018 

 
 
     
March 31, 2019 

 
    
Impaired loans    

 
         


    
Commercial(1)
 $1,169 
Sales comparison approach
 
Adjustment for differences between comparable sales
 (32.5)% to 25.0%  (4.5)% $1,654 
Sales comparison approach
Adjustment for differences between comparable sales
(48.0)% to 60.0% (5.1)%

  

 
     
Mortgage and    


     
Installment(2)  2,060 
Sales comparison approach
Adjustment for differences between comparable sales
(41.2) to 50.4  (1.9)

  
 
     
Other real estate    


     
Mortgage  188 
Sales comparison approach
Adjustment for differences between comparable sales
(30.9) to 77.9  4.7 

          
December 31, 2018
  

 
     
Impaired loans    


     
Commercial(1) $2,566 
Sales comparison approach
Adjustment for differences between comparable sales
(32.5)% to 60.0% (1.9)%
    

 

          


     
Mortgage  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 March 31, 2019 and December 31, 2018, we had an impaired collateral dependent commercial relationship that totaled $0.4 million and $0.7 million, respectively that was secured by collateral other than real estate. Collateral securing this relationship primarily included accounts receivable, inventory and cash at March 31, 2019 and December 31, 2018. Valuation techniques at March 31, 2019 and December 31, 2018, included discounting financial statement values for each particular asset type. Discount rates used ranged from 5% to 97% of stated values at March 31, 2019 and 20% to 80% of stated values at December 31, 2018.
(2)In addition to the valuation techniques and unobservable inputs discussed above, at March 31, 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.

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         
March 31, 2019 $43,098  $1,353  $41,745 
December 31, 2018  44,753   1,257   43,496 

12.
45

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.

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.

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               
March 31, 2019               
Assets               
Cash and due from banks $33,247  $33,247  $33,247  $-  $- 
Interest bearing deposits  38,376   38,376   38,376   -   - 
Interest bearing deposits - time  496   497   -   497   - 
Securities available for sale  461,531   461,531   -   461,531   - 
Federal Home Loan Bank and Federal Reserve Bank Stock
  18,359  NA  NA  NA  NA 
Net loans and loans held for sale  2,636,639   2,615,992   -   43,098   2,572,894 
Accrued interest receivable  10,984   10,984   7   2,153   8,824 
Derivative financial instruments  4,705   4,705   -   4,705   - 
                    
Liabilities                    
Deposits with no stated maturity (1) $2,276,138  $2,276,138  $2,276,138  $-  $- 
Deposits with stated maturity (1)  658,087   655,161   -   655,161   - 
Other borrowings  25,714   25,776   -   25,776   - 
Subordinated debentures  39,405   35,162   -   35,162   - 
Accrued interest payable  1,786   1,786   134   1,652   - 
Derivative financial instruments  2,219   2,219   -   2,219   - 
                    
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$209.912 million and $12.992$123.080 million at September 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. Deposits with a stated maturity include reciprocal deposits with a recorded book balance of $47.95457.266 million and $37.987$58.992 million September 30, 2018at March 31, 2019 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

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$0.11 million and $0.02$0.01 million for the three month periods ended September 30,March 31, 2019 and 2018, and 2017 and an expense of $0.08 million and $0.07 million for the nine month periods ended September 30, 2018 and 2017, respectively. The reserve for loss reimbursements on sold mortgage loans totaled $0.85$0.80 million and $0.67$0.78 million at September 30, 2018March 31, 2019 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.

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

14. Accumulated Other Comprehensive Loss (“AOCL”)

A summary of changes in AOCL follows:


 
Unrealized
Gains
(Losses) on
Securities
Available
for Sale
  
Dispropor-
tionate
Tax Effects
from
Securities
Available
for Sale
  
Unrealized
Gains on
Cash Flow
Hedges
  Total  
Unrealized
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,            
2018            
For the three months ended March 31,            
2019            
Balances at beginning of period $(4,437) $(5,798) $1,021  $(9,214) $(4,185) $(5,798) $(125) $(10,108)
Other comprehensive income (loss) before reclassifications  (925)  -   307   (618)  4,236   -   (719)  3,517 
Amounts reclassified from AOCL  -   -   (57)  (57)  (108)  -   (118)  (226)
Net current period other comprehensive income (loss)  (925)  -   250   (675)  4,128   -   (837)  3,291 
Balances at end of period $(5,362) $(5,798) $1,271  $(9,889) $(57) $(5,798) $(962) $(6,817)
                                
2017                
2018                
Balances at beginning of period $1,986  $(5,798) $-  $(3,812) $(470) $(5,798) $269  $(5,999)
Other comprehensive income before reclassifications  95   -   62   157   (3,054)  -   541   (2,513)
Amounts reclassified from AOCL  (5)  -   3   (2)  15   -   (5)  10 
Net current period other comprehensive income  90   -   65   155 
Balances at end of period $2,076  $(5,798) $65  $(3,657)
                
For the nine months ended September 30,                
2018                
Balances at beginning of period $(470) $(5,798) $269  $(5,999)
Other comprehensive income (loss) before reclassifications  (4,928)  -   1,106   (3,822)
Amounts reclassified from AOCL  36   -   (104)  (68)
Net current period other comprehensive income (loss)  (4,892)  -   1,002   (3,890)  (3,039)  -   536   (2,503)
Balances at end of period $(5,362) $(5,798) $1,271  $(9,889) $(3,509) $(5,798) $805  $(8,502)
                
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 30March 31 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 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
      
  $(149) Interest expense
   (31) Income tax expense
  $(118) Reclassification, net of tax
        
  $226  Total reclassifications for the period, net of tax
        
2018      
Unrealized losses on securities available for sale
      
  $(19) Net gains (losses) on securities
   -  Net impairment loss recognized in earnings
   (19) Total reclassifications before tax
   (4) Income tax expense
  $(15) Reclassifications, net of tax
        
Unrealized gains (losses) on cash flow hedges
      
  $(6) Interest expense
   (1) Income tax expense
  $(5) Reclassification, net of tax
        
  $(10) 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

15.Mepco Sale

On December 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, and certain other assets to Seabury, who also assumed certain liabilities of Mepco.

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

This transaction closed on May 18, 2017, with an effective date of May 1, 2017. As a result of the closing, Mepco sold $33.1 million of net payment plan receivables, $0.5 million of commercial loans, $0.2 million of furniture and equipment and $1.6 million of other assets to Seabury, who also assumed $2.0 million of specified liabilities. We received cash totaling $33.4 million and recorded no gain or loss in 2017 as the assets were sold and the liabilities were assumed at book value.

16.  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 preliminary 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).

Management views the disclosed fair values presented above to be provisional.  Prior to the end of the one-year measurement period for finalizing acquisition-date fair values, if information becomes available which would indicate adjustments are required to the allocation, such adjustments will be included in the allocation in the reporting period in which the adjustment amounts are determined. 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.

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.

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).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 ASU 2014-09.this topic.  These sources of revenue that are excluded from the scope of this amended guidancetopic 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%84.9% and 80.0%82.2% of total revenues at September 30,March 31, 2019 and 2018, and 2017, respectively.

Material sources of revenue that are included in the scope of ASC Topic 606this topic 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,March 31, 2019 and December 31, 2018.

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

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

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

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 monthsthree month periods ending September 30,March 31, 2019 and 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 ninefollows:

Three months ending September 30, 2018 follows:March 31, 2019

 
Service
Charges
on Deposits
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  Total  
Service
Charges
on Deposits
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  Total 
 (In thousands)  (In thousands) 
Retail                              
Overdraft fees $6,177           $6,177  $1,730   -   -   -  $1,730 
Account service charges  1,607            1,607   516   -   -   -   516 
ATM fees     $1,077         1,077   -  $322   -   -   322 
Other      656         656   -   251   -   -   251 
Business                                      
Overdraft fees  1,153             1,153   385   -   -   -   385 
Account service charges  229             229   9   -   -   -   9 
ATM fees      26         26   -   8   -   -   8 
Other      399         399   -   129   -   -   129 
Interchange income         $7,236      7,236   -   -  $2,355   -   2,355 
Asset management revenue             $826   826   -   -   -  $254   254 
Transaction based revenue              608   608   -   -   -   43   43 
                                        
Total $9,166  $2,158  $7,236  $1,434  $19,994  $2,640  $710  $2,355  $297  $6,002 
                                        
Reconciliation to Condensed Consolidated Statement of Operations:Reconciliation to Condensed Consolidated Statement of Operations:         Reconciliation to Condensed Consolidated Statement of Operations:         
Non-interest income - other:                                        
Other deposit related income                 $2,158                  $710 
Investment and insurance commissionsInvestment and insurance commissions               1,434 Investment and insurance commissions               297 
Bank owned life insurance                  713                   242 
Other                  1,989                   1,015 
Total                 $6,294                  $2,264 

ITEM 2.NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Three months ending March 31, 2018


 
Service
Charges
on Deposits
  
Other
Deposit
Related
Income
  
Interchange
Income
  
Investment
and
Insurance
Commissions
  Total 
  (In thousands) 
Retail               
Overdraft fees $1,972   -   -   -  $1,972 
Account service charges  500   -   -   -   500 
ATM fees  -  $345   -   -   345 
Other  -   207   -   -   207 
Business                    
Overdraft fees  365   -   -   -   365 
Account service charges  68   -   -   -   68 
ATM fees  -   8   -   -   8 
Other  -   129   -   -   129 
Interchange income  -   -  $2,246   -   2,246 
Asset management revenue  -   -   -  $271   271 
Transaction based revenue  -   -   -   167   167 
                     
Total $2,905  $689  $2,246  $438  $6,278 
                     
Reconciliation to Condensed Consolidated Statement of Operations:         
Non-interest income - other:                    
Other deposit related income                 $689 
Investment and insurance commissions               438 
Bank owned life insurance                  256 
Other                  560 
Total                 $1,943 

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
March 31, 2019
 
  (In thousands) 
Operating lease cost $564 
Variable lease cost  23 
Short-term lease cost  5 
Total $592 

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:

  
March 31, 2019
 
  (In thousands) 
Lease right of use asset $7,199 
Lease liabilities $7,202 
     
Weighted average remaining lease term (years)  5.65 
Weighted average discount rate  3.2%

Maturity analysis of our lease liabilities at March 31, 2019 based on required contractual payments follows:

  (In thousands) 
    
Nine months ending December 31, 2019 $1,662 
2020  1,711 
2021  1,248 
2022  963 
2023  925 
2024 and thereafter  1,423 
Total lease payments  7,932 
Less imputed interest  (730)
Total $7,202 

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

Management’s Discussion and Analysis17. Recent Acquisition
of Financial Condition and Results of Operations

Introduction. The following section presents additional information to assessEffective April 1, 2018, we completed the financial conditionacquisition of all of the issued and resultsoutstanding shares of operationscommon stock of TCSB through a merger of TCSB into Independent Bank Corporation (“IBCP”), its wholly-owned bank, Independent Bank (the "Bank"), and their subsidiaries. This section should be read in conjunction with the Condensed Consolidated Financial Statements. We also encourage you to read our 2017 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC"). That report includes a list of risk factors that you should consider in connection with any decision to buy or sell our securities.

Overview. We provide banking services to customers located primarily in Michigan’s Lower Peninsula.  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") (the "Merger Agreement") providing for a business combination of IBCP and TCSB.  On April 1, 2018, TCSB was merged with and into IBCP, with IBCP as the surviving corporation (the "Merger"‘‘Merger’’).  In connection with the Merger, on April 1, 2018, IBCPOn that same date we also 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  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 in IBCP common stock or stock options for allto the shareholders and option holders of the sharesTCSB.  The fair value of TCSB common stock and TCSB 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 outstanding immediately before the effective timeliabilities assumed at their estimated acquisition date fair values.  TCSB results of the Merger. Based on a preliminaryoperations are included in our results beginning April 1, 2018.

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

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

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

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

The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows.  However, we believe that all contractual cash flows related to these financial instruments will be periodically tested for impairmentcollected.  As such, these receivables were not considered impaired at the acquisition date and were not subject to the CDI will be amortized overguidance 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 ten year period ($0.2fair value and gross contractual amounts receivable of $292.9 million and $0.4$298.6 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 livesdate of acquisition.

ITEM 2.

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

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

66Overview. 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 2019, 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.


RegulationRecent Developments. On July 2, 2013,December 4, 2017, we entered into an Agreement and Plan of Merger with TCSB Bancorp, Inc. (“TCSB”) (the “Merger Agreement”) providing for a business combination of IBCP and TCSB.  On April 1, 2018, TCSB was merged with and into IBCP, with IBCP as the Federal Reserve Board approved a final rule that establishes an integrated regulatory capital frameworksurviving corporation (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”“Merger”).  In general, under the New Capital Rules, minimum requirements have increased for both the quantity and quality of capital held by banking organizations. Consistentconnection with the international Basel framework,Merger, on April 1, 2018, IBCP consolidated Traverse City State Bank, TCSB’s wholly-owned subsidiary bank, with and into Independent Bank (with Independent Bank as the 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)surviving institution). 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 thirdfirst quarter and first nine months of 20182019 as compared to 2017.2018.

Results of Operations

Summary.  We recorded net income of $11.9$9.4 million and $6.9 million, respectively, during the three months ended September 30, 2018 and 2017.March 31, 2019, compared to net income of $9.2 million during the three months ended March 31, 2018. The increase in 2018 third quarter results as comparednet income is primarily due to 2017 reflects increasesan increase in net interest income and non-interest income as well as decreases in the provision for loan losses and income tax expense that werewas 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 non-interest income tax expense that were partially offset byand increases in the provision for loan losses, non-interest expense and in non-interestincome tax expense.

6757

Key performance ratios

 
Three months ended
September 30,
  
Nine months ended
September 30,
  
Three months
ended March 31,
 
 2018  2017  2018  2017  2019  2018 
Net income (annualized) to                  
Average assets  1.46%  1.01%  1.30%  0.96%  1.13%  1.34%
Average common shareholders’ equity  13.83   10.27   12.73   9.69   11.14   14.04 
                        
Net income per common share                        
Basic $0.49  $0.32  $1.29  $0.88  $0.40  $0.43 
Diluted  0.49   0.32   1.27   0.87   0.39   0.42 

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

OurNet interest income totaled $30.2 million during the first quarter of 2019, which represents a $6.3 million, or 26.3% increase, from the comparable quarter one year earlier.  The increase in net interest income totaled $29.7 million during the third quarter ofin 2019 compared to 2018 an increase of $6.8 million, or 29.6% from the year-ago period.  This increase primarily reflects a $516.2 million increase in average interest-earning assets as well as a 2517 basis point increase 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, net interest income totaled $82.6 million, as well as an increase of $16.7 million, or 25.4% from 2017.  This increase primarily reflects a $433.5 million increase in average interest-earning assets as well as a 21 basis point increase in our net interest margin.assets.

Interest and fees on loans for the third quarter and first nine months of 2018 include $0.6 million and $1.2 million, respectively, of accretion of the discount recorded on loans acquiredTotal average interest-earning assets were $3.15 billion in the Merger.first quarter of 2019 compared to $2.61 billion in the year ago quarter.

The increase in average interest-earning assets primarily reflects the Merger and loan growth utilizing funds from increasesan increase in deposits and borrowed funds as well as the impact of the Merger.deposits.  The increase in the net interest margin reflects a change in the mix of average-interest earning assets (higher percentage of loans), as well as increases in short-term market interest rates and the impact of the Merger. rates.

Our net interest income is also adversely impacted by our level of non-accrual loans.  In the thirdfirst quarter and first nine months of 20182019 non-accrual loans averaged $9.2$9.1 million and $8.1 million, respectively, compared to $8.6$7.5 million and $9.7 million, respectively for the same periods in 2017.  In addition, in the thirdfirst quarter and first nine months of 2018 we had net (charge-offs)/recoveries of $(0.01) million and $0.35 million, respectively, of unpaid interest on loans placed on or taken off non-accrual during each period or on loans previously charged-off compared to net recoveries of $0.28 million and $0.90 million, respectively, during the same periods in 2017.2018.

Average Balances and Tax Equivalent Rates

 
Three Months Ended
September 30,
  
Three Months Ended
March 31,
 


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% $2,613,182  $32,600   5.03% $2,060,720  $23,339   4.57%
Tax-exempt loans (1)
  6,590   81   4.88   3,138   47   5.94   8,689   103   4.81   2,127   18   3.43 
Taxable securities  379,985   2,737   2.88   474,901   2,765   2.33   389,845   3,006   3.08   422,254   2,635   2.50 
Tax-exempt securities (1)
  62,964   518   3.29   90,645   783   3.46   56,889   469   3.30   78,345   603   3.08 
Interest bearing cash  27,477   66   0.95   29,336   63   0.85   65,213   311   1.93   32,901   82   1.01 
Other investments  17,493   237   5.38   15,543   200   5.11   18,359   264   5.83   15,543   248   6.47 
Interest Earning Assets  3,038,221   34,575   4.53   2,522,060   25,659   4.05   3,152,177   36,753   4.70   2,611,890   26,925   4.15 
Cash and due from banks  35,874           33,019           34,240           32,135         
Other assets, net  173,508           142,283           170,586           132,961         
Total Assets $3,247,603          $2,697,362          $3,357,003          $2,776,986         
                                                
Liabilities                                                
Savings and interest-bearing checking
 $1,241,868   1,223   0.39  $1,048,289   408   0.15 
Savings and interest- bearing checking
 $1,361,057   1,486   0.44  $1,094,981   551   0.20 
Time deposits  664,098   2,753   1.64   531,226   1,425   1.06   688,434   4,195   2.47   564,282   1,736   1.25 
Other borrowings  80,939   779   3.82   85,219   626   2.91   66,058   712   4.37   64,890   574   3.59 
Interest Bearing Liabilities  1,986,905   4,755   0.95   1,664,734   2,459   0.59   2,115,549   6,393   1.23   1,724,153   2,861   0.67 
Non-interest bearing deposits  884,003           736,291           859,605           758,643         
Other liabilities  34,697           31,263           40,257           29,606         
Shareholders’ equity  341,998           265,074           341,592           264,584         
Total liabilities and shareholders’ equity
 $3,247,603          $2,697,362          $3,357,003          $2,776,986         
                                                
Net Interest Income     $29,820          $23,200          $30,360          $24,064     
                                                
Net Interest Income as a Percent of Average Interest Earning Assets
          3.91%          3.66%          3.88%          3.71%


(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

6959

Average Balances and Tax Equivalent Rates

  
Nine Months Ended
September 30,
 
  2018  2017 
  
Average
Balance
  Interest  
Rate (2)
  
Average
Balance
  Interest  
Rate (2)
 
  (Dollars in thousands) 
Assets                  
Taxable loans $2,350,883  $83,881   4.77% $1,792,381  $61,544   4.59%
Tax-exempt loans (1)
  5,221   185   4.74   3,410   145   5.69 
Taxable securities  400,957   8,092   2.69   499,886   8,300   2.21 
Tax-exempt securities (1)
  70,155   1,680   3.19   85,853   2,264   3.52 
Interest bearing cash  29,502   214   0.97   42,610   229   0.72 
Other investments  16,457   684   5.56   15,543   638   5.49 
    Interest Earning Assets  2,873,175   94,736   4.40   2,439,683   73,120   4.00 
Cash and due from banks  33,204           32,492         
Other assets, net  159,844           146,753         
    Total Assets $3,066,223          $2,618,928         
                         
Liabilities                        
Savings and interest- bearing checking $1,193,388   2,785   0.31  $1,051,395   1,007   0.13 
Time deposits  611,103   6,687   1.46   494,219   3,747   1.01 
Other borrowings  82,253   2,267   3.68   66,392   1,659   3.34 
   Interest Bearing Liabilities  1,886,744   11,739   0.83   1,612,006   6,413   0.53 
Non-interest bearing deposits  833,283           717,589         
Other liabilities  32,177           30,372         
Shareholders’ equity  314,019           258,961         
   Total liabilities and shareholders’ equity $3,066,223          $2,618,928         
                         
    Net Interest Income     $82,997          $66,707     
                         
Net Interest Income as a Percent of Average Interest Earning Assets          3.86%          3.65%


(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

Reconciliation of Non-GAAP Financial Measures

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
March 31,
 
 2018  2017  2018  2017  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  $30,243  $23,936 
Add: taxable equivalent adjustment  123   288   384   837   117   128 
Net interest income - taxable equivalent $29,820  $23,200  $82,997  $66,707  $30,360  $24,064 
Net interest margin (GAAP) (1)
  3.88%  3.60%  3.84%  3.61%  3.86%  3.69%
Net interest margin (FTE) (1)
  3.91%  3.66%  3.86%  3.65%  3.88%  3.71%

(1)AnnualizedAnnualized.

Provision for loan losses.  The provision for loan losses was a credit of $0.1 million and an expense $0.6 million during the three months ended September 30, 2018 and 2017, respectively. During the nine-month periods ended September 30, 2018 and 2017, the provision was an expense of $0.9$0.7 million and $0.8$0.3 million in the first quarters of 2019 and 2018, 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 thirdfirst 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$10.0 million and $11.7 million during the third quarter of 2018 compared to $10.3 million in 2017.  For the first ninethree months of 2019 and 2018, non-interest income totaled $35.9 million compared to $31.1 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).respectively.

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
March 31,
 

 2018  2017  2018  2017  2019  2018 

 (In thousands)  (In thousands) 
Service charges on deposit accounts $3,166  $3,281  $9,166  $9,465  $2,640  $2,905 
Interchange income  2,486   1,942   7,236   5,869   2,355   2,246 
Net gains (losses) on assets:                
Net gains (losses) on assets        
Mortgage loans  2,745   2,971   8,571   8,886   3,611   2,571 
Securities  93   69   (71)  62   304   (173)
Mortgage loan servicing, net  1,212   1   4,668   668   (1,215)  2,221 
Investment and insurance commissions  513   606   1,434   1,541   297   438 
Bank owned life insurance  237   283   713   776   242   256 
Other  1,384   1,151   4,147   3,822   1,725   1,249 
Total non-interest income $11,836  $10,304  $35,864  $31,089  $9 ,959  $11,713 

Service charges on deposit accounts decreased on bothtotaled $2.6 million in the first quarter of 2019, a comparative quarterly and year-to-date basisdecrease of $0.3 million from the comparable period in 2018 as compared to 2017.  These decreases were2018.  This decrease was principally due to lower service charges on commercial accounts (due primarily to higher earnings credits) and a decreasedecline in non-sufficient funds occurrences.charges.

Interchange income increased on both a comparative quarterly and year-to-date basistotaled $2.4 million in 2018 asthe first quarter of 2019 compared to 2017$2.2 million in the year ago period due primarily to an increase in debit card transaction volume.  The increase in transaction volume reflects the aforementioned impact of ASU 2014-09.Merger and overall general growth.

Net gains on mortgage loans decreased on both a quarterlywere $3.6 million and a year to date basis.$2.6 million in the first quarters of 2019 and 2018, respectively.   Mortgage loan activity is summarized as follows:sales totaled $154.5 million in the first quarter of 2019 compared to $106.3 million in the first quarter of 2018.  Mortgage loans originated totaled $137.8 million in the first quarter of 2019 compared to $159.0 million in the comparable quarter of 2018.

Mortgage Loan Activity

 
Three months ended
September 30,
  
Nine months ended
September 30,
  
Three months ended
March 31,
 
 2018  2017  2018  2017  2019  2018 
 (Dollars in thousands)  (Dollars in thousands) 
Mortgage loans originated $231,849  $264,177  $617,080  $657,345  $137,758  $158,967 
Mortgage loans sold(1)  148,730   120,981   370,372   305,386   154,525   106,343 
Net gains on mortgage loans  2,745   2,971   8,571   8,886   3,611   2,571 
Net gains as a percent of mortgage loans sold (“Loan Sales Margin”)
  1.85%  2.46%  2.31%  2.91%
Net gains as a percentage of mortgage loans sold (“Loan Sales Margin”)
  2.34%  2.42%
Fair value adjustments included in the Loan Sales Margin
  (0.26)  (0.22)  0.10   0.08   0.58%  0.11%

The decrease in mortgage loans originated is due primarily to higher interest rates suppressing refinance volumes. Mortgage loans sold increased due to a higher mix of salable loans in our origination volumes. Net gains on mortgage loans decreased in 2018 as compared to 2017 due to a lower Loan Sales Margin as discussed below.

(1)2019 and 2018 include mortgage loans not originated for sale totaling $70.4 million and $16.5 million, respectively.

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 LoanNet gains as a percentage of mortgage loans sold (our “Loan Sales Margin isMargin”) are 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 aforementionedthese fair value accounting adjustments, as well as portfolio mortgage loan sales of $70.4 million and $16.5 million in the first quarters of 2019 and 2018, respectively, the adjusted Loan Sales Margin would have been 2.11%2.59% and 2.68% in the third quarters of 2018 and 2017, respectively and 2.21% and 2.83% for the comparative 2018 and 2017 year-to-date periods, respectively.  The decrease in the Loan Sales Margin (excluding fair value adjustments) in 2018 was generally due to a narrowing of primary-to-secondary market pricing spreads due to competitive factors throughout the mortgage banking industry (generally higher mortgage loan interest rates and a decline in refinance volume).these respective periods. The changes in the fair value accounting adjustments are primarily due to changes in the amount of commitments to originate mortgage loans for sale.sale during each period.

NetWe recorded net gains (losses) on securities of approximately $0.30 million and $(0.17) million in the first quarters of 2019 and 2018, respectively.  The first quarter 2019 net gains on securities are due primarily to an increase in the fair value of equity securities of $0.17 million and net gains of $0.14 million on the sale of $42.2 million of securities available for sale.  The first quarter 2018 net losses on securities were relatively nominaldue primarily to a decline in the fair value of equity securities of $0.15 million and net losses of $0.02 million on the sale of $22.3 million of securities available for all of the periods presented. sale.

We recorded no net impairment losses in either 2018the first quarter of 2019 or 20172018, for other than temporary impairment of securities available for sale.  (See “Securities.”)

Mortgage loan servicing net, generated incomea loss of $1.2 million and $0.001income of $2.2 million in the thirdfirst quarters of 2019 and 2018, and 2017, respectively. For the first nine months of 2018, mortgage loan servicing, net, generated income of $4.7 million as compared to income of $0.7 million in 2017.  This activity is summarized in the following table:

 Three Months Ended  Nine Months Ended  Three Months Ended 
 9/30/2018  9/30/2017  9/30/2018  9/30/2017  March 31, 2019  March 31, 2018 
Mortgage loan servicing, net: (In thousands) 
Mortgage loan servicing: (Dollars in thousands) 
Revenue, net $1,410  $1,091  $3,974  $3,253  $1,476  $1,192 
Fair value change due to price  610   (572)  2,586   (1,075)  (2,203)  1,458 
Fair value change due to pay-downs  (808)  (518)  (1,892)  (1,510)  (488)  (429)
Total $1,212  $1  $4,668  $668  $(1,215) $2,221 

73The significant variance in the fair value change due to price relates primarily to the decline in mortgage loan interest rates in the first quarter of 2019.  That decline increased projected prepayment rates for mortgage loans serviced for others, leading to a decrease in fair value.


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,
  
Three months ended
March 31,
 
 2018  2017  2018  2017  2019  2018 
 (In thousands)  (In thousands) 
Balance at beginning of period $21,848  $14,515  $15,699  $13,671  $21,400  $15,699 
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   1,200   1,055 
Change in fair value  (198)  (1,090)  694   (2,585)  (2,691)  1,029 
Balance at end of period $23,151  $14,675  $23,151  $14,675  $19,909  $17,783 

At September 30, 2018March 31, 2019 we were servicing approximately $2.28$2.38 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%4.26% and a weighted average service fee of approximately 25.8 basis points. Capitalized mortgage loan servicing rights (recorded at September 30, 2018fair value) at March 31, 2019 totaled $23.2$19.9 million, representing approximately 101.483.6 basis points on the related amount of mortgage loans serviced for others.

Investment and insurance commissions represent revenues generated ondeclined by $0.14 million in the sale or managementfirst quarter of investments and insurance for our customers.  These revenues declined on both a quarterly and year-to-date basis in 20182019 as compared to 2017the year ago period due primarily to reducedslower product sales.sales reflecting market volatility and uncertainty and a $0.05 million charge-back related to commission on a large annuity sale from the fourth quarter of 2018.

Income fromWe earned $0.24 million and $0.26 million in the first quarters of 2019 and 2018, respectively, principally as a result of increases in the cash surrender value of our separate account bank owned life insurance declined on both a comparative quarterly and year-to-date basis in 2018 compared to 2017 reflecting a lower crediting rate on our cash surrender value.insurance.  Our separate account is primarily invested in agency mortgage-backed securities and managed by PIMCO.a third-party. 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 insurance was $54.8$55.3 million and $54.6$55.1 million at September 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.

Other non-interest income increasedtotaled $1.73 million and $1.25 million during the first quarters of 2019 and 2018, respectively.  This increase is primarily due to $0.38 million of recoveries on both a comparative quarterlyTCSB loans that had been charged-off prior to the Merger and year-to-date basisan increase in 2018 compared to 2017, due primarily to increases in a variety of categories including: merchant processing, credit card related fees and earnings from limited partnerships (small business investment company and community/housing related investment funds).wire transfer fees.

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 $4.1totaled $28.0 million to $26.7 million and by $11.7 million to $80.6 million duringin the three- and nine-month periods ended September 30, 2018, respectively,first quarter of 2019 compared to $24.1 million in the same periods in 2017.year ago period. Many of our componentscategories of non-interest expense have increased in 2018 due toprimarily as a result of the TCSB Merger.

The components of non-interest expense are as follows:

Non-Interest Expense

Non-Interest Expense      
  
Three months ended
March 31,
 
  2019  2018 
  (In thousands) 
Compensation $10,481  $8,930 
Performance-based compensation  2,220   2,783 
Payroll taxes and employee benefits  3,650   2,755 
Compensation and employee benefits  16,351   14,468 
Occupancy, net  2,505   2,264 
Data processing  2,144   1,878 
Furniture, fixtures and equipment  1,029   967 
Communications  769   680 
Interchange expense  688   598 
Advertising  672   441 
Loan and collection  634   677 
Legal and professional  369   378 
FDIC deposit insurance  368   230 
Amortization of intangible assets  272   86 
Costs (recoveries) related to unfunded lending commitments  160   (114)
Supplies  158   165 
Net (gains) losses on other real estate and repossessed assets  119   (290)
Provision for loss reimbursement on sold loans  111   11 
Credit card and bank service fees  103   96 
Merger related expenses  --   174 
Other  1,538   1,426 
Total non-interest expense $27,990  $24,135 
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2018  2017  2018  2017 
  (In thousands) 
Compensation $9,582  $8,494  $28,086  $26,872 
Performance-based compensation  3,305   2,688   9,238   6,819 
Payroll taxes and employee benefits  3,282   2,395   9,182   7,413 
Compensation and employee benefits  16,169   13,577   46,506   41,104 
Occupancy, net  2,233   1,970   6,667   6,032 
Data processing  2,051   1,796   6,180   5,670 
Merger related expenses  98   10   3,354   10 
Furniture, fixtures and equipment  1,043   961   3,029   2,943 
Communications  727   685   2,111   2,046 
Interchange expense  715   294   1,974   869 
Loan and collection  531   481   1,900   1,564 
Advertising  594   526   1,578   1,551 
Legal and professional  477   540   1,311   1,366 
FDIC deposit insurance  270   208   750   608 
Amortization of intangible assets  295   87   676   260 
Supplies  173   176   516   507 
Credit card and bank service fees  108   105   310   432 
Provision for loss reimbursement on sold loans  47   15   78   66 
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 
Other  1,463   1,063   4,321   3,454 
Total non-interest expense $26,740  $22,616  $80,636  $68,946 

Compensation and employee benefits expenses, in total, increased $2.6by $1.9 million, on a quarterly comparative basis and increased $5.4 million foror 13.0%, in the first nine monthsquarter of 20182019, as compared to the same periods in 2017.year ago period.

Compensation expense increased by $1.1$1.6 million, and $1.2 million in the third quarter and first nine months of 2018, respectively, comparedor 17.4%.  This year-over-year increase was generally attributable to the same periods in 2017.  The third quarterMerger (approximately $0.9 million) and year-over-year increases werethe balance of the increase was due primarily due to the TCSB Merger as well as annual compensation increases instituted at the start of the year.  The increasethat were effective 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.January 1, 2019.

Performance-based compensation increaseddecreased by $0.6 million and $2.4 million in the third quarter and first nine months of 2018, respectively, versus the same periods in 2017,2019 due primarily to relative comparative changes in thea lower accrual for anticipated incentive compensation for salaried employees based on our estimated full-yearforecasted 2019 performance as compared to goals.  In addition, we introducedthe first quarter of 2018 included a new incentive compensation plan for$0.3 million bonus that was paid to hourly employees in 2018 that increased performance-based compensation.
employees.

Payroll taxes and employee benefits increased by $0.9 million in 2019 due primarily to higher health insurance costs ($0.7 million increase) as well as higher payroll taxes and $1.8401(k) plan costs (in part, reflecting an increased number of employees due to the Merger).  We have a self-insured health insurance plan with an individual claim stop-loss limit.  Health insurance claims levels have increased substantially since the second quarter of 2018 and continuing into 2019.

Occupancy, net, increased $0.2 million, or 10.6%, in the first quarter of 2019 compared to 2018 primarily due to additional branch locations added as a result of the Merger and higher snow removal costs.

Data processing expense increased $0.3 million, or 14.2%, in the first quarter of 2019 compared to the year earlier period due primarily to the Merger and various new software products that have been implemented.

Furniture, fixtures and equipment, legal and professional fees, supplies and credit card and bank service fees were all relatively unchanged in the first quarter of 2019 as compared to the year earlier period.

Communications expense increased $0.1 million, or 13.1%, in the first quarter of 2019 compared to the year earlier period due primarily to the Merger.

Interchange expense increased by $0.1 million in the thirdfirst quarter and first nine months of 2018, respectively,2019 compared to the same periodsyear ago quarter due primarily to increased transaction volume as a result of the Merger and general growth.

Advertising expense increased $0.2 million, or 52.4%, in 2017,the first quarter of 2019 compared to the year earlier period due primarily to increases in payroll taxes (due to the aforementioned increases in compensation), higher health care costs (due to increased claims in 2018 someoutdoor (billboards) advertising and sponsorship of which may be reimbursed prior to year end from a stop-loss reinsurance policy) and higher 401(k) plan costs (due to an increase in the employer match percentage).

Occupancy, net, increased by $0.3 million and $0.6 million in the third quarter and first nine months of 2018, respectively, 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.

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 community events.were relatively comparable on both a quarterly and year-to-date basis in 2018 as compared to 2017.

Interchange expense primarily represents our third-party cost to process debit card transactions.  This cost increased in 2018 on both a comparative quarterly and year-to-date basis due primarily 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.

Loan and collection expenses primarily reflect costs related to new lending activity as well asactivities, including the management and collection of non-performing loans and other problem credits. The year-to-date comparative increase is primarily becauseThese expenses were relatively unchanged in the first quarter of 2017 included a $0.2 million reimbursement of previously incurred expenses related2019 compared to the resolution and payoff of a non-accrual loan.year ago quarter.

FDIC deposit insurance expense increased by $0.1 million in 2018 on boththe first quarter of 2019 compared to the year ago quarter due to a comparative quarterly and year-to-date basis due primarily to ourcombination of an increase in our assessment rate and growth in our total assets.

The amortization of intangible assets primarily 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.transactions. We had remaining unamortized intangible assets of $6.7$6.1 million and $1.6$6.4 million at September 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. See note #7 to the Condensed Consolidated Financial Statements for a schedule of future amortization of intangible assets.

7664

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 $0.05 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 2018 and 2017 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 million at September 30, 2018 and December 31, 2017, respectively. This reserve is included in accrued expenses and other liabilities in our Condensed Consolidated Statements of Financial Condition.

The changes in cost (recoveries)costs 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.  In addition, in the first quarter of 2019, we made some adjustments to the look back period for determining these costs that led to the increased expense.

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 $0.1 million of net losses in the first quarter of 2019 were primarily attributed to write-downs of residential real estate.  The $0.3 million net gain in the first quarter of 2018 primarily relates to the sale of residential real estate and reflected generally increasing housing prices in our markets at that time.

The provision for loss reimbursement on sold loans was an expense of $0.11 million and $0.01 million in the first quarters of 2019 and 2018, respectively, and 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 [“FHLB”]).  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 $0.80 million and $0.78 million at March 31, 2019 and December 31, 2018, respectively. This reserve is included in accrued expenses and other liabilities in our Condensed Consolidated Statements of Financial Condition. 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.

Merger related expenses totaled $0.2 million in the first quarter of 2018 and primarily represented professional fees incurred related to the Merger.

Other non-interest expenses increased by $0.1 million in 2018 on both a comparative quarterly and year-to-date basisthe first quarter of 2019 compared to the year ago quarter due primarily to increases in several categories a higher level of expenses (directors’ fees, travel and entertainment, certain state franchise taxes, and deposit account/debit card fraud).fraud losses.

Income tax expense.  We recorded an income tax expense of $2.9$2.2 million and $7.0$2.0 million in the third quarterfirst quarters of 2019 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 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,insurance.  In addition, both the first quarters of 2019 and differences in2018, include a reduction of $0.2 million of income tax expense related to impact of the excess value of stock awards that vestvested and stock options that arewere 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,both March 31, 2019 and 2018 and 2017 and at December 31, 2017,2018, that the realization of substantially all of our deferred tax assets continues to be more likely than not.

Financial Condition

Summary.  Our total assets increased by $507.8$30.3 million during the first ninethree 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$2.62 billion at September 30, 2018,March 31, 2019, an increase of $543.8$36.3 million, or 26.9%1.4%, from December 31, 2017.2018.  (See "Portfolio“Portfolio Loans and asset quality.")

Deposits totaled $2.80$2.93 billion at September 30, 2018,March 31, 2019, compared to $2.40$2.91 billion at December 31, 2017.2018.  The $398.1$20.8 million increase in total deposits during the period is primarily due to the TCSB Merger and growth in reciprocal depositssavings and brokered timeinterest-bearing checking deposit account balances and in reciprocal deposits.

Securities.  We maintain diversified securities portfolios, which include obligations of U.S. government-sponsored agencies, securities issued by states and political subdivisions, residential and commercial mortgage-backed securities, asset-backed securities, corporate securities, trust preferred securities and foreign government securities (that are denominated in U.S. dollars). We regularly evaluate asset/liability management needs and attempt to maintain a portfolio structure that provides sufficient liquidity and cash flow. Except as discussed below, we believe that the unrealized losses on securities available for sale are temporary in nature and are expected to be recovered.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
       Securities      
 
 Unrealized         Unrealized    
 
Amortized
Cost
 Gains
  Losses 
Fair
Value
  
Amortized
Cost
  Gains Losses  
Fair
Value
 
 (In thousands)  (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 
March 31, 2019 $461,604  $2,755 $2,828  $461,531 
December 31, 2018  433,224   1,520  6,818   427,926 

Securities available for sale declined $86.0increased $33.6 million during the first nine monthsquarter 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 monthsquarter of 20182019 or 2017.
2018.

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

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


(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.
  
Three months ended
March 31,
 
  2019  2018 
  (In thousands) 
     
Proceeds $42,236  $22,277 
         
Gross gains $169  $76 
Gross losses  (32)  (95)
Net impairment charges  --   -- 
Fair value adjustments  167   (154)
Net gains (losses) $304  $(173)

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 attempt to sell fixed rate jumbo mortgage loans in the future.

A summary of our Portfolio Loans follows:

 
September 30,
2018
  
December 31,
2017
  
March 31,
2019
  
December 31,
2018
 
 (In thousands)  (In thousands) 
Real estate(1)            
Residential first mortgages $815,202  $672,592  $805,875  $811,719 
Residential home equity and other junior mortgages  175,426   136,560   176,082   177,574 
Construction and land development  171,546   143,188   189,865   180,286 
Other(2)  701,711   538,880   719,622   707,347 
Consumer  377,451   291,091   392,458   379,607 
Commercial  314,848   231,786   328,643   319,058 
Agricultural  6,394   4,720   6,250   6,929 
Total loans $2,562,578  $2,018,817  $2,618,795  $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
  
March 31,
2019
  
December 31,
2018
 
 (Dollars in thousands)  (Dollars in thousands) 
Non-accrual loans $9,343  $8,184  $8,849  $9,029 
Loans 90 days or more past due and still accruing interest  --   --   --   5 
Total non-performing loans  9,343   8,184   8,849   9,034 
Other real estate and repossessed assets  1,445   1,643   1,338   1,299 
Total non-performing assets $10,788  $9,827  $10,187  $10,333 
As a percent of Portfolio Loans                
Non-performing loans  0.36%  0.41%  0.34%  0.35%
Allowance for loan losses  0.95   1.12   0.96   0.96 
Non-performing assets to total assets  0.33   0.35   0.30   0.31 
Allowance for loan losses as a percent of non-performing loans  261.17   275.99   285.39   275.49 

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

Troubled debt restructurings ("TDR"(“TDR”)

  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, 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 
  March 31, 2019 
  Commercial  
Retail (1)
  Total 
  (In thousands) 
Performing TDR’s $6,209  $44,427  $50,636 
Non-performing TDR’s (2)
  67   2,657
(3) 
  2,724 
Total $6,276  $47,084  $53,360 
             
  December 31, 2018 
  Commercial  
Retail (1)
  Total 
  (In thousands) 
Performing TDR’s $6,460  $46,627  $53,087 
Non-performing TDR’s (2)
  74   2,884
(3) 
  2,958 
Total $6,534  $49,511  $56,045 

(1)Retail loans include mortgage and installment 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$0.2 million, or 2.0%, during the first nine monthsquarter of 20182019 due principally to an increasea decline in non-performing commercial 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$50.6 million, or 2.2%1.9% of total Portfolio Loans, and $60.1$53.1 million, or 3.0%2.1% of total Portfolio Loans, at September 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. The decrease in the amount of performing TDRs in the first nine monthsquarter of 20182019 primarily reflects pay downs and payoffs.

Other real estate and repossessed assets were essentially unchanged and totaled $1.4 million and $1.6$1.3 million at September 30, 2018both March 31, 2019 and December 31, 2017, respectively.2018.

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

The ratio of loan net charge-offs to average Portfolio Loans was 0.05% on an annualized basis in the first quarter of 2019 compared to a negative 0.03% (as a result of net recoveries) in the first quarter of 2018.  This year-over-year change was primarily due to a decline in recoveries on previously charged-off commercial loans.

8169

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,
  
Three months ended
March 31,
 
 2018  2017  2019  2018 
 Loans  
Unfunded
Commitments
  Loans  
Unfunded
Commitments
  Loans  
Unfunded
Commitments
  Loans  
Unfunded
Commitments
 
 (Dollars in thousands)  (Dollars in thousands) 
Balance at beginning of period $22,587  $1,125  $20,234  $650  $24,888  $1,296  $22,587  $1,125 
Additions (deductions)                                
Provision for loan losses  912   -   806   -   664   -   315   - 
Recoveries credited to allowance  3,768   -   2,998   -   568   -   1,014   - 
Loans charged against the allowance  (2,866)  -   (2,560)  -   (866)  -   (845)  - 
Additions included in non-interest expense  -   (6)  -   332   -   160   -   (114)
Balance at end of period $24,401  $1,119  $21,478  $982  $25,254  $1,456  $23,071  $1,011 
                                
Net loans charged against the allowance to average Portfolio Loans  (0.04)%      (0.03)%      0.05%      (0.03)%    

Allocation of the Allowance for Loan Losses

 
September 30,
2018
  
December 31,
2017
  
March 31,
2019
  
December 31,
2018
 
 (In thousands)  (In thousands) 
Specific allocations $6,102  $6,839  $6,686  $6,310 
Other adversely rated commercial loans  1,883   1,228   2,095   1,861 
Historical loss allocations  7,665   7,125   8,400   7,792 
Additional allocations based on subjective factors  8,751   7,395   8,073   8,925 
Total $24,401  $22,587  $25,254  $24,888 

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

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

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$0.4 million to $24.4$25.3 million at September 30, 2018March 31, 2019 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 September 30, 2018 compared to 1.12%both March 31, 2019 and at December 31, 2017.2018.

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

Three of the four components of the AFLL outlined above increased in the first quarter of 2019. The AFLL related to specific loans increased $0.4 million in 2019 due primarily to a slight shift from the historical to the specific loan component of the AFLL as described above.  The AFLL related to other adversely rated commercial loans increased $0.2 million in 2019 primarily due to an increase in the balance of such loans included in this component to $47.0 million at March 31, 2019 from $44.7 million at December 31, 2018 and $35.3 million at March 31, 2018.  The AFLL related to historical losses increased $0.6 million during 2019, and the AFLL related to subjective factors decreased $0.9 million during 2019.

Three of the four components of the allowanceAFLL for loan losses outlined above also increased in the first nine monthsquarter of 2018. The allowance for loan lossesAFLL related to specific loans decreased $0.7$0.5 million induring the first quarter of 2018 due primarily to a decline in the balance of individually impaired loans and lower loss given default rates as well as charge-offs.  The allowance for loan lossesAFLL related to other adversely rated commercial loans increased $0.7$0.6 million induring the first quarter of 2018 primarily due to an increase in the balance of such loans included in this component to $37.5$35.3 million at September 30,March 31, 2018 from $27.2 million at December 31, 2017 and $23.2 million at September 30, 2017.  The allowance for loan lossesAFLL related to historical losses increased $0.5$0.1 million during the first quarter of 2018 due principally to loan growth.  The allowance for loan lossesAFLL related to subjective factors increased $1.4$0.2 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 monthsquarter of 2017.  The allowance for loan losses related to specific loans decreased $2.1 million in 2017 due primarily to a decline in 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 losses related to subjective factors increased $1.4 million during 20172018 primarily due to loan growth.

Deposits and borrowings.  Historically, the loyalty of our customer base has allowed us to price deposits competitively, contributing to a net interest margin that 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$2.93 billion and $2.40$2.91 billion at September 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.  The $398.1$20.8 million increase in deposits in the first nine monthsquarter of 20182019 is primarily due to the TCSB Merger and growth in reciprocal depositssavings and brokered timeinterest-bearing checking deposit account balances and in reciprocal deposits.  Reciprocal deposits totaled $92.6$267.2 million and $51.0$182.1 million at September 30, 2018March 31, 2019 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.

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,March 31, 2019, we had approximately $650.0$565.9 million of uninsured deposits. A reduction in core deposits would likely increase our need to rely on wholesale funding sources.

We have also implemented strategies that incorporate using federal funds purchased, other borrowings and brokered 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, totaled $79.7 million and $54.6$25.7 million at September 30, 2018both March 31, 2019 and December 31, 2017, respectively.2018.

As described above, we utilize wholesale funding, including FHLB borrowings and brokered time depositsBrokered CDs to augment our core deposits and fund a portion of our assets. At September 30, 2018,March 31, 2019, our use of such wholesale funding sources (including reciprocal deposits) amounted to approximately $380.4$505.0 million, or 13.2%17.1% of total funding (deposits and total borrowings, excluding subordinated debentures). Because wholesale funding sources are affected by general market conditions, the availability of such funding may be dependent on the confidence these sources have in our financial condition and operations. The continued availability to us of these funding sources is not certain, and Brokered CDs may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity may be constrained if we are unable to renew our wholesale funding sources or if adequate financing is not available in the future at acceptable rates of interest or at all.  Our financial performance could also be affected if we are unable to maintain our access to funding sources or if we are required to rely more heavily on more expensive funding sources. In such case, our net interest income and results of operations could be adversely affected.

We historically employed derivative financial instruments to manage our exposure to changes in interest rates.  During the first nine monthsquarters of 20182019 and 2017,2018, we entered into $16.6$8.4 million and $14.6$11.3 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$0.07 million and $0.2$0.10 million of fee income related to these transactions during the first nine monthsquarters 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,March 31, 2019, we had $506.9$511.1 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$2.28 billion of our deposits at September 30, 2018,March 31, 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$32.0 million as of September 30, 2018March 31, 2019 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,
2018
  
December 31,
2017
  
March 31,
2019
  
December 31,
2018
 
 (In thousands)  (In thousands) 
Subordinated debentures $39,371  $35,569  $39,405  $39,388 
Amount not qualifying as regulatory capital  (1,224)  (1,069)  (1,224)  (1,224)
Amount qualifying as regulatory capital  38,147   34,500   38,181   38,164 
Shareholders’ equity                
Common stock  389,689   324,986   374,678   377,372 
Accumulated deficit  (34,596)  (54,054)  (23,135)  (28,270)
Accumulated other comprehensive loss  (9,889)  (5,999)  (6,817)  (10,108)
Total shareholders’ equity  345,204   264,933   344,726   338,994 
Total capitalization $383,351  $299,433  $382,907  $377,158 

We currently have four special purpose entities with $38.1$39.4 million of outstanding cumulative trust preferred securities.  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.


74
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.
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, 2018March 31, 2019 and December 31, 2017.2018. 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.

Common shareholders’ equity increased to $345.2$344.7 million at September 30, 2018March 31, 2019, 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.a cash dividend. Our tangible common equity (“TCE”) totaled $310.2$310.3 million and $263.3$304.3 million, respectively, at those same dates. Our ratio of TCE to tangible assets was 9.51%9.26% and 9.45%9.17% at September 30, 2018March 31, 2019, 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 intangible assets.

In January 2018,2019, our Board of Directors authorized a share repurchase plan.  Under the terms of the 20182019 share repurchase plan, we are authorized to buy back up to 5% of our outstanding common stock.    This repurchase plan is authorized to last through December 31, 2018.2019.  We did not repurchase anyrepurchased 115,787 shares during the first nine monthsquarter of 2018.2019 at a weighted average price of $21.85 per share.

We pay a quarterly cash dividend on our common stock.  These dividends totaled $0.15$0.18 per share and $0.10$0.15 per share in the thirdfirst quarters of 20182019 and 2017,2018, respectively.    We generally favor a dividend payout ratio between 30% and 50% of net income.

As of September 30, 2018March 31, 2019 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.

CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY AND NET INTEREST INCOME
88
Change in Interest Rates 
Market
Value of
Portfolio
Equity(1)
  
Percent
Change
  
Net
Interest
Income(2)
  
Percent
Change
 
  (Dollars in thousands) 
March 31, 2019            
200 basis point rise $466,000   (4.59)% $124,800   2.89%
100 basis point rise  482,600   (1.19)  123,600   1.90 
Base-rate scenario  488,400   -   121,300   - 
100 basis point decline  469,200   (3.93)  119,100   (1.81)
                 
December 31, 2018                
200 basis point rise $481,100   (3.37)% $126,200   3.27%
100 basis point rise  495,400   (0.50)  124,800   2.13 
Base-rate scenario  497,900   -   122,200   - 
100 basis point decline  482,800   (3.03)  119,600   (2.13)


Changes in Market Value of Portfolio Equity and Net Interest Income

Change in Interest
Rates
 
Market Value
Of Portfolio
Equity(1)
  
Percent
Change
  
Net Interest
Income(2)
  
Percent
Change
 
  (Dollars in thousands) 
September 30, 2018            
200 basis point rise $474,800   (4.33)% $123,700   2.66%
100 basis point rise  489,900   (1.29)  122,700   1.83 
Base-rate scenario  496,300   -   120,500   - 
100 basis point decline  486,100   (2.06)  117,700   (2.32)
                 
December 31, 2017                
200 basis point rise $409,200   (1.23)% $99,100   2.27%
100 basis point rise  417,100   0.68   98,600   1.75 
Base-rate scenario  414,300   -   96,900   - 
100 basis point decline  386,400   (6.73)  91,600   (5.47)


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

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

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

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

Litigation Matters

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

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

Critical Accounting Policies

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

Item 3.

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,March 31, 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,March 31, 2019, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II

Item 1A.
Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 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 thirdfirst quarter of 2018,2019, the Company issued 587712 shares of common stock to non-employee directors on a current basis and 1,4551,833 shares of common stock to the trust for distribution to directors on a deferred basis.  The shares were issued on JulyJanuary 2, 2018,2019, at a price of $25.50$21.02 per share, representing aggregate fees of $0.05 million.  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:March 31, 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
 
January 2019  93,659  $22.07   53,214   1,125,772 
February 2019  57,075   22.86   6,373   1,119,399 
March 2019  56,200   21.98   56,200   1,063,199 
Total  206,934  $22.26   115,787   1,063,199 

(1)Represents
January and February include 40,445 shares and 15,841 shares, respectively, withheld from the shares that would otherwise have been issued to certain officers in order to satisfy tax withholding obligations resulting from the vesting of restricted stock.stock as well as satisfy tax withholding obligations and stock option exercise price resulting from the exercise of stock options. February also includes 34,861 shares of our common stock purchased in the open market by the Independent Bank Corporation Employee Stock Ownership Trust as part of our employee stock ownership plan.

Item 6.
Exhibits

(a)The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report:
Amended and Restated Deferred Compensation and Stock Purchase Plan for Nonemployee Directors, effective March 19, 2019.*
 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

* Represents a compensation plan.

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.

DateNovember 2, 2018May 3, 2019 By/s/ Robert N. Shuster
    Robert N. Shuster, Principal Financial Officer
     
DateNovember 2, 2018May 3, 2019 By/s/ James J. Twarozynski
    James J. Twarozynski, Principal Accounting Officer


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