MACATAWA BANK CORP - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
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, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 000-25927
MACATAWA BANK CORPORATION
(Exact name of registrant as specified in its charter)
|
Michigan
|
38-3391345
|
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
10753 Macatawa Drive, Holland, Michigan 49424
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (616) 820-1444
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Trading Symbol
|
Name of each exchange on which registered
|
|||
|
Common stock
|
MCBC
|
NASDAQ
|
Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 34,189,799 shares of the Company’s Common Stock (no par value) were outstanding as of October 28, 2021.
Forward-Looking Statements
This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and
Macatawa Bank Corporation. Forward-looking statements are identifiable by words or phrases such as “outlook”, “plan” or “strategy” that an event or trend “could”, “may”, “should”, “will”, “is likely”, or is “possible” or “probable” to
occur or “continue”, has “begun” or “is scheduled” or “on track” or that the Company or its management “anticipates”, “believes”, “estimates”, “plans”, “forecasts”, “intends”, “predicts”, “projects”, or “expects” a particular result, or
is “committed”, “confident”, “optimistic” or has an “opinion” that an event will occur, or other words or phrases such as “ongoing”, “future”, “signs”, “efforts”, “tend”, “exploring”, “appearing”, “until”, “near term”, “concern”, “going
forward”, “focus”, “starting”, “initiative,” “trend” and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause
actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, those related to the risks and uncertainties related to, and the impact of, the global
coronavirus (COVID-19) pandemic on the business, financial condition and results of operations of our company and our customers, future levels of earning assets, future composition of our loan portfolio, trends in credit quality metrics,
future capital levels and capital needs, real estate valuation, future levels of repossessed and foreclosed properties and nonperforming assets, future levels of losses and costs associated with the administration and disposition of
repossessed and foreclosed properties and nonperforming assets, future levels of loan charge-offs, future levels of other real estate owned, future levels of provisions for loan losses and reserve recoveries, the rate of asset
dispositions, future dividends, future growth and funding sources, future cost of funds, future liquidity levels, future profitability levels, future interest rate levels, future net interest margin levels, the effects on earnings of
changes in interest rates, future economic conditions, future effects of new or changed accounting standards, future loss recoveries, loan demand and loan growth and the future level of other revenue sources. Management’s determination of
the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including deferred tax assets) and other real estate owned, and the fair value of investment securities (including whether any impairment on
any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. All statements with references to future time periods are forward-looking. All of the
information concerning interest rate sensitivity is forward-looking. The future effect of changes in the real estate, financial and credit markets and the national and regional economy on the banking industry, generally, and Macatawa Bank
Corporation, specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to
timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Macatawa Bank Corporation does not undertake to
update forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.
Risk factors include, but are not limited to, the risk factors described in “Item 1A - Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020. These and other factors are
representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.
| Part I |
Financial Information
|
MACATAWA BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2021 (unaudited) and December 31, 2020
(Dollars in thousands, except per share data)
|
September 30,
2021
|
December 31,
2020
|
|||||||
|
ASSETS
|
||||||||
|
Cash and due from banks
|
$
|
30,413
|
$
|
31,480
|
||||
|
Federal funds sold and other short-term investments
|
1,239,525
|
752,256
|
||||||
|
Cash and cash equivalents
|
1,269,938
|
783,736
|
||||||
|
Debt securities available for sale, at fair value
|
241,475
|
236,832
|
||||||
|
Debt securities held to maturity (fair value 2021
- $140,412 and 2020
- $83,246)
|
137,569
|
79,468
|
||||||
|
Federal Home Loan Bank (FHLB) stock
|
11,558
|
11,558
|
||||||
|
Loans held for sale, at fair value
|
2,635
|
5,422
|
||||||
|
Total loans
|
1,136,613
|
1,429,331
|
||||||
|
Allowance for loan losses
|
(16,532
|
)
|
(17,408
|
)
|
||||
|
Net loans
|
1,120,081
|
1,411,923
|
||||||
|
Premises and equipment – net
|
42,343
|
43,254
|
||||||
|
Accrued interest receivable
|
4,005
|
5,625
|
||||||
|
Bank-owned life insurance
|
52,781
|
42,516
|
||||||
|
Other real estate owned - net
|
2,343
|
2,537
|
||||||
|
Net deferred tax asset
|
2,126
|
2,059
|
||||||
|
Other assets
|
14,646
|
17,096
|
||||||
|
Total assets
|
$
|
2,901,500
|
$
|
2,642,026
|
||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Deposits
|
||||||||
|
Noninterest-bearing
|
$
|
934,477
|
$
|
809,437
|
||||
|
Interest-bearing
|
1,618,698
|
1,489,150
|
||||||
|
Total deposits
|
2,553,175
|
2,298,587
|
||||||
|
Other borrowed funds
|
85,000
|
70,000
|
||||||
|
Long-term debt
|
—
|
20,619
|
||||||
|
Accrued expenses and other liabilities
|
11,112
|
12,977
|
||||||
|
Total liabilities
|
2,649,287
|
2,402,183
|
||||||
|
Commitments and contingent liabilities
|
||||||||
|
Shareholders’ equity
|
||||||||
|
Common stock, no par value, 200,000,000 shares authorized; 34,189,799
and 34,197,519 shares issued and outstanding at September 30, 2021 and December 31, 2020
|
218,991
|
218,528
|
||||||
|
Retained earnings
|
31,728
|
17,101
|
||||||
|
Accumulated other comprehensive income
|
1,494
|
4,214
|
||||||
|
Total shareholders’ equity
|
252,213
|
239,843
|
||||||
|
Total liabilities and shareholders’ equity
|
$
|
2,901,500
|
$
|
2,642,026
|
||||
See accompanying notes to consolidated financial statements.
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three and nine month periods ended September 30, 2021 and 2020
(unaudited)
(Dollars in thousands, except per share data)
|
Three Months
Ended
September 30,
2021
|
Three Months
Ended
September 30,
2020
|
Nine Months
Ended
September 30,
2021
|
Nine Months
Ended
September 30,
2020
|
|||||||||||||
|
Interest income
|
||||||||||||||||
|
Loans, including fees
|
$
|
12,761
|
$
|
13,854
|
$
|
39,530
|
$
|
43,194
|
||||||||
|
Securities
|
||||||||||||||||
|
Taxable
|
786
|
867
|
2,365
|
2,881
|
||||||||||||
|
Tax-exempt
|
777
|
861
|
2,295
|
2,607
|
||||||||||||
|
FHLB Stock
|
44
|
100
|
162
|
339
|
||||||||||||
|
Federal funds sold and other short-term investments
|
474
|
140
|
948
|
802
|
||||||||||||
|
Total interest income
|
14,842
|
15,822
|
45,300
|
49,823
|
||||||||||||
|
Interest expense
|
||||||||||||||||
|
Deposits
|
209
|
621
|
732
|
3,118
|
||||||||||||
|
Other borrowings
|
325
|
364
|
1,006
|
1,069
|
||||||||||||
|
Long-term debt
|
12
|
163
|
319
|
612
|
||||||||||||
|
Total interest expense
|
546
|
1,148
|
2,057
|
4,799
|
||||||||||||
|
Net interest income
|
14,296
|
14,674
|
43,243
|
45,024
|
||||||||||||
|
Provision for loan losses
|
(550
|
)
|
500
|
(1,300
|
)
|
2,200
|
||||||||||
|
Net interest income after provision for loan losses
|
14,846
|
14,174
|
44,543
|
42,824
|
||||||||||||
|
Noninterest income
|
||||||||||||||||
|
Service charges and fees
|
1,183
|
987
|
3,240
|
2,957
|
||||||||||||
|
Net gains on mortgage loans
|
851
|
1,546
|
4,177
|
4,045
|
||||||||||||
|
Trust fees
|
1,079
|
921
|
3,217
|
2,801
|
||||||||||||
|
ATM and debit card fees
|
1,676
|
1,542
|
4,844
|
4,199
|
||||||||||||
|
Bank owned life insurance (“BOLI”) income
|
260
|
215
|
787
|
688
|
||||||||||||
|
Other
|
593
|
881
|
2,084
|
2,214
|
||||||||||||
|
Total noninterest income
|
5,642
|
6,092
|
18,349
|
16,904
|
||||||||||||
|
Noninterest expense
|
||||||||||||||||
|
Salaries and benefits
|
6,278
|
6,480
|
19,192
|
18,937
|
||||||||||||
|
Occupancy of premises
|
992
|
1,026
|
3,023
|
2,984
|
||||||||||||
|
Furniture and equipment
|
1,014
|
967
|
2,929
|
2,704
|
||||||||||||
|
Legal and professional
|
272
|
260
|
768
|
798
|
||||||||||||
|
Marketing and promotion
|
175
|
239
|
525
|
716
|
||||||||||||
|
Data processing
|
839
|
761
|
2,602
|
2,309
|
||||||||||||
|
FDIC assessment
|
204
|
131
|
532
|
207
|
||||||||||||
|
Interchange and other card expense
|
391
|
367
|
1,137
|
1,041
|
||||||||||||
|
Bond and D&O Insurance
|
112
|
104
|
334
|
313
|
||||||||||||
|
Other
|
1,273
|
1,198
|
3,711
|
3,750
|
||||||||||||
|
Total noninterest expenses
|
11,550
|
11,533
|
34,753
|
33,759
|
||||||||||||
|
Income before income tax
|
8,938
|
8,733
|
28,139
|
25,969
|
||||||||||||
|
Income tax expense
|
1,736
|
1,613
|
5,341
|
4,800
|
||||||||||||
|
Net income
|
$
|
7,202
|
$
|
7,120
|
$
|
22,798
|
$
|
21,169
|
||||||||
|
Basic earnings per common share
|
$
|
0.21
|
$
|
0.21
|
$
|
0.67
|
$
|
0.62
|
||||||||
|
Diluted earnings per common share
|
$
|
0.21
|
$
|
0.21
|
$
|
0.67
|
$
|
0.62
|
||||||||
|
Cash dividends per common share
|
$
|
0.08
|
$
|
0.08
|
$
|
0.24
|
$
|
0.24
|
||||||||
See accompanying notes to consolidated financial statements.
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and nine month periods ended September 30, 2021 and 2020
(unaudited)
(Dollars in thousands)
|
Three Months
Ended
September 30,
2021
|
Three Months
Ended
September 30,
2020
|
Nine Months
Ended
September 30,
2021
|
Nine Months
Ended
September 30,
2020
|
|||||||||||||
|
Net income
|
$
|
7,202
|
$
|
7,120
|
$
|
22,798
|
$
|
21,169
|
||||||||
|
Other comprehensive income:
|
||||||||||||||||
|
Unrealized gains (losses):
|
||||||||||||||||
|
Net change in unrealized gains (losses) on debt securities available for sale
|
(792
|
)
|
39
|
(3,443
|
)
|
3,865
|
||||||||||
|
Tax effect
|
166
|
(8
|
)
|
723
|
(814
|
)
|
||||||||||
|
Net change in unrealized gains (losses) on debt securities available for sale, net of tax
|
(626
|
)
|
31
|
(2,720
|
)
|
3,051
|
||||||||||
|
Less: reclassification adjustments:
|
||||||||||||||||
|
Reclassification for gains included in net income
|
—
|
—
|
—
|
—
|
||||||||||||
|
Tax effect
|
—
|
—
|
—
|
—
|
||||||||||||
|
Reclassification for gains included in net income, net of tax
|
—
|
—
|
—
|
—
|
||||||||||||
|
Other comprehensive income (loss), net of tax
|
(626
|
)
|
31
|
(2,720
|
)
|
3,051
|
||||||||||
|
Comprehensive income
|
$
|
6,576
|
$
|
7,151
|
$
|
20,078
|
$
|
24,220
|
||||||||
See accompanying notes to consolidated financial statements.
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three and nine month periods ended September 30, 2021 and 2020
(unaudited)
(Dollars in thousands, except per share data)
|
Common
Stock
|
Retained Earnings
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Total
Shareholders’
Equity
|
|||||||||||||
|
Balance, July 1, 2020
|
$
|
218,349
|
$
|
6,425
|
$
|
4,564
|
$
|
229,338
|
||||||||
|
Net income for the three months ended September 30, 2020
|
—
|
7,120
|
—
|
7,120
|
||||||||||||
|
Cash dividends at $0.08 per share
|
—
|
(2,720
|
)
|
—
|
(2,720
|
)
|
||||||||||
| Repurchase of 1,696 shares for taxes withheld on
vested restricted stock |
(13 | ) | — | — | (13 | ) | ||||||||||
|
Net change in unrealized gain on debt securities available for sale, net of tax
|
—
|
—
|
31
|
31
|
||||||||||||
|
Stock compensation expense
|
109
|
—
|
—
|
109
|
||||||||||||
|
Balance, September 30, 2020
|
$
|
218,445
|
$
|
10,825
|
$
|
4,595
|
$
|
233,865
|
||||||||
|
Balance, July 1, 2021
|
$
|
218,846
|
$
|
27,251
|
$
|
2,120
|
$
|
248,217
|
||||||||
|
Net income for the three months ended September 30, 2021
|
—
|
7,202
|
—
|
7,202
|
||||||||||||
|
Cash dividends at $0.08 per share
|
—
|
(2,725
|
)
|
—
|
(2,725
|
)
|
||||||||||
|
Repurchase of 2,518 shares for taxes withheld on vested restricted stock
|
(21
|
)
|
—
|
—
|
(21
|
)
|
||||||||||
|
Net change in unrealized gain on debt securities available for sale, net of tax
|
—
|
—
|
(626
|
)
|
(626
|
)
|
||||||||||
|
Stock compensation expense
|
166
|
—
|
—
|
166
|
||||||||||||
|
Balance, September 30, 2021
|
$
|
218,991
|
$
|
31,728
|
$
|
1,494
|
$
|
252,213
|
||||||||
|
Common
Stock
|
Retained Earnings
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Total
Shareholders’
Equity
|
|||||||||||||
|
Balance, January 1, 2020
|
$
|
218,109
|
$
|
(2,184
|
)
|
$
|
1,544
|
$
|
217,469
|
|||||||
|
Net income for the nine months ended September 30, 2020
|
—
|
21,169
|
—
|
21,169
|
||||||||||||
|
Cash dividends at $0.24 per share
|
—
|
(8,160
|
)
|
—
|
(8,160
|
)
|
||||||||||
|
Repurchase of 3,304 shares for taxes withheld on vested restricted stock
|
(24
|
)
|
—
|
—
|
(24
|
)
|
||||||||||
|
Net change in unrealized gain on debt securities available for sale, net of tax
|
—
|
—
|
3,051
|
3,051
|
||||||||||||
|
Stock compensation expense
|
360
|
—
|
—
|
360
|
||||||||||||
|
Balance, September 30, 2020
|
$
|
218,445
|
$
|
10,825
|
$
|
4,595
|
$
|
233,865
|
||||||||
|
Balance, January 1, 2021
|
$
|
218,528
|
$
|
17,101
|
$
|
4,214
|
$
|
239,843
|
||||||||
|
Net income for the nine months ended September 30, 2021
|
—
|
22,798
|
—
|
22,798
|
||||||||||||
|
Cash dividends at $0.24 per share
|
—
|
(8,171
|
)
|
—
|
(8,171
|
)
|
||||||||||
|
Repurchase of 3,859 shares for taxes withheld on vested restricted stock
|
(34
|
)
|
—
|
—
|
(34
|
)
|
||||||||||
|
Net change in unrealized gain on debt securities available for sale, net of tax
|
—
|
—
|
(2,720
|
)
|
(2,720
|
)
|
||||||||||
|
Stock compensation expense
|
497
|
—
|
—
|
497
|
||||||||||||
|
Balance, September 30, 2021
|
$
|
218,991
|
$
|
31,728
|
$
|
1,494
|
$
|
252,213
|
||||||||
See accompanying notes to consolidated financial statements.
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine month periods ended September 30, 2021 and 2020
(unaudited)
(Dollars in thousands)
|
Nine Months
Ended
September 30,
2021
|
Nine Months
Ended
September 30,
2020
|
|||||||
|
Cash flows from operating activities
|
||||||||
|
Net income
|
$
|
22,798
|
$
|
21,169
|
||||
|
Adjustments to reconcile net income to net cash from operating activities:
|
||||||||
|
Depreciation and amortization
|
1,863
|
2,105
|
||||||
|
Stock compensation expense
|
497
|
360
|
||||||
|
Provision for loan losses
|
(1,300
|
)
|
2,200
|
|||||
|
Origination of loans for sale
|
(107,845
|
)
|
(120,171
|
)
|
||||
|
Proceeds from sales of loans originated for sale
|
114,809
|
124,002
|
||||||
|
Net gains on mortgage loans
|
(4,177
|
)
|
(4,045
|
)
|
||||
|
Write-down of other real estate
|
4
|
32
|
||||||
|
Net loss on sales of other real estate
|
20
|
—
|
||||||
|
Deferred income tax expense (benefit)
|
656
|
(1,174
|
)
|
|||||
|
Change in accrued interest receivable and other assets
|
4,071
|
(7,450
|
)
|
|||||
|
Earnings in bank-owned life insurance
|
(787
|
)
|
(688
|
)
|
||||
|
Change in accrued expenses and other liabilities
|
(1,865
|
)
|
4,483
|
|||||
|
Net cash from operating activities
|
28,744
|
20,823
|
||||||
|
Cash flows from investing activities
|
||||||||
|
Loan originations and payments, net
|
293,142
|
(159,550
|
)
|
|||||
|
Purchases of securities available for sale
|
(71,864
|
)
|
(102,158
|
)
|
||||
|
Purchases of securities held to maturity
|
(72,916
|
)
|
(29,745
|
)
|
||||
|
Purchase of bank-owned life insurance
|
(10,000 | ) | — | |||||
|
Proceeds from:
|
||||||||
|
Maturities and calls of securities
|
47,220
|
86,667
|
||||||
|
Principal paydowns on securities
|
31,317
|
27,423
|
||||||
|
Sales of other real estate
|
170
|
92
|
||||||
|
Proceeds from payout of bank-owned insurance claim
|
560
|
—
|
||||||
|
Additions to premises and equipment
|
(935
|
)
|
(2,103
|
)
|
||||
|
Net cash from investing activities
|
216,694
|
(179,374
|
)
|
|||||
|
Cash flows from financing activities
|
||||||||
|
Change in deposits
|
254,588
|
417,285
|
||||||
|
Repayments and maturities of other borrowed funds
|
(30,619 | ) | — | |||||
|
Proceeds from other borrowed funds
|
25,000
|
10,000
|
||||||
|
Repurchase of shares for taxes withheld on vested restricted stock
|
(34
|
)
|
(24
|
)
|
||||
|
Cash dividends paid
|
(8,171
|
)
|
(8,160
|
)
|
||||
|
Net cash from financing activities
|
240,764
|
419,101
|
||||||
|
Net change in cash and cash equivalents
|
486,202
|
260,550
|
||||||
|
Cash and cash equivalents at beginning of period
|
783,736
|
272,450
|
||||||
|
Cash and cash equivalents at end of period
|
$
|
1,269,938
|
$
|
533,000
|
||||
See accompanying notes to consolidated financial statements.
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Nine month periods ended September 30, 2021 and 2020
(unaudited)
(Dollars in thousands)
|
Nine Months
Ended
September 30,
2021
|
Nine Months
Ended
September 30,
2020
|
|||||||
|
Supplemental cash flow information
|
||||||||
|
Interest paid
|
$
|
2,227
|
$
|
5,043
|
||||
|
Income taxes paid
|
4,750
|
5,315
|
||||||
|
Supplemental noncash disclosures:
|
||||||||
|
Security settlement
|
—
|
1,937
|
||||||
See accompanying notes to consolidated financial statements.
-9-
MACATAWA BANK CORPORATION
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation: The
accompanying consolidated financial statements include the accounts of Macatawa Bank Corporation (“the Company”, “our”, “we”) and its wholly-owned subsidiary, Macatawa Bank (“the Bank”). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Macatawa Bank is a Michigan chartered bank with
depository accounts insured by the Federal Deposit Insurance Corporation. The Bank operates 26 full service branch offices
providing a full range of commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan County, Michigan.
The Company previously owned all of the
common stock of Macatawa Statutory Trust II. This was a grantor trust that issued trust preferred securities and was not consolidated with the Company under accounting principles generally accepted in the United States of America.
On July 7, 2021, the Company redeemed all of the $20.0 million of outstanding trust preferred securities and $619,000 of common securities associated with this trust.
Recent Events: On March 22, 2020, the
federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with
Customers Affected by the Coronavirus.” The guidance explained that in consultation with the FASB staff the federal banking agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to
borrowers who were current as of the implementation date of a modification are not Troubled Debt Restructurings (“TDRs”). The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020.
Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were not more than 30 days past due as of December 31, 2019 are not TDRs. On December 27,
2020, another COVID-19 relief bill was signed that extended this guidance until the earlier of January 1, 2022 or 60 days after the date on which the national emergency declared as a result of COVID-19 is terminated. Through
September 30, 2021, the Bank had applied this guidance and modified 726 individual loans with aggregate principal balances
totaling $337.2 million. As of September 30, 2021, all of these modifications had expired and the loans returned to their
contractual payment terms.
The CARES Act, as amended, included an
allocation of $659 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). PPP loans are forgivable, in whole or in part, if the proceeds are
used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June
5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered
period if the borrower does not apply for forgiveness within that 10 month period. Through December 31, 2020, the Bank had originated 1,738
PPP loans totaling $346.7 million in principal, with an average loan size of $200,000. Fees totaling $10.0 million were
generated from the SBA for these loans in the year ended December 31, 2020. These fees are deferred and amortized into interest income over the contractual period of 24 months or 60 months, as applicable. Upon SBA forgiveness,
unamortized fees are then recognized into interest income. Participation in the PPP had a significant impact on the Bank’s asset mix and net interest income in 2020 and will continue to impact both asset mix and net interest income
until these loans are forgiven or paid off. The initial PPP expired on August 8, 2020. Through December 31, 2020, 765
PPP loans totaling $113.5 million had been forgiven by the SBA and a total of $5.4 million in PPP fees had been recognized by the Bank.
On December 27, 2020, another COVID-19 relief
bill was signed that extended and modified several provisions of the PPP. This included an additional allocation of $284 billion. The SBA reactivated the PPP on January 11, 2021. The Bank originated additional loans through the
PPP, which expired on May 31, 2021. In the nine months ended September 30, 2021, the Bank had generated and received SBA approval on 1,000
PPP loans totaling $128.1 million and generated $5.6 million in related deferred PPP fees. In the nine months ended September 30, 2021, 1,742 PPP loans totaling $279.9 million had been forgiven by the
SBA and a total of $7.1 million in PPP fees had been recognized by the Bank including fees recognized upon forgiveness and
continuing amortization of fees from the 2020 and 2021 PPP originations.
While the Company continues to evaluate the
disruption caused by the pandemic and impact of the CARES Act, these events may have a material adverse impact on the Company’s results of future operations, financial position, capital, and liquidity in fiscal year 2021 and beyond.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) believed necessary
for a fair presentation have been included.
Operating results for the three and nine month
periods ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. For further information, refer to the consolidated financial statements and related notes
included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Use of Estimates: To prepare financial
statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, valuation of deferred tax assets, loss contingencies, fair value of other real estate owned and fair
values of financial instruments are particularly subject to change.
Bank-Owned Life Insurance (BOLI): The Bank has purchased life insurance policies on certain officers. BOLI is recorded at its
currently realizable cash surrender value. Changes in cash surrender value are recorded in other income. In early April 2021, the Bank purchased an additional $10.0 million in BOLI policies.
Allowance for Loan Losses: The allowance
for loan losses (allowance) is a valuation allowance for probable incurred credit losses inherent in our loan portfolio, increased by the provision for loan losses and recoveries, and decreased by charge-offs of loans. Management
believes the allowance for loan losses balance to be adequate based on known and inherent risks in the portfolio, past loan loss experience, information about specific borrower situations and estimated collateral values, economic
conditions and other relevant factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged
against the allowance when management believes the uncollectibility of a loan balance is confirmed. Management continues its collection efforts on previously charged-off balances and applies recoveries as additions to the allowance
for loan losses.
The allowance consists of
specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for
current qualitative factors. The Company maintains a loss migration analysis that tracks loan losses and recoveries based on loan class and the loan risk grade assignment for commercial loans. At September 30, 2021, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted
(both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other
considerations. At September 30, 2021, the qualitative factor allocations for economic trends related to the COVID-19 that had been increased significantly during 2020 were maintained reflecting continued uncertainty of economic
conditions with the reopening of the economy and surges in COVID-19 cases associated with the Delta variant of the virus. PPP loans receive $0 allocation as they are fully guaranteed by the SBA and are subject to be forgiven under the SBA forgiveness criteria.
A loan is impaired when, based on current
information and events, it is believed to be probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified and a concession
has been made, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.
Commercial and commercial real estate loans
with relationship balances exceeding $500,000 and an internal risk grading of 6 or worse are evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated and the loan is reported at the present value of
estimated future cash flows using the loan’s existing interest rate or at the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous
loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and they are not separately identified for impairment disclosures.
Troubled debt restructurings are also
considered impaired with impairment generally measured at the present value of estimated future cash flows using the loan’s effective rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment
is expected solely from the collateral.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Foreclosed Assets: Assets acquired
through or instead of loan foreclosure, primarily other real estate owned, are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. If fair value declines, a valuation allowance
is recorded through expense. Costs after acquisition are expensed unless they add value to the property.
Income Taxes: Income tax expense is
the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the
carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
The Company recognizes a tax position as a
benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater
than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and penalties related to income tax matters in income tax
expense.
Revenue Recognition: The Company
recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company’s primary source of revenue is interest income from the
Bank’s loans and investment securities. The Company also earns noninterest revenue from various banking services offered by the Bank.
Interest Income: The Company’s largest source
of revenue is interest income which is primarily recognized on an accrual basis based on contractual terms written into loans and investment contracts.
Noninterest Revenue: The Company derives the
majority of its noninterest revenue from: (1) service charges for deposit related services, (2) gains related to mortgage loan sales, (3) trust fees and (4) debit and credit card interchange income. Most of these services are
transaction based and revenue is recognized as the related service is provided.
Derivatives: Certain of the Bank’s
commercial loan customers have entered into interest rate swap agreements directly with the Bank. At the same time the Bank enters into a swap agreement with its customer, the Bank enters into a corresponding interest rate swap
agreement with a correspondent bank at terms mirroring the Bank’s interest rate swap with its commercial loan customer. This is known as a back-to-back swap agreement. Under this arrangement the Bank has two freestanding interest rate swaps, each of which is carried at fair value. As the terms mirror each other, there is no income
statement impact to the Bank. At September 30, 2021 and December 31, 2020, the total notional amount of such agreements was $143.2
million and $156.4 million, respectively, and resulted in a derivative asset with a fair value of $3.4 million and $4.2
million, respectively, which were included in other assets and a derivative liability of $3.4 million and $4.2 million, respectively, which were included in other liabilities.
Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary
market and forward commitments for the future delivery of these mortgage loans are accounted for as derivatives not qualifying for hedge accounting. Fair values of these mortgage derivatives are estimated based on changes in
mortgage interest rates from the date the interest rate on the loan is locked. The Bank enters into commitments to sell mortgage backed securities, which it later buys back in order to hedge its exposure to interest rate risk
in its mortgage pipeline. At times, the Bank also enters into forward commitments for the future delivery of mortgage loans when loans are closed but not yet sold, in order to hedge the change in interest rates resulting from
its commitments to sell the loans.
Changes in the fair values of these interest rate lock and mortgage backed security and forward commitment derivatives are included in net gains on mortgage
loans. The fair value of interest rate lock commitments was $(28,000) at September 30, 2021 and $103,000 at December 31, 2020. The fair value of mortgage backed security derivatives was $43,000 at September 30, 2021 and $(233,000) at
December 31, 2020.
Reclassifications: Some items in the
prior year financial statements were reclassified to conform to the current presentation.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Newly Issued Not Yet Effective Standards: FASB issued ASU No. 2016-13, Financial Instruments—Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and
other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance eliminates the probable initial recognition threshold and, instead, reflects an entity’s current estimate
of all expected credit losses. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted
information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss
estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change
to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will now have to be presented as an allowance
rather than as a write-down.
ASU No. 2019-10 Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) – Effective Dates updated the effective date of this ASU for smaller reporting companies, such as the
Company, to fiscal years beginning after December 15, 2022. The Company selected a software vendor for applying this new ASU for Current Expected Credit Losses (“CECL”), began implementation of the software in the second quarter of
2018, completed integration during the third quarter of 2018 and ran parallel computations with both systems using the current GAAP incurred loss model in the fourth quarter of 2018. The Company went live with this software
beginning in January 2019 for its monthly incurred loss computations and began modeling the new current expected credit loss model assumptions to the allowance for loan losses computation. During 2019, 2020 and the first nine
months of 2021, the Company modeled the various methods prescribed in the ASU against the Company’s identified loan segments. The Company anticipates continuing to run parallel computations and fine tune assumptions as it continues
to evaluate the impact of adoption of the new standard. The COVID-19 pandemic that broke out in the United States in the first quarter of 2020 and continued into 2021 may have a significant impact on allowance computations under
the incurred loss model which could be amplified under the new standard.
NOTE 2 – SECURITIES
The amortized cost and fair value of securities
at period-end were as follows (dollars in thousands):
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
September 30, 2021
|
||||||||||||||||
|
Available for Sale
|
||||||||||||||||
|
U.S. Treasury and federal agency securities
|
$
|
69,488
|
$
|
85
|
$
|
(701
|
)
|
$
|
68,872
|
|||||||
|
U.S. Agency MBS and CMOs
|
64,353
|
691
|
(535
|
)
|
64,509
|
|||||||||||
|
Tax-exempt state and municipal bonds
|
38,624
|
1,384
|
—
|
40,008
|
||||||||||||
|
Taxable state and municipal bonds
|
63,723
|
1,170
|
(300
|
)
|
64,593
|
|||||||||||
|
Corporate bonds and other debt securities
|
3,396
|
97
|
—
|
3,493
|
||||||||||||
|
$
|
239,584
|
$
|
3,427
|
$
|
(1,536
|
)
|
$
|
241,475
|
||||||||
|
Held to Maturity
|
||||||||||||||||
|
Tax-exempt state and municipal bonds
|
$
|
137,569
|
$
|
2,890
|
$
|
(47
|
)
|
$
|
140,412
|
|||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
December 31, 2020
|
||||||||||||||||
|
Available for Sale
|
||||||||||||||||
|
U.S. Treasury and federal agency securities
|
$
|
63,993
|
$
|
287
|
$
|
(170
|
)
|
$
|
64,110
|
|||||||
|
U.S. Agency MBS and CMOs
|
63,652
|
1,376
|
(45
|
)
|
64,983
|
|||||||||||
|
Tax-exempt state and municipal bonds
|
43,739
|
1,903
|
—
|
45,642
|
||||||||||||
|
Taxable state and municipal bonds
|
55,383
|
1,801
|
(7
|
)
|
57,177
|
|||||||||||
|
Corporate bonds and other debt securities
|
4,731
|
189
|
—
|
4,920
|
||||||||||||
|
$
|
231,498
|
$
|
5,556
|
$
|
(222
|
)
|
$
|
236,832
|
||||||||
|
Held to Maturity
|
||||||||||||||||
|
Tax-exempt state and municipal bonds
|
$
|
79,468
|
$
|
3,778
|
$ | — |
$
|
83,246
|
||||||||
There were no sales of securities in the three and nine month periods ended September 30, 2021 and 2020.
Contractual maturities of debt securities at September 30, 2021
were as follows (dollars in thousands):
|
Held–to-Maturity Securities
|
Available-for-Sale Securities
|
|||||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||
|
Due in one year or less
|
$
|
31,503
|
$
|
31,569
|
$
|
22,681
|
$
|
22,881
|
||||||||
|
Due from one to five years
|
69,127
|
70,077
|
66,771
|
68,448
|
||||||||||||
|
Due from five to ten years
|
19,359
|
20,425
|
87,960
|
87,899
|
||||||||||||
|
Due after ten years
|
17,580
|
18,341
|
62,172
|
62,247
|
||||||||||||
|
$
|
137,569
|
$
|
140,412
|
$
|
239,584
|
$
|
241,475
|
|||||||||
NOTE 2 – SECURITIES (Continued)
Securities with unrealized losses at September 30,
2021 and December 31, 2020,
aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (dollars in thousands):
|
Less than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
|
September 30, 2021
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
||||||||||||||||||
|
Available for Sale
|
||||||||||||||||||||||||
|
U.S. Treasury and federal agency securities
|
$
|
53,249
|
$
|
(655
|
)
|
$
|
4,953
|
$
|
(46
|
)
|
$
|
58,202
|
$
|
(701
|
)
|
|||||||||
|
U.S. Agency MBS and CMOs
|
34,332
|
(510
|
)
|
1,563
|
(25
|
)
|
35,895
|
(535
|
)
|
|||||||||||||||
|
Tax-exempt state and municipal bonds
|
250
|
—
|
—
|
—
|
250
|
—
|
||||||||||||||||||
|
Taxable state and municipal bonds
|
21,919
|
(285
|
)
|
490
|
(15
|
)
|
22,409
|
(300
|
)
|
|||||||||||||||
|
Corporate bonds and other debt securities
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Total
|
$
|
109,750
|
$
|
(1,450
|
)
|
$
|
7,006
|
$
|
(86
|
)
|
$
|
116,756
|
$
|
(1,536
|
)
|
|||||||||
|
Held to Maturity
|
||||||||||||||||||||||||
|
Tax-exempt state and municipal bonds
|
$
|
20,390
|
$
|
(47
|
)
|
$
|
—
|
$
|
—
|
$
|
20,390
|
$
|
(47
|
)
|
||||||||||
|
Less than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
|
December 31, 2020
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
||||||||||||||||||
|
Available for Sale
|
||||||||||||||||||||||||
|
U.S. Treasury and federal agency securities
|
$
|
22,830
|
$
|
(170
|
)
|
$
|
—
|
$
|
—
|
$
|
22,830
|
$
|
(170
|
)
|
||||||||||
|
U.S. Agency MBS and CMOs
|
9,299
|
(45
|
)
|
—
|
—
|
9,299
|
(45
|
)
|
||||||||||||||||
|
Tax-exempt state and municipal bonds
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Taxable state and municipal bonds
|
2,336
|
(7
|
)
|
—
|
—
|
2,336
|
(7
|
)
|
||||||||||||||||
|
Corporate bonds and other debt securities
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Total
|
$
|
34,465
|
$
|
(222
|
)
|
$
|
—
|
$
|
—
|
$
|
34,465
|
$
|
(222
|
)
|
||||||||||
|
Held to Maturity
|
||||||||||||||||||||||||
|
Tax-exempt state and municipal bonds
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||||
Other-Than-Temporary-Impairment
Management evaluates securities for
other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. At September 30, 2021, 88 securities available for sale with fair values totaling $116.8
million had unrealized losses totaling $1.5 million. At September 30, 2021, 7 securities held to maturity with fair values totaling $20.4
million had unrealized losses totaling $47,000. Management has the intent and ability to hold the securities classified as
held to maturity until they mature, at which time the Company will receive full value for the securities. In addition, management believes it is more likely than not that the Company will not be required to sell any of its investment
securities before a recovery of cost. Management determined that the unrealized losses for the three and nine month periods ended September 30, 2021 and 2020 were attributable to changes in interest rates and not due to credit
quality. As such, no OTTI charges were necessary during each period.
Securities with a carrying value
of approximately $5.0 million and $6.1 million were pledged as security for public deposits, letters of credit and for other purposes required or permitted by law at September 30, 2021 and December 31, 2020, respectively.
NOTE 3 – LOANS
Portfolio loans were as follows (dollars in thousands):
|
September 30,
2021
|
December 31,
2020
|
|||||||
|
Commercial and industrial:
|
||||||||
|
Commercial and industrial,
excluding PPP
|
$
|
356,812
|
$
|
436,331
|
||||
|
PPP
|
77,571
|
229,079
|
||||||
|
Total commercial and
industrial
|
434,383
|
665,410
|
||||||
|
Commercial real estate:
|
||||||||
|
Residential developed
|
6,184
|
8,549
|
||||||
|
Unsecured to residential
developers
|
19
|
—
|
||||||
|
Vacant and unimproved
|
36,616
|
47,122
|
||||||
|
Commercial development
|
403
|
857
|
||||||
|
Residential improved
|
100,608
|
114,392
|
||||||
|
Commercial improved
|
267,910
|
266,006
|
||||||
|
Manufacturing and
industrial
|
115,470
|
115,247
|
||||||
|
Total commercial real
estate
|
527,210
|
552,173
|
||||||
|
Consumer:
|
||||||||
|
Residential mortgage
|
119,106
|
149,556
|
||||||
|
Unsecured
|
103
|
161
|
||||||
|
Home equity
|
52,127
|
57,975
|
||||||
|
Other secured
|
3,684
|
4,056
|
||||||
|
Total consumer
|
175,020
|
211,748
|
||||||
|
Total loans
|
1,136,613
|
1,429,331
|
||||||
|
Allowance for loan losses
|
(16,532
|
)
|
(17,408
|
)
|
||||
|
$
|
1,120,081
|
$
|
1,411,923
|
|||||
NOTE 3 – LOANS (Continued)
Activity in the allowance for loan losses by portfolio segment was as follows (dollars in thousands):
|
Three months ended September 30, 2021
|
Commercial
and
Industrial
|
Commercial
Real Estate
|
Consumer
|
Unallocated
|
Total
|
|||||||||||||||
|
Beginning balance
|
$
|
5,206
|
$
|
8,740
|
$
|
2,856
|
$
|
4
|
$
|
16,806
|
||||||||||
|
Charge-offs
|
—
|
—
|
(22
|
)
|
—
|
(22
|
)
|
|||||||||||||
|
Recoveries
|
265
|
11
|
22
|
—
|
298
|
|||||||||||||||
|
Provision for loan losses
|
(259
|
)
|
(250
|
)
|
(68
|
)
|
27
|
(550
|
)
|
|||||||||||
|
Ending Balance
|
$
|
5,212
|
$
|
8,501
|
$
|
2,788
|
$
|
31
|
$
|
16,532
|
||||||||||
|
Three months ended September 30, 2020
|
Commercial
and
Industrial
|
Commercial
Real Estate
|
Consumer
|
Unallocated
|
Total
|
|||||||||||||||
|
Beginning balance
|
$
|
5,431
|
$
|
7,262
|
$
|
3,138
|
$
|
24
|
$
|
15,855
|
||||||||||
|
Charge-offs
|
—
|
—
|
(24
|
)
|
—
|
(24
|
)
|
|||||||||||||
|
Recoveries
|
22
|
168
|
37
|
—
|
227
|
|||||||||||||||
|
Provision for loan losses
|
513
|
237
|
(242
|
)
|
(8
|
)
|
500
|
|||||||||||||
|
Ending Balance
|
$
|
5,966
|
$
|
7,667
|
$
|
2,909
|
$
|
16
|
$
|
16,558
|
||||||||||
|
Nine months ended September 30, 2021
|
Commercial
and
Industrial
|
Commercial
Real Estate
|
Consumer
|
Unallocated
|
Total
|
|||||||||||||||
|
Beginning balance
|
$
|
6,632
|
$
|
7,999
|
$
|
2,758
|
$
|
19
|
$
|
17,408
|
||||||||||
|
Charge-offs
|
—
|
—
|
(102
|
)
|
—
|
(102
|
)
|
|||||||||||||
|
Recoveries
|
320
|
122
|
84
|
—
|
526
|
|||||||||||||||
|
Provision for loan losses
|
(1,740
|
)
|
380
|
48
|
12
|
(1,300
|
)
|
|||||||||||||
|
Ending Balance
|
$
|
5,212
|
$
|
8,501
|
$
|
2,788
|
$
|
31
|
$
|
16,532
|
||||||||||
|
Nine months ended September 30, 2020
|
Commercial
and
Industrial
|
Commercial
Real Estate
|
Consumer
|
Unallocated
|
Total
|
|||||||||||||||
|
Beginning balance
|
$
|
7,658
|
$
|
6,521
|
$
|
3,009
|
$
|
12
|
$
|
17,200
|
||||||||||
|
Charge-offs
|
(1,192
|
)
|
(2,957
|
)
|
(97
|
)
|
—
|
(4,246
|
)
|
|||||||||||
|
Recoveries
|
124
|
1,159
|
121
|
—
|
1,404
|
|||||||||||||||
|
Provision for loan losses
|
(624
|
)
|
2,944
|
(124
|
)
|
4
|
2,200
|
|||||||||||||
|
Ending Balance
|
$
|
5,966
|
$
|
7,667
|
$
|
2,909
|
$
|
16
|
$
|
16,558
|
||||||||||
NOTE 3 – LOANS (Continued)
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on
impairment method (dollars in thousands):
|
September 30, 2021
|
Commercial
and
Industrial
|
Commercial
Real Estate
|
Consumer
|
Unallocated
|
Total
|
|||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||
|
Ending allowance attributable to
loans:
|
||||||||||||||||||||
|
Individually reviewed for
impairment
|
$
|
303
|
$
|
10
|
$
|
261
|
$
|
—
|
$
|
574
|
||||||||||
|
Collectively evaluated for impairment
|
4,909
|
8,491
|
2,527
|
31
|
15,958
|
|||||||||||||||
|
Total ending allowance balance
|
$
|
5,212
|
$
|
8,501
|
$
|
2,788
|
$
|
31
|
$
|
16,532
|
||||||||||
|
Loans:
|
||||||||||||||||||||
|
Individually reviewed for impairment
|
$
|
969
|
$
|
1,165
|
$
|
3,296
|
$
|
—
|
$
|
5,430
|
||||||||||
|
Collectively evaluated for impairment
|
433,414
|
526,045
|
171,724
|
—
|
1,131,183
|
|||||||||||||||
|
Total ending loans balance
|
$
|
434,383
|
$
|
527,210
|
$
|
175,020
|
$
|
—
|
$
|
1,136,613
|
||||||||||
|
December 31, 2020
|
Commercial
and
Industrial
|
Commercial
Real Estate
|
Consumer
|
Unallocated
|
Total
|
|||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||
|
Ending allowance attributable to loans:
|
||||||||||||||||||||
|
Individually reviewed for impairment
|
$
|
587
|
$
|
313
|
$
|
310
|
$
|
—
|
$
|
1,210
|
||||||||||
|
Collectively evaluated for impairment
|
6,045
|
7,686
|
2,448
|
19
|
16,198
|
|||||||||||||||
|
Total ending allowance balance
|
$
|
6,632
|
$
|
7,999
|
$
|
2,758
|
$
|
19
|
$
|
17,408
|
||||||||||
|
Loans:
|
||||||||||||||||||||
|
Individually reviewed for impairment
|
$
|
3,957
|
$
|
2,613
|
$
|
4,049
|
$
|
—
|
$
|
10,619
|
||||||||||
|
Collectively evaluated for impairment
|
661,453
|
549,560
|
207,699
|
—
|
1,418,712
|
|||||||||||||||
|
Total ending loans balance
|
$
|
665,410
|
$
|
552,173
|
$
|
211,748
|
$
|
—
|
$
|
1,429,331
|
||||||||||
NOTE 3 – LOANS (Continued)
The following table presents loans individually evaluated
for impairment by class of loans as of September 30, 2021 (dollars in thousands):
|
September 30, 2021
|
Unpaid
Principal
Balance
|
Recorded
Investment
|
Allowance
Allocated
|
|||||||||
|
With no related allowance recorded:
|
||||||||||||
|
Commercial and industrial
|
$
|
72
|
$
|
72
|
$
|
—
|
||||||
|
Commercial real estate:
|
||||||||||||
|
Residential improved
|
42
|
42
|
—
|
|||||||||
|
Commercial improved
|
929
|
929
|
—
|
|||||||||
|
971
|
971
|
—
|
||||||||||
|
Consumer
|
—
|
—
|
—
|
|||||||||
|
Total with no related allowance recorded
|
$
|
1,043
|
$
|
1,043
|
$
|
—
|
||||||
|
With an allowance recorded:
|
||||||||||||
|
Commercial and industrial
|
$
|
897
|
$
|
897
|
$
|
303
|
||||||
|
Commercial real estate:
|
||||||||||||
|
Commercial improved
|
—
|
—
|
—
|
|||||||||
|
Manufacturing and industrial
|
194
|
194
|
10
|
|||||||||
|
194
|
194
|
10
|
||||||||||
|
Consumer:
|
||||||||||||
|
Residential mortgage
|
2,944
|
2,944
|
233
|
|||||||||
|
Unsecured
|
84
|
84
|
7
|
|||||||||
|
Home equity
|
267
|
267
|
21
|
|||||||||
|
Other secured
|
1
|
1
|
—
|
|||||||||
|
3,296
|
3,296
|
261
|
||||||||||
|
Total with an allowance recorded
|
$
|
4,387
|
$
|
4,387
|
$
|
574
|
||||||
|
Total
|
$
|
5,430
|
$
|
5,430
|
$
|
574
|
||||||
NOTE 3 – LOANS (Continued)
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2020 (dollars in thousands):
|
December 31, 2020
|
Unpaid
Principal
Balance
|
Recorded
Investment
|
Allowance
Allocated
|
|||||||||
|
With no related allowance recorded:
|
||||||||||||
|
Commercial and industrial
|
$
|
156
|
$
|
156
|
$
|
—
|
||||||
|
Commercial real estate:
|
||||||||||||
|
Residential improved
|
107
|
107
|
—
|
|||||||||
|
Commercial improved
|
714
|
714
|
—
|
|||||||||
|
821
|
821
|
—
|
||||||||||
|
Consumer
|
—
|
—
|
—
|
|||||||||
|
Total with no related allowance recorded
|
$
|
977
|
$
|
977
|
$
|
—
|
||||||
|
With an allowance recorded:
|
||||||||||||
|
Commercial and industrial
|
$
|
3,801
|
$
|
3,801
|
$
|
587
|
||||||
|
Commercial real estate:
|
||||||||||||
|
Residential developed
|
67
|
67
|
3
|
|||||||||
|
Commercial improved
|
1,524
|
1,524
|
301
|
|||||||||
|
Manufacturing and industrial
|
201
|
201
|
9
|
|||||||||
|
1,792
|
1,792
|
313
|
||||||||||
|
Consumer:
|
||||||||||||
|
Residential mortgage
|
3,484
|
3,484
|
266
|
|||||||||
|
Unsecured
|
123
|
123
|
10
|
|||||||||
|
Home equity
|
419
|
419
|
32
|
|||||||||
|
Other secured
|
23
|
23
|
2
|
|||||||||
|
4,049
|
4,049
|
310
|
||||||||||
|
Total with an allowance recorded
|
$
|
9,642
|
$
|
9,642
|
$
|
1,210
|
||||||
|
Total
|
$
|
10,619
|
$
|
10,619
|
$
|
1,210
|
||||||
NOTE 3 – LOANS (Continued)
The following table presents information regarding average balances of impaired loans and interest recognized on impaired loans for the three and nine month periods ended September 30, 2021
and 2020 (dollars in thousands):
|
Three
Months
Ended
September 30,
2021
|
Three
Months
Ended
September 30,
2020
|
Nine
Months
Ended
September 30,
2021
|
Nine
Months
Ended
September 30,
2020
|
|||||||||||||
|
Average of impaired loans during the period:
|
||||||||||||||||
|
Commercial and industrial
|
$
|
749
|
$
|
2,208
|
$
|
2,417
|
$
|
4,362
|
||||||||
|
Commercial real estate:
|
||||||||||||||||
|
Residential developed
|
—
|
71
|
15
|
72
|
||||||||||||
|
Residential improved
|
18
|
168
|
46
|
211
|
||||||||||||
|
Commercial improved
|
1,349
|
1,650
|
1,909
|
4,652
|
||||||||||||
|
Manufacturing and industrial
|
195
|
347
|
197
|
352
|
||||||||||||
|
Consumer
|
3,362
|
4,441
|
3,641
|
4,687
|
||||||||||||
|
Interest income recognized during impairment:
|
||||||||||||||||
|
Commercial and industrial
|
40
|
23
|
336
|
303
|
||||||||||||
|
Commercial real estate
|
22
|
33
|
88
|
193
|
||||||||||||
|
Consumer
|
28
|
41
|
97
|
153
|
||||||||||||
|
Cash-basis interest income recognized
|
||||||||||||||||
|
Commercial and industrial
|
37
|
13
|
356
|
298
|
||||||||||||
|
Commercial real estate
|
22
|
33
|
88
|
218
|
||||||||||||
|
Consumer
|
30
|
43
|
98
|
148
|
||||||||||||
NOTE 3 – LOANS (Continued)
Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The following tables present the recorded investment in
nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2021 and December 31, 2020:
|
September 30, 2021
|
Nonaccrual
|
Over 90
days
Accruing
|
||||||
|
Commercial and industrial
|
$
|
—
|
$
|
—
|
||||
|
Commercial real estate:
|
||||||||
|
Residential improved
|
5
|
—
|
||||||
|
Commercial improved
|
327
|
—
|
||||||
|
332
|
—
|
|||||||
|
Consumer:
|
||||||||
|
Residential mortgage
|
88
|
—
|
||||||
|
88
|
—
|
|||||||
|
Total
|
$
|
420
|
$
|
—
|
||||
|
December 31, 2020
|
Nonaccrual
|
Over 90 days
Accruing
|
||||||
|
Commercial and industrial
|
$
|
—
|
$
|
—
|
||||
|
Commercial real estate:
|
||||||||
|
Residential improved
|
87
|
—
|
||||||
|
Commercial improved
|
351
|
—
|
||||||
|
438
|
—
|
|||||||
|
Consumer:
|
||||||||
|
Residential mortgage
|
95
|
—
|
||||||
|
95
|
—
|
|||||||
|
Total
|
$
|
533
|
$
|
—
|
||||
NOTE 3 – LOANS (Continued)
The following table presents the aging of the recorded investment in past due loans as of September 30, 2021 and December 31, 2020 by class of
loans (dollars in thousands):
|
September 30, 2021
|
30-90
Days
|
Greater Than
90 Days
|
Total
Past Due
|
Loans Not
Past Due
|
Total
|
|||||||||||||||
|
Commercial and industrial
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
434,383
|
$
|
434,383
|
||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Residential developed
|
—
|
—
|
—
|
6,184
|
6,184
|
|||||||||||||||
|
Unsecured to residential developers
|
—
|
—
|
—
|
19
|
19
|
|||||||||||||||
|
Vacant and unimproved
|
—
|
—
|
—
|
36,616
|
36,616
|
|||||||||||||||
|
Commercial development
|
—
|
—
|
—
|
403
|
403
|
|||||||||||||||
|
Residential improved
|
—
|
5
|
5
|
100,603
|
100,608
|
|||||||||||||||
|
Commercial improved
|
344
|
—
|
344
|
267,566
|
267,910
|
|||||||||||||||
|
Manufacturing and industrial
|
—
|
—
|
—
|
115,470
|
115,470
|
|||||||||||||||
|
344
|
5
|
349
|
526,861
|
527,210
|
||||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
Residential mortgage
|
—
|
87
|
87
|
119,019
|
119,106
|
|||||||||||||||
|
Unsecured
|
—
|
—
|
—
|
103
|
103
|
|||||||||||||||
|
Home equity
|
—
|
—
|
—
|
52,127
|
52,127
|
|||||||||||||||
|
Other secured
|
1
|
—
|
1
|
3,683
|
3,684
|
|||||||||||||||
|
1
|
87
|
88
|
174,932
|
175,020
|
||||||||||||||||
|
Total
|
$
|
345
|
$
|
92
|
$
|
437
|
$
|
1,136,176
|
$
|
1,136,613
|
||||||||||
|
December 31, 2020
|
30-90
Days
|
Greater Than
90 Days
|
Total
Past Due
|
Loans Not
Past Due
|
Total
|
|||||||||||||||
|
Commercial and industrial
|
$
|
45
|
$
|
—
|
$
|
45
|
$
|
665,365
|
$
|
665,410
|
||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Residential developed
|
—
|
—
|
—
|
8,549
|
8,549
|
|||||||||||||||
|
Unsecured to residential developers
|
— | — | — | — | — | |||||||||||||||
|
Vacant and unimproved
|
—
|
—
|
—
|
47,122
|
47,122
|
|||||||||||||||
|
Commercial development
|
—
|
—
|
—
|
857
|
857
|
|||||||||||||||
|
Residential improved
|
—
|
87
|
87
|
114,305
|
114,392
|
|||||||||||||||
|
Commercial improved
|
353
|
—
|
353
|
265,653
|
266,006
|
|||||||||||||||
|
Manufacturing and industrial
|
—
|
—
|
—
|
115,247
|
115,247
|
|||||||||||||||
|
353
|
87
|
440
|
551,733
|
552,173
|
||||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
Residential mortgage
|
—
|
94
|
94
|
149,462
|
149,556
|
|||||||||||||||
|
Unsecured
|
—
|
—
|
—
|
161
|
161
|
|||||||||||||||
|
Home equity
|
—
|
—
|
—
|
57,975
|
57,975
|
|||||||||||||||
|
Other secured
|
2
|
—
|
2
|
4,054
|
4,056
|
|||||||||||||||
|
2
|
94
|
96
|
211,652
|
211,748
|
||||||||||||||||
|
Total
|
$
|
400
|
$
|
181
|
$
|
581
|
$
|
1,428,750
|
$
|
1,429,331
|
||||||||||
NOTE 3 – LOANS (Continued)
The Company had allocated $574,000
and $1,210,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”)
as of September 30, 2021 and December 31, 2020, respectively. These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their
current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit. The Company has been active at utilizing these programs and working with its customers to reduce
the risk of foreclosure. For commercial loans, these modifications typically include an interest only period and, in some cases, a lowering of the interest rate on the loan. In some cases, the modification will include separating the
note into two notes with the first note structured to be supported by current cash flows and collateral, and the second note
made for the remaining unsecured debt. The second note is charged off immediately and collected only after the first note is paid in full. This modification type is commonly referred to as an A-B note structure. For consumer mortgage
loans, the restructuring typically includes a lowering of the interest rate to provide payment and cash flow relief. For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects
of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured debt. An analysis is also performed to determine whether the
restructured loan should be on accrual status. Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring. In some cases, a nonaccrual loan may be placed on accrual at
restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms. After six
consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.
In situations where there is a subsequent modification or renewal and the loan is brought to market terms, including a contractual
interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired loan designations may be removed. In addition, the TDR designation may also be removed from loans modified
under an A-B note structure. If the remaining “A” note is at a market rate at the time of restructuring (taking into account the borrower’s credit risk and prevailing market conditions), the loan can be removed from TDR designation in a
subsequent calendar year after six months of performance in accordance with the new terms. The market rate relative to the
borrower’s credit risk is determined through analysis of market pricing information gathered from peers and use of a loan pricing model. The general objective of the model is to achieve a consistent return on equity from one credit to
the next, taking into consideration differences in credit risk. In the model, credits with higher risk receive a higher potential loss allocation, and therefore require a higher interest rate to achieve the target return on equity.
As with other impaired loans, an allowance for loan loss is estimated for each TDR based on the most likely source of repayment for
each loan. For impaired commercial real estate loans that are collateral dependent, the allowance is computed based on the fair value of the underlying collateral, less estimated costs to sell. For impaired commercial loans where
repayment is expected from cash flows from business operations, the allowance is computed based on a discounted cash flow computation. Certain groups of TDRs, such as residential mortgages, have common characteristics and for them the
allowance is computed based on a discounted cash flow computation on the change in weighted rate for the pool. The allowance allocations for commercial TDRs where we have reduced the contractual interest rate are computed by measuring
cash flows using the new payment terms discounted at the original contractual rate.
The following table presents information regarding troubled debt restructurings as of September 30, 2021 and December 31, 2020
(dollars in thousands):
|
September 30, 2021
|
December 31, 2020
|
|||||||||||||||
|
Number of
Loans
|
Outstanding
Recorded
Balance
|
Number of
Loans
|
Outstanding
Recorded
Balance
|
|||||||||||||
|
Commercial and industrial
|
5
|
$
|
969
|
7
|
$
|
3,957
|
||||||||||
|
Commercial real estate
|
6
|
1,165
|
9
|
1,439
|
||||||||||||
|
Consumer
|
48
|
3,296
|
60
|
4,049
|
||||||||||||
|
59
|
$
|
5,430
|
76
|
$
|
9,445
|
|||||||||||
NOTE 3 – LOANS (Continued)
The following table presents information related to accruing TDRs as of September 30, 2021 and December 31, 2020. The table presents
the amount of accruing troubled debt restructurings that were on nonaccrual status prior to the restructuring, accruing at the time of restructuring and those that were upgraded to accruing status after receiving six consecutive monthly
payments in accordance with the restructured terms as of each period reported (dollars in thousands):
|
September 30,
2021
|
December 31,
2020
|
|||||||
|
Accruing TDR - nonaccrual at restructuring
|
$
|
—
|
$
|
—
|
||||
|
Accruing TDR - accruing at restructuring
|
4,554
|
5,479
|
||||||
|
Accruing TDR - upgraded to accruing after six consecutive payments
|
544
|
3,529
|
||||||
|
$
|
5,098
|
$
|
9,008
|
|||||
There were no
TDRs executed during the three month and nine month periods ended September 30, 2021. There were no TDRs executed during the
three month period ended September 30, 2020 and two consumer TDRs totaling $30,000 executed during the nine month period ended September 30, 2020.
According to the accounting standards, not all loan modifications are TDRs. TDRs are modifications or renewals where the Company has
granted a concession to a borrower in financial distress. The Company reviews all modifications and renewals for determination of TDR status. In some situations a borrower may be experiencing financial distress, but the Company does not
provide a concession. These modifications are not considered TDRs. In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress. This could be the
case if the Company is matching a competitor’s interest rate. These modifications would also not be considered TDRs. Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered
TDRs. As with other loans not considered TDR or impaired, allowance allocations are based on the historical based allocation for the applicable loan grade and loan class.
Payment defaults on TDRs have been minimal and during the three and nine month periods ended September 30, 2021 and 2020, the balance
of loans that became delinquent by more than 90 days past due or that were transferred to nonaccrual within 12 months of restructuring were not material.
In late March 2020, the federal banking regulators issued guidance that modifications made to a borrower affected by the COVID-19
pandemic and governmental shutdown orders do not need to be identified as a TDR if the loan was current at the time a modification plan was implemented. Section 4013 of the CARES Act also addressed COVID-19 related modifications and
specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs. On December 27, 2020, President Trump signed another COVID-19 relief bill that extends this guidance until the earlier of January 1,
2022 or 60 days after the national emergency termination date. Through September 30, 2021, the Bank had applied this guidance and had made 726
such modifications with principal balances totaling $337.2 million. The Bank continues to follow the guidance issued by the
banking regulators in making any TDR determinations. At September 30, 2021, there were no such loans still in their
modification period.
NOTE 3 – LOANS (Continued)
Credit Quality
Indicators: The Company categorizes loans into risk
categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic
trends, among other factors. The Company analyzes commercial loans individually and classifies these relationships by credit risk grading. The Company uses an eight point grading system, with grades 5 through 8 being considered classified, or watch, credits. All commercial loans are assigned a grade at origination, at
each renewal or any amendment. When a credit is first downgraded to a watch credit (either through renewal, amendment, loan officer identification or the loan review process), an Administrative Loan Review (“ALR”) is generated by the
credit department and the loan officer. All watch credits have an ALR completed quarterly which analyzes the collateral position and cash flow of the borrower and its guarantors. Management meets quarterly with loan officers to
discuss each of these credits in detail and to help formulate solutions where progress has stalled. When necessary, the loan officer proposes changes to the assigned loan grade as part of the ALR. Additionally, Loan Review reviews all
loan grades upon origination, renewal or amendment and again as loans are selected though the loan review process. The credit will stay on the ALR until either its grade has improved to a 4 or the credit relationship is at a zero
balance. The Company uses the following definitions for the risk grades:
1. Excellent - Loans supported by extremely strong financial condition or secured by the Bank’s own
deposits. Minimal risk to the Bank and the probability of serious rapid financial deterioration is extremely small.
2. Above Average - Loans supported by sound financial statements that indicate the ability to repay or
borrowings secured (and margined properly) with marketable securities. Nominal risk to the Bank and probability of serious financial deterioration is highly unlikely. The overall quality of these credits is very high.
3. Good Quality - Loans supported by satisfactory asset quality and liquidity, good debt capacity coverage,
and good management in all critical positions. Loans are secured by acceptable collateral with adequate margins. There is a slight risk of deterioration if adverse market conditions prevail.
4. Acceptable Risk - Loans carrying an acceptable risk to the Bank, which may be slightly below average
quality. The borrower has limited financial strength with considerable leverage. There is some probability of deterioration if adverse market conditions prevail. These credits should be monitored closely by the Relationship Manager.
5. Marginally Acceptable - Loans are of marginal quality with above normal risk to the Bank. The borrower
shows acceptable asset quality but very little liquidity with high leverage. There is inconsistent earning performance without the ability to sustain adverse market conditions. The primary source of repayment is questionable, but the
secondary source of repayment still remains an option. Very close attention by the Relationship Manager and management is needed.
6. Substandard - Loans are inadequately protected by the net worth and paying capacity of the borrower or
the collateral pledged. The primary and secondary sources of repayment are questionable. Heavy debt condition may be evident and volume and earnings deterioration may be underway. It is possible that the Bank will sustain some loss if the
deficiencies are not immediately addressed and corrected.
7. Doubtful - Loans supported by weak or no financial statements, as well as the ability to repay the
entire loan, are questionable. Loans in this category are normally characterized less than adequate collateral, insolvent, or extremely weak financial condition. A loan classified doubtful has all the weaknesses inherent in one classified
substandard with the added characteristic that the weaknesses makes collection or liquidation in full highly questionable. The possibility of loss is extremely high, however, activity may be underway to minimize the loss or maximize the
recovery.
8. Loss - Loans are considered uncollectible and of little or no value as a bank asset.
NOTE 3 – LOANS (Continued)
As of September 30, 2021 and December 31, 2020, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):
|
September 30, 2021
|
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
Total
|
|||||||||||||||||||||||||||
|
Commercial and industrial
|
$
|
92,615
|
$
|
13,376
|
$
|
94,433
|
$
|
230,163
|
$
|
2,862
|
$
|
934
|
$
|
—
|
$
|
—
|
$
|
434,383
|
||||||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||||||||||||||||||
|
Residential developed
|
—
|
—
|
—
|
6,184
|
—
|
—
|
—
|
—
|
6,184
|
|||||||||||||||||||||||||||
|
Unsecured to residential developers
|
—
|
—
|
19
|
—
|
—
|
—
|
—
|
—
|
19
|
|||||||||||||||||||||||||||
|
Vacant and unimproved
|
—
|
1,791
|
9,028
|
25,797
|
—
|
—
|
—
|
—
|
36,616
|
|||||||||||||||||||||||||||
|
Commercial development
|
—
|
—
|
220
|
183
|
—
|
—
|
—
|
—
|
403
|
|||||||||||||||||||||||||||
|
Residential improved
|
—
|
—
|
22,774
|
77,705
|
124
|
—
|
5
|
—
|
100,608
|
|||||||||||||||||||||||||||
|
Commercial improved
|
—
|
13,713
|
64,208
|
182,085
|
7,577
|
—
|
327
|
—
|
267,910
|
|||||||||||||||||||||||||||
|
Manufacturing & industrial
|
—
|
3,563
|
42,672
|
66,440
|
2,795
|
—
|
—
|
—
|
115,470
|
|||||||||||||||||||||||||||
|
$
|
92,615
|
$
|
32,443
|
$
|
233,354
|
$
|
588,557
|
$
|
13,358
|
$
|
934
|
$
|
332
|
$
|
—
|
$
|
961,593
|
|||||||||||||||||||
|
December 31, 2020
|
1 |
2 |
3 | 4 |
5 |
6 |
7 |
8 |
Total
|
|||||||||||||||||||||||||||
|
Commercial and industrial
|
$
|
244,079
|
$
|
14,896
|
$
|
111,611
|
$
|
276,728
|
$
|
13,957
|
$
|
4,139
|
$
|
—
|
$
|
—
|
$
|
665,410
|
||||||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||||||||||||||||||
|
Residential developed
|
—
|
—
|
—
|
8,549
|
—
|
—
|
—
|
—
|
8,549
|
|||||||||||||||||||||||||||
|
Vacant and unimproved
|
—
|
3,473
|
9,427
|
32,751
|
1,471
|
—
|
—
|
—
|
47,122
|
|||||||||||||||||||||||||||
|
Commercial development
|
—
|
—
|
302
|
555
|
—
|
—
|
—
|
—
|
857
|
|||||||||||||||||||||||||||
|
Residential improved
|
—
|
—
|
23,706
|
90,372
|
227
|
—
|
87
|
—
|
114,392
|
|||||||||||||||||||||||||||
|
Commercial improved
|
—
|
6,328
|
58,483
|
192,030
|
7,641
|
1,174
|
350
|
—
|
266,006
|
|||||||||||||||||||||||||||
|
Manufacturing & industrial
|
—
|
—
|
31,451
|
80,075
|
3,721
|
—
|
—
|
—
|
115,247
|
|||||||||||||||||||||||||||
|
$
|
244,079
|
$
|
24,697
|
$
|
234,980
|
$
|
681,060
|
$
|
27,017
|
$
|
5,313
|
$
|
437
|
$
|
—
|
$
|
1,217,583
|
|||||||||||||||||||
Commercial loans rated a 6
or worse per the Company’s internal risk rating system are considered substandard, doubtful or loss. Commercial loans classified as substandard or worse were as follows at period-end (dollars in thousands):
|
September 30,
2021
|
December 31,
2020
|
|||||||
|
Not classified as impaired
|
$
|
263
|
$
|
591
|
||||
|
Classified as impaired
|
1,003
|
5,159
|
||||||
|
Total commercial loans classified substandard or worse
|
$
|
1,266
|
$
|
5,750
|
||||
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan
classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in consumer loans based on payment
activity (dollars in thousands):
|
September 30, 2021
|
Residential
Mortgage
|
Consumer
Unsecured
|
Home
Equity
|
Consumer
Other
|
||||||||||||
|
Performing
|
$
|
119,018
|
$
|
103
|
$
|
52,127
|
$
|
3,684
|
||||||||
|
Nonperforming
|
88
|
—
|
—
|
—
|
||||||||||||
|
Total
|
$
|
119,106
|
$
|
103
|
$
|
52,127
|
$
|
3,684
|
||||||||
|
December 31, 2020
|
Residential
Mortgage
|
Consumer
Unsecured
|
Home
Equity
|
Consumer
Other
|
||||||||||||
|
Performing
|
$
|
149,461
|
$
|
161
|
$
|
57,975
|
$
|
4,056
|
||||||||
|
Nonperforming
|
95
|
—
|
—
|
—
|
||||||||||||
|
Total
|
$
|
149,556
|
$
|
161
|
$
|
57,975
|
$
|
4,056
|
||||||||
NOTE 4 – FAIR VALUE
ASC Topic 820, Fair
Value Measurements and Disclosures, 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 three levels of
inputs that may be used to measure fair value include:
| Level 1: |
Quoted prices (unadjusted) for identical assets or liabilities
in active markets that the entity has the ability to access as of the measurement date.
|
| Level 2: |
Significant other observable inputs other than Level 1 prices
such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
|
| Level 3: |
Significant unobservable inputs that reflect a reporting
entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
|
Investment Securities: The fair values of
investment securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by
relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair values of certain securities held to maturity are determined by computing discounted cash flows using observable and unobservable
market inputs (Level 3 inputs).
Loans Held for Sale: The fair value of loans held for sale is based upon binding quotes from third party investors (Level 2 inputs).
Impaired Loans: Loans identified as
impaired are measured using one of three methods: the loan’s observable market price, the fair value of collateral or the present value of expected future cash flows. For each period presented, no impaired loans were measured using the
loan’s observable market price. If an impaired loan has had a charge-off or if the fair value of the collateral is less than the recorded investment in the loan, we establish a specific reserve and report the loan as nonrecurring Level
3. The fair value of collateral of impaired loans is generally based on recent real estate appraisals. 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 appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a
Level 3 classification of the inputs for determining fair value.
Other Real Estate Owned: Other real estate
owned (OREO) properties are initially recorded at fair value, less estimated costs to sell when acquired, establishing a new cost basis. Adjustments to OREO are measured at fair value, less costs to sell. Fair values are generally
based on third party appraisals or realtor evaluations of the property. These appraisals and evaluations 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 appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3
classification. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, an impairment loss is recognized through a valuation allowance, and the property is reported as nonrecurring Level 3.
Interest Rate Swaps: For interest rate
swap agreements, we measure fair value utilizing pricing provided by a third-party pricing source that that uses market observable inputs, such as forecasted yield curves, and other unobservable inputs and accordingly, interest rate
swap agreements are classified as Level 3.
NOTE 4 – FAIR VALUE (Continued)
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
|
Fair
Value
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
Significant Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
|
September 30, 2021
|
||||||||||||||||
|
U.S. Treasury and federal agency securities
|
$
|
68,872
|
$
|
—
|
$
|
68,872
|
$
|
—
|
||||||||
|
U.S. Agency MBS and CMOs
|
64,509
|
—
|
64,509
|
—
|
||||||||||||
|
Tax-exempt state and municipal bonds
|
40,008
|
—
|
40,008
|
—
|
||||||||||||
|
Taxable state and municipal bonds
|
64,593
|
—
|
64,593
|
—
|
||||||||||||
|
Corporate bonds and other debt securities
|
3,493
|
—
|
3,493
|
—
|
||||||||||||
|
Other equity securities
|
1,484
|
—
|
1,484
|
—
|
||||||||||||
|
Loans held for sale
|
2,635
|
—
|
2,635
|
—
|
||||||||||||
|
Interest rate swaps
|
3,446
|
—
|
—
|
3,446
|
||||||||||||
|
Interest rate swaps
|
(3,446
|
)
|
—
|
—
|
(3,446
|
)
|
||||||||||
|
December 31, 2020
|
||||||||||||||||
|
Available for sale securities
|
||||||||||||||||
|
U.S. Treasury and federal agency securities
|
$
|
64,110
|
$
|
—
|
$
|
64,110
|
$
|
—
|
||||||||
|
U.S. Agency MBS and CMOs
|
64,983
|
—
|
64,983
|
—
|
||||||||||||
|
Tax-exempt state and municipal bonds
|
45,642
|
—
|
45,642
|
—
|
||||||||||||
|
Taxable state and municipal bonds
|
57,177
|
—
|
57,177
|
—
|
||||||||||||
|
Corporate bonds and other debt securities
|
4,920
|
—
|
4,920
|
—
|
||||||||||||
|
Other equity securities
|
1,513
|
—
|
1,513
|
—
|
||||||||||||
|
Loans held for sale
|
5,422
|
—
|
5,422
|
—
|
||||||||||||
|
Interest rate swaps
|
4,217
|
—
|
—
|
4,217
|
||||||||||||
|
Interest rate swaps
|
(4,217
|
)
|
—
|
—
|
(4,217
|
)
|
||||||||||
Assets measured at fair value on a non-recurring basis are summarized below (in thousands):
| |
Fair
Value
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
Significant Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
||||||||||||
|
September 30, 2021
|
||||||||||||||||
|
Impaired loans
|
$
|
794
|
$
|
—
|
$
|
—
|
$
|
794
|
||||||||
|
December 31, 2020
|
||||||||||||||||
|
Impaired loans
|
$
|
4,686
|
$
|
—
|
$
|
—
|
$
|
4,686
|
||||||||
|
Other real estate owned
|
194
|
—
|
—
|
194
|
||||||||||||
NOTE 4 – FAIR VALUE (Continued)
Quantitative information about Level 3 fair value measurements measured on a non-recurring basis was as follows at period end (dollars in thousands):
|
Asset Fair
Value
|
Valuation
Technique
|
Unobservable
Inputs
|
Range (%)
|
||||||
|
September 30, 2021
|
|||||||||
|
Impaired Loans
|
$
|
794
|
Sales comparison approach
|
Adjustment for differences between comparable sales
|
1.0 to 7.0
|
||||
|
Asset Fair
Value
|
Valuation
Technique
|
Unobservable
Inputs
|
Range (%)
|
||||||
|
December 31, 2020
|
|||||||||
|
Impaired Loans
|
$
|
4,686
|
Sales comparison approach
|
Adjustment for differences between comparable sales
|
1.5 to 20.0
|
||||
|
Income approach
|
Capitalization rate
|
9.5 to 11.0
|
|||||||
|
Other real estate owned
|
194
|
Sales comparison approach
|
Adjustment for differences between comparable sales
|
3.0 to 20.0
|
|||||
|
Income approach
|
Capitalization rate
|
9.5 to 11.0
|
|||||||
NOTE 4 – FAIR VALUE (Continued)
The carrying amounts and estimated
fair values of financial instruments, not previously presented, were as follows at September 30, 2021 and December 31, 2020
(dollars in thousands):
| Level in | September 30, 2021 | December 31, 2020 | |||||||||||||||
| |
Fair Value
Hierarchy
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||||
|
Financial assets
|
|||||||||||||||||
|
Cash and due from banks
|
Level 1
|
$
|
30,413
|
$
|
30,413
|
$
|
31,480
|
$
|
31,480
|
||||||||
|
Cash equivalents
|
Level 2
|
1,239,525
|
1,239,525
|
752,256
|
752,256
|
||||||||||||
|
Securities held to maturity
|
Level 3
|
137,569
|
140,412
|
79,468
|
83,246
|
||||||||||||
|
FHLB stock
|
11,558
|
NA
|
11,558
|
NA
|
|||||||||||||
|
Loans, net
|
Level 2
|
1,119,287
|
1,140,169
|
1,407,236
|
1,448,874
|
||||||||||||
|
Bank owned life insurance
|
Level 3
|
52,781
|
52,781
|
42,516
|
42,516
|
||||||||||||
|
Accrued interest receivable
|
Level 2
|
4,005
|
4,005
|
5,625
|
5,625
|
||||||||||||
|
Financial liabilities
|
|||||||||||||||||
|
Deposits
|
Level 2
|
(2,553,175
|
)
|
(2,553,148
|
)
|
(2,298,587
|
)
|
(2,298,867
|
)
|
||||||||
|
Other borrowed funds
|
Level 2
|
(85,000
|
)
|
(86,973
|
)
|
(70,000
|
)
|
(73,010
|
)
|
||||||||
|
Long-term debt
|
Level 2
|
—
|
—
|
(20,619
|
)
|
(18,011
|
)
|
||||||||||
|
Accrued interest payable
|
Level 2
|
(72
|
)
|
(72
|
)
|
(242
|
)
|
(242
|
)
|
||||||||
|
Off-balance sheet credit-related items
|
|||||||||||||||||
|
Loan commitments
|
—
|
—
|
—
|
—
|
|||||||||||||
The methods and assumptions used to estimate fair
value are described as follows.
Carrying amount is the estimated fair value for
cash and cash equivalents, bank owned life insurance, accrued interest receivable and payable, demand deposits, short-term borrowings and variable rate loans or deposits that reprice frequently and fully. Security fair values are
determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities as discussed above. For fixed rate loans, interest-bearing time deposits in other financial institutions, or deposits
and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk (including consideration of
widening credit spreads). Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of
off-balance sheet credit-related items is not significant.
The estimated fair values of financial
instruments disclosed above as follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity and marketability
factors.
NOTE 5 – DEPOSITS
Deposits are summarized as follows (dollars in thousands):
|
September 30,
2021
|
December 31,
2020
|
|||||||
|
Noninterest-bearing demand
|
$
|
934,477
|
$
|
809,437
|
||||
|
Interest bearing demand
|
706,247
|
642,918
|
||||||
|
Savings and money market accounts
|
818,525
|
742,685
|
||||||
|
Certificates of deposit
|
93,926
|
103,547
|
||||||
|
$
|
2,553,175
|
$
|
2,298,587
|
|||||
Time deposits that exceed the FDIC insurance
limit of $250,000 were approximately $29.7 million at September 30, 2021 and $28.8 million at December 31, 2020.
NOTE 6 - OTHER BORROWED FUNDS
Other borrowed funds include advances from the
Federal Home Loan Bank and borrowings from the Federal Reserve Bank.
Federal Home Loan Bank Advances
At period-end, advances from the Federal Home
Loan Bank were as follows (dollars in thousands):
|
Principal Terms
|
Advance
Amount
|
Range of Maturities
|
Weighted
Average
Interest Rate
|
||||||
|
September 30, 2021
|
|||||||||
|
Single maturity fixed rate advances
|
$
|
30,000
|
May to July
|
2.87
|
%
|
||||
|
Putable advances
|
55,000
|
November to July
|
0.74
|
%
|
|||||
|
$
|
85,000
|
||||||||
|
Principal Terms
|
Advance
Amount
|
Range of Maturities
|
Weighted
Average
Interest Rate
|
||||||
|
December 31, 2020
|
|||||||||
|
Single maturity fixed rate advances
|
$
|
40,000
|
April to July
|
2.50
|
%
|
||||
|
Putable advances
|
30,000
|
November to February
|
1.36
|
%
|
|||||
|
$
|
70,000
|
||||||||
Each advance is subject to a prepayment fee if
paid prior to its maturity date. Fixed rate advances are payable at maturity. Amortizable mortgage advances are fixed rate advances with scheduled repayments based upon amortization to maturity. These advances were collateralized by
residential and commercial real estate loans totaling $389.8 million and $427.9 million under a blanket lien arrangement at September 30, 2021 and December 31, 2020, respectively.
Scheduled repayments of FHLB advances as of September 30, 2021 were
as follows (in thousands):
|
2021
|
$
|
—
|
||
| 2022 |
—
|
|||
|
2023
|
10,000
|
|||
|
2024
|
40,000
|
|||
|
2025
|
—
|
|||
|
Thereafter
|
35,000
|
|||
|
$
|
85,000
|
Federal Reserve Bank borrowings
The Company has a financing arrangement with the
Federal Reserve Bank. There were no borrowings outstanding at September 30, 2021 and December 31, 2020, and the Company
had approximately $4.8 million and $12.9 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling $5.2 million and $13.8 million at September 30, 2021
and December 31, 2020, respectively.
NOTE 7 - EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the three and nine month periods ended September 30,
2021 and 2020
are as follows (dollars in thousands, except per share data):
|
Three Months
Ended
September 30, 2021
|
Three Months
Ended
September 30, 2020
|
Nine Months
Ended
September 30, 2021
|
Nine Months
Ended
September 30, 2020
|
|||||||||||||
|
Net income available to common shares
|
$
|
7,202
|
$
|
7,120
|
$
|
22,798
|
$
|
21,169
|
||||||||
|
Weighted average shares outstanding, including participating stock
awards - Basic
|
34,190,264
|
34,109,901
|
34,192,916
|
34,108,676
|
||||||||||||
|
Dilutive potential common shares:
|
||||||||||||||||
|
Stock options
|
—
|
—
|
—
|
—
|
||||||||||||
|
Weighted average shares outstanding - Diluted
|
34,190,264
|
34,109,901
|
34,192,916
|
34,108,676
|
||||||||||||
|
Basic earnings per common share
|
$
|
0.21
|
$
|
0.21
|
$
|
0.67
|
$
|
0.62
|
||||||||
|
Diluted earnings per common share
|
$
|
0.21
|
$
|
0.21
|
$
|
0.67
|
$
|
0.62
|
||||||||
There were no antidilutive shares
of common stock in the three and nine month periods ended September 30, 2021 and 2020.
NOTE 8 - FEDERAL INCOME TAXES
Income tax expense was as follows (dollars in thousands):
|
Three Months
Ended
September 30, 2021
|
Three Months
Ended
September 30, 2020
|
Nine Months
Ended
September 30, 2021
|
Nine Months
Ended
September 30, 2020
|
|||||||||||||
|
Current
|
$
|
936
|
$
|
1,304
|
$
|
4,685
|
$
|
5,974
|
||||||||
|
Deferred
|
800
|
309
|
656
|
(1,174
|
)
|
|||||||||||
|
$
|
1,736
|
$
|
1,613
|
$
|
5,341
|
$
|
4,800
|
|||||||||
The difference between the financial statement tax expense and amount computed by applying the statutory federal tax rate to pretax
income was reconciled as follows (dollars in thousands):
|
Three Months
Ended
September 30, 2021
|
Three Months
Ended
September 30, 2020
|
Nine Months
Ended
September 30, 2021
|
Nine Months
Ended
September 30, 2020
|
|||||||||||||
|
Statutory rate
|
21
|
%
|
21
|
%
|
21
|
%
|
21
|
%
|
||||||||
|
Statutory rate applied to income before taxes
|
$
|
1,877
|
$
|
1,834
|
$
|
5,909
|
$
|
5,454
|
||||||||
|
Deduct
|
||||||||||||||||
|
Tax-exempt interest income
|
(162
|
)
|
(178
|
)
|
(477
|
)
|
(533
|
)
|
||||||||
|
Bank-owned life insurance
|
(54
|
)
|
(45
|
)
|
(165
|
)
|
(144
|
)
|
||||||||
|
Other, net
|
75
|
2
|
74
|
23
|
||||||||||||
|
$
|
1,736
|
$
|
1,613
|
$
|
5,341
|
$
|
4,800
|
|||||||||
The realization of deferred tax assets is largely dependent upon future taxable income, future reversals of existing taxable
temporary differences and the ability to carryback losses to available tax years. In assessing the need for a valuation allowance, we consider positive and negative evidence, including taxable income in carry-back years, scheduled
reversals of deferred tax liabilities, expected future taxable income and tax planning strategies. Management believes it is more likely than not that all of the deferred tax assets will be realized against deferred tax liabilities and
projected future taxable income.
The net deferred tax asset recorded included the following amounts of deferred tax assets and liabilities (dollars in thousands):
|
September 30,
2021
|
December 31,
2020
|
|||||||
|
Deferred tax assets
|
||||||||
|
Allowance for loan losses
|
$
|
3,472
|
$
|
3,656
|
||||
|
Net deferred loan fees
|
519
|
|
822
|
|||||
|
Nonaccrual loan interest
|
69
|
120
|
||||||
|
Valuation allowance on other real estate owned
|
5
|
41
|
||||||
|
Other
|
389
|
499
|
||||||
|
Gross deferred tax assets
|
4,454
|
5,138
|
||||||
|
Valuation allowance
|
—
|
—
|
||||||
|
Total net deferred tax assets
|
4,454
|
5,138
|
||||||
|
Deferred tax liabilities
|
||||||||
|
Depreciation
|
(1,260
|
)
|
(1,285
|
)
|
||||
|
Prepaid expenses
|
(262
|
)
|
(170
|
)
|
||||
|
Unrealized gain on securities available for sale
|
(397
|
)
|
(1,120
|
)
|
||||
|
Other
|
(409
|
)
|
(504
|
)
|
||||
|
Gross deferred tax liabilities
|
(2,328
|
)
|
(3,079
|
)
|
||||
|
Net deferred tax asset
|
$
|
2,126
|
$
|
2,059
|
||||
There were no
unrecognized tax benefits at September 30, 2021 or December 31, 2020 and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company is no longer subject to examination by the Internal Revenue Service for years before 2018.
NOTE 9 – COMMITMENTS AND OFF BALANCE-SHEET RISK
Some financial instruments are used to meet
customer financing needs and to reduce exposure to interest rate changes. These financial instruments include commitments to extend credit and standby letters of credit. These involve, to varying degrees, credit and interest rate risk
in excess of the amount reported in the financial statements.
Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established in the commitment, and generally have fixed expiration dates. Collateral or other security is normally not obtained for these financial instruments prior
to their use and many of the commitments are expected to expire without being used. Standby letters of credit are conditional commitments to guarantee a customer’s performance to a third party. Exposure to credit loss if the other
party does not perform is represented by the contractual amount for commitments to extend credit and standby letters of credit.
A summary of the contractual amounts of financial
instruments with off‑balance‑sheet risk was as follows at period-end (dollars in thousands):
|
September 30,
2021
|
December 31,
2020
|
|||||||
|
Commitments to make loans
|
$
|
103,595
|
$
|
88,022
|
||||
|
Letters of credit
|
11,784
|
11,751
|
||||||
|
Unused lines of credit
|
691,928
|
596,298
|
||||||
The notional amount of commitments to fund
mortgage loans to be sold into the secondary market was approximately $3.7 million and $0 at September 30, 2021 and December 31, 2020, respectively.
The Bank enters into commitments to sell mortgage backed securities, which it later buys back in order to hedge its exposure to interest
rate risk in its mortgage pipeline. These commitments were approximately $8.5 million and $21.0 million at September 30, 2021 and December 31, 2020, respectively.
At September 30, 2021, approximately 40.3% of the Bank’s commitments to make loans were at fixed rates, offered at current market rates. The remainder of the commitments to
make loans were at variable rates tied to prime or one month LIBOR and generally expire within 30 days. The majority of the unused lines of credit were at variable rates tied to prime.
NOTE 10 – CONTINGENCIES
The Company and its subsidiaries periodically
become defendants in certain claims and legal actions arising in the ordinary course of business. As of September 30, 2021, there were no material pending legal proceedings to which the Company or any of its subsidiaries are a party or
which any of its properties are the subject.
NOTE 11 – SHAREHOLDERS’ EQUITY
Regulatory Capital
The Company and the Bank are subject to
regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items
calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower
classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.
The prompt corrective action regulations provide
five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over
brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.
In July 2013, the Board of Governors of the
Federal Reserve Board and the FDIC approved the rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (commonly known as Basel III). The rules include a common equity Tier 1 capital to
risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which effectively results in a minimum CET1 ratio of 7.0%. The minimum ratio of Tier 1 capital to risk-weighted assets is
6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5%), which effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital
conservation buffer), and requires a minimum leverage ratio of 4.0%.
NOTE 11 – SHAREHOLDERS' EQUITY (Continued)
At September 30, 2021 and December 31, 2020, actual capital levels and minimum required levels were (dollars in thousands):
|
Minimum
Capital
|
Minimum Capital
Adequacy With
|
To Be Well
Capitalized Under
Prompt Corrective
|
||||||||||||||||||||||||||||||
|
Actual
|
Adequacy
|
Capital Buffer
|
Action Regulations
|
|||||||||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||||||||
|
September 30, 2021
|
||||||||||||||||||||||||||||||||
|
CET1 capital (to risk weighted assets)
|
||||||||||||||||||||||||||||||||
|
Consolidated
|
$
|
250,719
|
17.4
|
%
|
$
|
64,714
|
4.5
|
%
|
$
|
100,666
|
7.0
|
%
|
N/A
|
N/A
|
||||||||||||||||||
|
Bank
|
242,635
|
16.9
|
64,703
|
4.5
|
100,648
|
7.0
|
$
|
93,459
|
6.5
|
%
|
||||||||||||||||||||||
|
Tier 1 capital (to risk weighted assets)
|
||||||||||||||||||||||||||||||||
|
Consolidated
|
250,719
|
17.4
|
86,285
|
6.0
|
122,237
|
8.5
|
N/A
|
N/A
|
||||||||||||||||||||||||
|
Bank
|
242,635
|
16.9
|
86,270
|
6.0
|
122,216
|
8.5
|
115,027
|
8.0
|
||||||||||||||||||||||||
|
Total capital (to risk weighted assets)
|
||||||||||||||||||||||||||||||||
|
Consolidated
|
267,251
|
18.6
|
115,046
|
8.0
|
150,998
|
10.5
|
N/A
|
N/A
|
||||||||||||||||||||||||
|
Bank
|
259,167
|
18.0
|
115,027
|
8.0
|
150,973
|
10.5
|
143,783
|
10.0
|
||||||||||||||||||||||||
|
Tier 1 capital (to average assets)
|
||||||||||||||||||||||||||||||||
|
Consolidated
|
250,719
|
8.5
|
117,813
|
4.0
|
N/A
|
N/A
|
N/A
|
N/A
|
||||||||||||||||||||||||
|
Bank
|
242,635
|
8.2
|
117,801
|
4.0
|
N/A
|
N/A
|
147,251
|
5.0
|
||||||||||||||||||||||||
|
December 31, 2020
|
||||||||||||||||||||||||||||||||
|
CET1 capital (to risk weighted assets)
|
||||||||||||||||||||||||||||||||
|
Consolidated
|
$
|
235,629
|
15.8
|
%
|
$
|
67,170
|
4.5
|
%
|
$
|
104,487
|
7.0
|
%
|
N/A
|
N/A
|
||||||||||||||||||
|
Bank
|
248,829
|
16.7
|
67,161
|
4.5
|
104,473
|
7.0
|
$
|
97,010
|
6.5
|
%
|
||||||||||||||||||||||
|
Tier 1 capital (to risk weighted assets)
|
||||||||||||||||||||||||||||||||
|
Consolidated
|
255,629
|
17.1
|
89,561
|
6.0
|
126,877
|
8.5
|
N/A
|
N/A
|
||||||||||||||||||||||||
|
Bank
|
248,829
|
16.7
|
89,548
|
6.0
|
126,860
|
8.5
|
119,397
|
8.0
|
||||||||||||||||||||||||
|
Total capital (to risk weighted assets)
|
||||||||||||||||||||||||||||||||
|
Consolidated
|
273,037
|
18.3
|
119,414
|
8.0
|
156,731
|
10.5
|
N/A
|
N/A
|
||||||||||||||||||||||||
|
Bank
|
266,237
|
17.8
|
119,397
|
8.0
|
156,709
|
10.5
|
149,247
|
10.0
|
||||||||||||||||||||||||
|
Tier 1 capital (to average assets)
|
||||||||||||||||||||||||||||||||
|
Consolidated
|
255,629
|
9.9
|
103,420
|
4.0
|
N/A
|
N/A
|
N/A
|
N/A
|
||||||||||||||||||||||||
|
Bank
|
248,829
|
9.6
|
103,391
|
4.0
|
N/A
|
N/A
|
129,238
|
5.0
|
||||||||||||||||||||||||
All $20.0 million of trust preferred securities outstanding at December 31, 2020 qualified as Tier 1 capital. On July 7, 2021, the Company redeemed all of the
outstanding trust preferred securities. Refer to our 2020 Form 10-K for more information on the trust preferred securities.
The Bank was categorized as “well capitalized” at
September 30, 2021 and December 31, 2020.
| Item 2. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Macatawa Bank Corporation is a Michigan corporation and a registered bank holding company. It wholly-owns Macatawa Bank. Macatawa Bank is a Michigan chartered bank with depository accounts
insured by the FDIC. The Bank operates twenty-six branch offices and a lending and operational service facility, providing a full range of commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan
County, Michigan. The Company previously owned all of the common stock of Macatawa Statutory Trust II, a grantor trust that issued trust preferred securities and was not consolidated with the Company under accounting principles generally accepted
in the United States of America. On July 7, 2021, the Company redeemed all of the $20.0 million of outstanding trust preferred securities and $619,000 of common securities associated with this trust. For further information regarding
consolidation, see the Notes to Consolidated Financial Statements.
At September 30, 2021, we had total assets of $2.90 billion, total loans of $1.14 billion, total deposits of $2.55 billion and shareholders' equity of $252.2 million. For the three months ended
September 30, 2021, we recognized net income of $7.2 million compared to $7.1 million for the same period in 2020. For the nine months ended September 30, 2021, we recognized net income of $22.8 million compared to $21.2 million for the same
period in 2020. The Bank was categorized as “well capitalized” under regulatory capital standards at September 30, 2021.
We paid a dividend of $0.08 per share in each quarter in 2020 and in the first three quarters of 2021.
On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with
Customers Affected by the Coronavirus.” The guidance explained that in consultation with the FASB staff the federal banking agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who
were current as of the implementation date of a modification are not Troubled Debt Restructurings (“TDRs”). The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020. Section 4013 of the CARES Act
also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were not more than 30 days past due as of December 31, 2019 are not TDRs. On December 27, 2020, another COVID-19 relief bill was signed
that extended this guidance until the earlier of January 1, 2022 or 60 days after the date on which the national emergency declared as a result of COVID-19 is terminated. Through September 30, 2021, the Bank had applied this guidance and modified
726 individual loans with aggregate principal balances totaling $337.2 million. As of September 30, 2021, all of these modifications had expired and the loans returned to their contractual payment terms.
The CARES Act, as amended, included an allocation of $659 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”) Paycheck Protection Program
(“PPP”). PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years (loans made
before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that
is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. Through December 31, 2020, the Bank had originated 1,738 PPP loans totaling $346.7 million in principal, with an
average loan size of $200,000. Fees totaling $10.0 million were generated from the SBA for these loans in the year ended December 31, 2020. These fees are deferred and amortized into interest income over the contractual period of 24 months or 60
months, as applicable. Upon SBA forgiveness, unamortized fees are then recognized into interest income. Participation in the PPP had a significant impact on the Bank’s asset mix and net interest income in 2020 and will continue to impact both
asset mix and net interest income until these loans are forgiven or paid off. The initial PPP expired on August 8, 2020. Through December 31, 2020, 765 PPP loans totaling $113.5 million had been forgiven by the SBA and a total of $5.4 million in
PPP fees had been recognized by the Bank.
On December 27, 2020, another COVID-19 relief bill was signed that extended and modified several provisions of the PPP. This included an additional allocation of $284 billion. The SBA
reactivated the PPP on January 11, 2021. The Bank originated additional loans through the PPP, which expired on May 31, 2021. In the nine months ended September 30, 2021, the Bank had generated and received SBA approval on 1,000 PPP loans
totaling $128.1 million and generated $5.6 million in related deferred PPP fees. In the nine months ended September 30, 2021, 1,742 PPP loans totaling $279.9 million had been forgiven by the SBA and a total of $7.1 million in PPP fees had been
recognized by the Bank including fees recognized upon forgiveness and continuing amortization of fees from the 2020 and 2021 PPP originations.
RESULTS OF OPERATIONS
Summary: Net income for the three
months ended September 30, 2021 was $7.2 million, compared to $7.1 million for the same period in 2020. Net income per share on a diluted basis for the three months ended September 30, 2021 was $0.21 compared to $0.21 for the same period in
2020. Net income for the nine months ended September 30, 2021 was $22.8 million, compared to $21.2 million for the same period in 2020. Net income per share on a diluted basis for the nine months ended September 30, 2021 was $0.67 compared to
$0.62 for the same period in 2020.
The increase in earnings in both the three and nine months ended September 30, 2021 compared to the same periods in 2020 was due primarily to lower provision for loan losses more than offsetting
the impact of lower levels of net interest income. Net interest income decreased to $14.3 million in the three months ended September 30, 2021 compared to $14.7 million in the same period in 2020. Net interest income decreased to $43.2 million in
the nine months ended September 30, 2021 compared to $45.0 million in the nine months ended September 30, 2020. These decreases in net interest income were primarily attributable to the decreases in volumes of interest-earning assets and, to a
lesser extent, decreases in short-term interest rates instituted by the Federal Reserve in March 2020.
The provision for loan losses was a benefit of $550,000 for the three months ended September 30, 2021, compared to an expense of $500,000 for the same period in 2020. The provision for loan
losses was a benefit of $1.3 million for the nine months ended September 30, 2021 compared to an expense of $2.2 million for the same period in 2020. We were in a net loan recovery position for the three months ended September 30, 2021, with
$276,000 in net loan recoveries, compared to $203,000 in net loan recoveries in the same period in 2020. We were also in a net loan recovery position for the nine months ended September 30, 2021, with $424,000 in net loan recoveries compared to
$2.8 million in net loan charge-offs in the same period in 2020. The nine month period ended September 30, 2020 was impacted by a $4.1 million charge-off taken in June 2020 related to a single loan relationship with a movie theater business where
the underlying assets were sold through bankruptcy proceedings. The provision for loan losses in the 2020 periods was also impacted by increases to qualitative environmental factors to address increased risk of loss attributable to the COVID-19
pandemic.
Net Interest Income: Net interest
income totaled $14.3 million for the three months ended September 30, 2021 compared to $14.7 million for the same period in 2020. Net interest income decreased to $43.2 million in the nine months ended September 30, 2021 compared to $45.0
million in the nine months ended September 30, 2020.
Net interest income for the third quarter of 2021 decreased $378,000 compared to the same period in 2020. Of this decrease, $2.5 million was from changes in the volume of average interest
earning assets and interest bearing liabilities, partially offset by a $2.1 million increase from changes in rates earned or paid. The largest changes occurred in interest income on commercial loans (excluding PPP loans) and in PPP loans which
fluctuated significantly in the third quarter of 2021 compared to the same period in 2020. The net change in interest income for commercial loans (excluding PPP loans) was $1.4 million with a decrease of $639,000 due to rate and a decrease of
$786,000 due to portfolio contraction. PPP loans contributed an additional $1.0 million in net interest income in the third quarter of 2021 primarily due to higher PPP fee recognition tied to loan principal forgiveness. Additionally, residential
mortgage loan interest income decreased by $565,000 in the third quarter of 2021 compared to the same period in 2020. Of the $565,000 decrease in interest income on residential mortgage loans, $448,000 was due to a decrease in average balances
resulting from a high volume of originations of refinanced loans which are sold versus retained in portfolio. Rate reductions in the deposit portfolio served to partially offset the net negative effects of the changes noted above in interest
income.
Net interest income for the nine months ended September 30, 2021 decreased $1.8 million compared to the same period in 2020. Of this decrease, $4.0 million was from changes in the volume of
average interest earning assets and interest bearing liabilities, partially offset by a $2.2 million increase due to changes in rates earned or paid. The largest changes occurred in interest income on commercial loans (excluding PPP loans) and in
PPP loans which fluctuated significantly in the first nine months of 2021 compared to the same period in 2020. The net change for commercial loans (excluding PPP loans) was a $6.3 million decrease with a decrease in interest income of $2.5 million
due to rate and a decrease in interest income of $3.8 million due to portfolio contraction. PPP loans contributed an additional $5.0 million in net interest income in the first nine months of 2021 due to slightly higher average balances and
significantly higher levels of PPP fee recognition upon forgiveness. Of the $1.7 million decrease in interest income on residential mortgage loans, $1.4 million was due to a decrease in average balances resulting from a high volume of originations
of refinanced loans which are sold versus retained in portfolio and $326,000 was due to lower loan rates. Rate reductions in the deposit portfolio served to partially offset the net negative effects of the changes noted above in interest income.
As we are in an asset-sensitive position, reductions in market interest rates have a negative impact on margin as our interest earning assets reprice faster than its interest-bearing liabilities.
Much of our asset-sensitivity is due to commercial and consumer loans that have variable interest rates. For both loan types we established floor rates several years ago. These floors provide protection to net interest income when short-term
interest rates decline.
The cost of funds decreased to 0.13% in the third quarter of 2021 compared to 0.29% in the third quarter of 2020. For the first nine months of 2021, the cost of funds decreased to 0.16% compared
to 0.44% for the same period in 2020. Decreases in the rates paid on our interest-bearing checking, savings and money market accounts in response to the federal funds rate decreases over the past year caused the decrease in our cost of funds.
The following table shows an analysis of net interest margin for the three month periods ended September 30, 2021 and 2020 (dollars in thousands):
|
For the three months ended September 30,
|
||||||||||||||||||||||||
|
2021
|
2020
|
|||||||||||||||||||||||
|
Average
Balance
|
Interest
Earned
or Paid
|
Average
Yield
or Cost
|
Average
Balance
|
Interest
Earned
or Paid
|
Average
Yield
or Cost
|
|||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Taxable securities
|
$
|
200,981
|
$
|
786
|
1.56
|
%
|
$
|
179,887
|
$
|
867
|
1.92
|
%
|
||||||||||||
|
Tax-exempt securities (1)
|
172,372
|
777
|
2.32
|
137,351
|
861
|
3.23
|
||||||||||||||||||
|
Commercial loans (2)
|
873,248
|
8,055
|
3.61
|
955,695
|
9,480
|
3.88
|
||||||||||||||||||
|
PPP loans (3)
|
133,413
|
3,104
|
9.10
|
346,073
|
2,067
|
2.34
|
||||||||||||||||||
|
Residential mortgage loans
|
123,574
|
1,039
|
3.36
|
175,978
|
1,604
|
3.64
|
||||||||||||||||||
|
Consumer loans
|
54,591
|
563
|
4.09
|
67,549
|
703
|
4.14
|
||||||||||||||||||
|
Federal Home Loan Bank stock
|
11,558
|
44
|
1.51
|
11,558
|
100
|
3.41
|
||||||||||||||||||
|
Federal funds sold and other short-term investments
|
1,234,420
|
474
|
0.15
|
541,981
|
140
|
0.10
|
||||||||||||||||||
|
Total interest earning assets (1)
|
2,804,157
|
14,842
|
2.12
|
2,416,072
|
15,822
|
2.62
|
||||||||||||||||||
|
Noninterest earning assets:
|
||||||||||||||||||||||||
|
Cash and due from banks
|
39,725
|
35,737
|
||||||||||||||||||||||
|
Other
|
104,782
|
102,389
|
||||||||||||||||||||||
|
Total assets
|
$
|
2,948,664
|
$
|
2,554,198
|
||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Interest bearing demand
|
$
|
723,516
|
$
|
49
|
0.03
|
%
|
$
|
587,356
|
$
|
78
|
0.05
|
%
|
||||||||||||
|
Savings and money market accounts
|
817,307
|
60
|
0.03
|
743,612
|
121
|
0.07
|
||||||||||||||||||
|
Time deposits
|
99,312
|
100
|
0.40
|
128,551
|
422
|
1.31
|
||||||||||||||||||
|
Borrowings:
|
||||||||||||||||||||||||
|
Other borrowed funds
|
79,565
|
325
|
1.60
|
72,057
|
364
|
1.97
|
||||||||||||||||||
|
Long-term debt
|
1,345
|
12
|
3.42
|
20,619
|
163
|
3.10
|
||||||||||||||||||
|
Total interest bearing liabilities
|
1,721,045
|
546
|
0.13
|
1,552,195
|
1,148
|
0.29
|
||||||||||||||||||
|
Noninterest bearing liabilities:
|
||||||||||||||||||||||||
|
Noninterest bearing demand accounts
|
964,908
|
755,990
|
||||||||||||||||||||||
|
Other noninterest bearing liabilities
|
12,717
|
14,311
|
||||||||||||||||||||||
|
Shareholders' equity
|
249,994
|
231,702
|
||||||||||||||||||||||
|
Total liabilities and shareholders' equity
|
$
|
2,948,664
|
$
|
2,554,198
|
||||||||||||||||||||
|
Net interest income
|
$
|
14,296
|
$
|
14,674
|
||||||||||||||||||||
|
Net interest spread (1)
|
1.99
|
%
|
2.33
|
%
|
||||||||||||||||||||
|
Net interest margin (1)
|
2.04
|
%
|
2.43
|
%
|
||||||||||||||||||||
|
Ratio of average interest earning assets to average interest bearing liabilities
|
162.93
|
%
|
155.66
|
%
|
||||||||||||||||||||
| (1) |
Yields are presented on a tax equivalent basis using an assumed tax rate of 21% at September 30, 2021 and 2020.
|
| (2) |
Includes loan fees of $103,000 and $152,000 for the three months ended September 30, 2021 and 2020, respectively. Includes average nonaccrual loans of approximately $426,000 and $196,000
for the three months ended September 30, 2021 and 2020, respectively. Excludes PPP loans.
|
| (3) |
Includes loan fees of $2.8 million and $1.2 million for the three months ended September 30, 2021 and 2020, respectively.
|
The following table shows an analysis of net interest margin for the nine month periods ended September 30, 2021 and 2020 (dollars in thousands):
|
For the nine months ended September 30,
|
||||||||||||||||||||||||
|
2021
|
2020
|
|||||||||||||||||||||||
|
Average
Balance
|
Interest
Earned
or Paid
|
Average
Yield
or Cost
|
Average
Balance
|
Interest
Earned
or Paid
|
Average
Yield
or Cost
|
|||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Taxable securities
|
$
|
195,867
|
$
|
2,365
|
1.61
|
%
|
$
|
184,809
|
$
|
2,882
|
2.08
|
%
|
||||||||||||
|
Tax-exempt securities (1)
|
145,571
|
2,295
|
2.71
|
132,471
|
2,607
|
3.38
|
||||||||||||||||||
|
Commercial loans (2)
|
906,493
|
25,590
|
3.72
|
1,035,247
|
31,882
|
4.06
|
||||||||||||||||||
|
PPP loans (3)
|
206,941
|
8,690
|
5.54
|
203,875
|
3,682
|
2.38
|
||||||||||||||||||
|
Residential mortgage loans
|
136,435
|
3,526
|
3.44
|
190,782
|
5,275
|
3.69
|
||||||||||||||||||
|
Consumer loans
|
56,373
|
1,724
|
4.09
|
71,732
|
2,354
|
4.38
|
||||||||||||||||||
|
Federal Home Loan Bank stock
|
11,558
|
162
|
1.84
|
11,558
|
339
|
3.86
|
||||||||||||||||||
|
Federal funds sold and other short-term investments
|
1,012,179
|
948
|
0.12
|
346,900
|
802
|
0.30
|
||||||||||||||||||
|
Total interest earning assets (1)
|
2,671,417
|
45,300
|
2.28
|
2,177,374
|
49,823
|
3.07
|
||||||||||||||||||
|
Noninterest earning assets:
|
||||||||||||||||||||||||
|
Cash and due from banks
|
35,084
|
30,572
|
||||||||||||||||||||||
|
Other
|
102,849
|
96,605
|
||||||||||||||||||||||
|
Total assets
|
$
|
2,809,350
|
$
|
2,304,551
|
||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Interest bearing demand
|
$
|
670,029
|
$
|
122
|
0.02
|
%
|
$
|
510,181
|
$
|
356
|
0.09
|
%
|
||||||||||||
|
Savings and money market accounts
|
811,381
|
183
|
0.03
|
698,097
|
1,050
|
0.20
|
||||||||||||||||||
|
Time deposits
|
103,271
|
428
|
0.55
|
141,762
|
1,712
|
1.62
|
||||||||||||||||||
|
Borrowings:
|
||||||||||||||||||||||||
|
Other borrowed funds
|
70,623
|
1,005
|
1.88
|
68,610
|
1,069
|
2.06
|
||||||||||||||||||
|
Long-term debt
|
14,123
|
319
|
2.98
|
20,619
|
612
|
3.90
|
||||||||||||||||||
|
Total interest bearing liabilities
|
1,669,427
|
2,057
|
0.16
|
1,439,269
|
4,799
|
0.44
|
||||||||||||||||||
|
Noninterest bearing liabilities:
|
||||||||||||||||||||||||
|
Noninterest bearing demand accounts
|
881,177
|
625,759
|
||||||||||||||||||||||
|
Other noninterest bearing liabilities
|
13,535
|
13,327
|
||||||||||||||||||||||
|
Shareholders' equity
|
245,211
|
226,196
|
||||||||||||||||||||||
|
Total liabilities and shareholders' equity
|
$
|
2,809,350
|
$
|
2,304,551
|
||||||||||||||||||||
|
Net interest income
|
$
|
43,243
|
$
|
45,024
|
||||||||||||||||||||
|
Net interest spread (1)
|
2.12
|
%
|
2.63
|
%
|
||||||||||||||||||||
|
Net interest margin (1)
|
2.18
|
%
|
2.77
|
%
|
||||||||||||||||||||
|
Ratio of average interest earning assets to average interest bearing liabilities
|
160.02
|
%
|
151.28
|
%
|
||||||||||||||||||||
| (1) |
Yields are presented on a tax equivalent basis using an assumed tax rate of 21% at September 30, 2021 and 2020.
|
| (2) |
Includes loan fees of $628,000 and $612,000 for the nine months ended September 30, 2021 and 2020, respectively. Includes average nonaccrual loans of approximately $472,000 and $2.8
million for the nine months ended September 30, 2021 and 2020, respectively. Excludes PPP loans.
|
| (3) |
Includes loan fees of $7.1 million and $2.1 million for the nine months ended September 30, 2021 and 2020, respectively.
|
The following table presents the dollar amount of changes in net interest income due to changes in volume and rate (dollars in thousands):
|
For the three months ended September 30,
2021 vs 2020
Increase (Decrease) Due to
|
For the nine months ended September 30,
2021 vs 2020
Increase (Decrease) Due to
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
|||||||||||||||||||
|
Interest income
|
||||||||||||||||||||||||
|
Taxable securities
|
$
|
94
|
$
|
(175
|
)
|
$
|
(81
|
)
|
$
|
164
|
$
|
(681
|
)
|
$
|
(517
|
)
|
||||||||
|
Tax-exempt securities
|
255
|
(339
|
)
|
(84
|
)
|
338
|
(650
|
)
|
(312
|
)
|
||||||||||||||
|
Commercial loans, excluding PPP loans
|
(786
|
)
|
(639
|
)
|
(1,425
|
)
|
(3,767
|
)
|
(2,525
|
)
|
(6,292
|
)
|
||||||||||||
|
PPP loans
|
(1,868
|
)
|
2,905
|
1,037
|
56
|
4,952
|
5,008
|
|||||||||||||||||
|
Residential mortgage loans
|
(448
|
)
|
(117
|
)
|
(565
|
)
|
(1,423
|
)
|
(326
|
)
|
(1,749
|
)
|
||||||||||||
|
Consumer loans
|
(134
|
)
|
(6
|
)
|
(140
|
)
|
(484
|
)
|
(146
|
)
|
(630
|
)
|
||||||||||||
|
Federal Home Loan Bank stock
|
—
|
(56
|
)
|
(56
|
)
|
—
|
(177
|
)
|
(177
|
)
|
||||||||||||||
|
Federal funds sold and other short-term investments
|
240
|
94
|
334
|
828
|
(682
|
)
|
146
|
|||||||||||||||||
|
Total interest income
|
(2,647
|
)
|
1,667
|
(980
|
)
|
(4,288
|
)
|
(235
|
)
|
(4,523
|
)
|
|||||||||||||
|
Interest expense
|
||||||||||||||||||||||||
|
Interest bearing demand
|
$
|
15
|
$
|
(44
|
)
|
$
|
(29
|
)
|
$
|
87
|
$
|
(321
|
)
|
(234
|
)
|
|||||||||
|
Savings and money market accounts
|
11
|
(72
|
)
|
(61
|
)
|
147
|
(1,014
|
)
|
(867
|
)
|
||||||||||||||
|
Time deposits
|
(80
|
)
|
(242
|
)
|
(322
|
)
|
(376
|
)
|
(908
|
)
|
(1,284
|
)
|
||||||||||||
|
Other borrowed funds
|
34
|
(73
|
)
|
(39
|
)
|
30
|
(94
|
)
|
(64
|
)
|
||||||||||||||
|
Long-term debt
|
(166
|
)
|
15
|
(151
|
)
|
(167
|
)
|
(126
|
)
|
(293
|
)
|
|||||||||||||
|
Total interest expense
|
(186
|
)
|
(416
|
)
|
(602
|
)
|
(279
|
)
|
(2,463
|
)
|
(2,742
|
)
|
||||||||||||
|
Net interest income
|
$
|
(2,461
|
)
|
$
|
2,083
|
$
|
(378
|
)
|
$
|
(4,009
|
)
|
$
|
2,228
|
$
|
(1,781
|
)
|
||||||||
Provision for Loan Losses: The
provision for loan losses for the three months ended September 30, 2021 was a benefit of $550,000 compared to an expense of $500,000 for the same period in 2020. The provision for loan losses for the first nine months of 2021 was a benefit of
$1.3 million compared to an expense of $2.2 million for the same period in 2020. The provisions for loan losses for the 2020 periods were impacted by additional qualitative adjustments made to provide for estimated losses associated with the
COVID-19 pandemic as well as a $4.1 million charge-off taken in June 2020 related to a single loan relationship with a movie theater business for which the underlying assets were sold through bankruptcy proceedings, some of which was specifically
reserved for previously. No other loans of this industry type remain in our portfolio. This was partially offset by continued strong asset quality metrics and loan portfolio contraction. When excluding PPP loans, which are 100% guaranteed by
the SBA, total loans decreased by $9.6 million in the three months ended September 30, 2021. This was a partial factor in determining the provision for loan losses in the third quarter of 2021. Net loan recoveries were $276,000 in the three
months ended September 30, 2021 compared to net loan recoveries of $203,000 in the same period in 2020.
Gross loan recoveries were $298,000 for the three months ended September 30, 2021 and $227,000 for the same period in 2020. In the three months ended September 30, 2021, we had $22,000 in gross
loan charge-offs, compared to $24,000 in the same period in 2020. For the nine months ended September 30, 2021, we experienced gross loan recoveries of $526,000 compared to $1.4 million for the same period in 2020. Gross charge-offs for the nine
months ended September 30, 2021 were $102,000 compared to $4.2 million for the same period in 2020.
The amounts of loan loss provision in both the most recent quarter and comparable prior year period were the result of establishing our allowance for loan losses at levels believed necessary
based upon our methodology for determining the adequacy of the allowance. More information about our allowance for loan losses and our methodology for establishing its level may be found under the heading "Allowance for Loan Losses" below.
Noninterest Income: Noninterest
income for the three and nine month periods ended September 30, 2021 was $5.6 million and $18.3 million compared to $6.1 million and $16.9 million for the same periods in 2020, respectively. The components of noninterest income are shown in the
table below (in thousands):
|
Three Months
Ended
September 30,
2021
|
Three Months
Ended
September 30,
2020
|
Nine Months
Ended
September 30,
2021
|
Nine Months
Ended
September 30,
2020
|
|||||||||||||
|
Service charges and fees on deposit accounts
|
$
|
1,183
|
$
|
987
|
$
|
3,240
|
$
|
2,957
|
||||||||
|
Net gains on mortgage loans
|
851
|
1,546
|
4,177
|
4,045
|
||||||||||||
|
Trust fees
|
1,079
|
921
|
3,217
|
2,801
|
||||||||||||
|
ATM and debit card fees
|
1,676
|
1,542
|
4,844
|
4,199
|
||||||||||||
|
Bank owned life insurance (“BOLI”) income
|
260
|
215
|
787
|
688
|
||||||||||||
|
Investment services fees
|
330
|
328
|
1,146
|
980
|
||||||||||||
|
Other income
|
263
|
553
|
938
|
1,234
|
||||||||||||
|
Total noninterest income
|
$
|
5,642
|
$
|
6,092
|
$
|
18,349
|
$
|
16,904
|
||||||||
Net gains on mortgage loans were down $695,000 in the three months ended September 30, 2021 and were up $132,000 in the nine months ended September 30, 2021 compared to the same periods in 2020
as a result of changes in the volume of loans originated for sale. In the past two years volumes have been high due to a lower interest rate environment, spurring more refinancing of fixed rate loans which we sell into the secondary market.
Mortgage loans originated for sale in the three months ended September 30, 2021 were $21.3 million, compared to $40.8 million in the same period in 2020. For the first nine months of 2021, mortgages originated for sale were $107.8 million,
compared to $120.2 million for the same period in 2020.
Trust fees were up $158,000 in the three months ended September 30, 2021 and were up $416,000 in the nine months ended September 30, 2021 compared to the three and nine months ended September 30,
2020, respectively. The increase for the three and nine months ended September 30, 2021 was largely due to the 2020 periods reflecting lower market valuations of trust assets resulting from the COVID-19 shutdown of the economy. ATM and debit card
fees were also up in the three and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020, respectively, due to reduced volume of usage by our customers during the COVID-19 shutdown of the economy in
the 2020 periods. These volumes and resulting income have returned to more normal levels in the 2021 periods. Service charges on deposit accounts increased in the three and nine months ended September 30, 2021 as compared to the same periods in
2020 as customers returned to more normal behaviors in 2021 after having curtailed spending in 2020 due to uncertainty related to the COVID-19 pandemic. Additionally, customers’ account balances in 2020 were bolstered by economic impact payments,
thereby resulting in fewer overdrafts.
Noninterest Expense: Noninterest
expense increased by $17,000 to $11.6 million for the three month period ended September 30, 2021 as compared to the same period in 2020. Noninterest expense increased by $994,000 to $34.8 million for the nine months ended September 30, 2021
compared to $33.8 million for the same period in 2020. The components of noninterest expense are shown in the table below (in thousands):
|
Three Months
Ended
September 30,
2021
|
Three Months
Ended
September 30,
2020
|
Nine Months
Ended
September 30,
2021
|
Nine Months
Ended
September 30,
2020
|
|||||||||||||
|
Salaries and benefits
|
$
|
6,278
|
$
|
6,480
|
$
|
19,192
|
$
|
18,937
|
||||||||
|
Occupancy of premises
|
992
|
1,026
|
3,023
|
2,984
|
||||||||||||
|
Furniture and equipment
|
1,014
|
967
|
2,929
|
2,704
|
||||||||||||
|
Legal and professional
|
272
|
260
|
768
|
798
|
||||||||||||
|
Marketing and promotion
|
175
|
239
|
525
|
716
|
||||||||||||
|
Data processing
|
839
|
761
|
2,602
|
2,309
|
||||||||||||
|
FDIC assessment
|
204
|
131
|
532
|
207
|
||||||||||||
|
Interchange and other card expense
|
391
|
367
|
1,137
|
1,041
|
||||||||||||
|
Bond and D&O insurance
|
112
|
104
|
334
|
313
|
||||||||||||
|
Outside services
|
510
|
491
|
1,434
|
1,322
|
||||||||||||
|
Other noninterest expense
|
763
|
707
|
2,277
|
2,428
|
||||||||||||
|
Total noninterest expense
|
$
|
11,550
|
$
|
11,533
|
$
|
34,753
|
$
|
33,759
|
||||||||
Most categories of noninterest expense were relatively unchanged compared to the three months ended September 30, 2020 due to our ongoing efforts to manage expenses and scale our operations. Our
largest component of noninterest expense, salaries and benefits, decreased by $202,000 in the three months ended September 30, 2021 from same period in 2020. This decrease is primarily due to a decrease in variable-based compensation due to lower
mortgage origination volume and a reduction in 401k matching contributions. Salaries and benefits increased by $255,000 for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 due primarily to a higher
level of stock-based compensation and variable-based compensation tied to brokerage services. The table below identifies the primary components of salaries and benefits (in thousands):
|
Three Months
Ended
September 30,
2021
|
Three Months
Ended
September 30,
2020
|
Nine Months
Ended
September 30,
2021
|
Nine Months
Ended
September 30,
2020
|
|||||||||||||
|
Salaries and other compensation
|
$ |
5,708
|
$ |
5,678
|
$ |
17,174
|
$ |
16,919
|
||||||||
|
Salary deferral from commercial loan originations
|
(204
|
)
|
(229
|
)
|
(825
|
)
|
(899
|
)
|
||||||||
|
Bonus accrual
|
289
|
296
|
688
|
619
|
||||||||||||
|
Mortgage production - variable comp
|
187
|
316
|
903
|
834
|
||||||||||||
|
401k matching contributions
|
98
|
194
|
327
|
464
|
||||||||||||
|
Medical insurance costs
|
200
|
225
|
925
|
1,000
|
||||||||||||
|
Total salaries and benefits
|
$
|
6,278
|
$
|
6,480
|
$
|
19,192
|
$
|
18,937
|
||||||||
Occupancy expenses were down $34,000 in the three months ended September 30, 2021 and were up $39,000 in the nine months ended September 30, 2021 compared to the same periods in 2020 due to
fluctuations in maintenance costs incurred. Furniture and equipment expenses were up $47,000 in the three months ended September 30, 2021 and were up $225,000 in the nine months ended September 30, 2021 compared to the same periods in 2020 due to
costs associated with equipment and service contracts primarily to improve information security.
Our FDIC assessment costs increased by $73,000 in the three months ended September 30, 2021 compared to the same period in 2020 due to the significant increase in deposit balances between these
periods. In January 2019, the FDIC notified us that the Bank would receive an assessment credit of approximately $438,000 to offset future assessment as the FDIC Deposit Insurance Fund had exceeded its target ratio of 1.35%. Assessment credits
totaling $172,000 were applied in the nine months ended September 30, 2020, contributing to the increase in FDIC assessment costs of $325,000 in the first nine months of 2021 compared to the same period in 2020.
Data processing costs were up $78,000 and $293,000 in the three and nine month periods ended September 30, 2021, respectively, compared to the same periods in 2020 due to higher usage of
electronic banking services and debit cards by our customers.
Outside services were up $19,000 and $112,000 in the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020 due to certain increased vendor costs
including a periodic business process review of our customer onboarding process.
Federal Income Tax Expense: We
recorded $1.7 million and $5.3 million in federal income tax expense for the three and nine month periods ended September 30, 2021 compared to $1.6 million and $4.8 million for the same periods in 2020. Our effective tax rates for the three and
nine month periods ended September 30, 2021 were 19.42% and 18.98%, respectively, compared to 18.47% and 18.48% for the same periods in 2020.
FINANCIAL CONDITION
Total assets were $2.90 billion at September 30, 2021, an increase of $259.5 million from December 31, 2020. This change reflected increases of $486.2 million in cash and cash equivalents, $4.6
million in debt securities available for sale, $58.1 million in debt securities held to maturity, and $10.3 in bank-owned life insurance, partially offset by a decrease of $292.7 million in our loan portfolio including PPP loans. Total deposits
increased by $254.6 million at September 30, 2021 compared to December 31, 2020. FHLB advances increased by $15 million from December 31, 2020 to September 30, 2021, while long term debt decreased by $20.6 million with the redemption of the
remaining trust preferred securities on July 7, 2021.
Cash and Cash Equivalents: Our cash
and cash equivalents, which include federal funds sold and short-term investments, were $1.27 billion at September 30, 2021 compared to $783.7 million at December 31, 2020. The increase in these balances primarily related to an increase in our
total deposits combined with a decrease in our loan portfolio.
Securities: Debt securities
available for sale were $241.5 million at September 30, 2021 compared to $236.8 million at December 31, 2020. The balance at September 30, 2021 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal
investments. Our held to maturity portfolio was $137.6 million at September 30, 2021 compared to $79.5 million at December 31, 2020. Our held to maturity portfolio is comprised of state, municipal and privately placed commercial bonds.
Portfolio Loans and Asset Quality:
Total portfolio loans decreased by $292.7 million in the first nine months of 2021 and were $1.14 billion at September 30, 2021 compared to $1.43 billion at December 31, 2020. During the first nine months of 2021, our commercial portfolio
decreased by $256.0 million. We originated a total of 1,000 PPP loans totaling $128.1 million in the nine months ended September 30, 2021 and received forgiveness proceeds in the amount of $279.9 million from the SBA in the same time period. As
a result, PPP loans decreased by $151.5 million during the first nine months of 2021. Excluding the PPP loans, our commercial loans decreased by $104.5 million in the first nine months of 2021 as customers substituted PPP loans for drawing on
their lines of credit. Our consumer portfolio decreased by $6.3 million and our residential mortgage portfolio decreased by $30.4 million in the first nine months of 2021.
Mortgage loans originated for portfolio are typically adjustable rate loans as well as fixed rate loans that conform to secondary market requirements and have a term of fifteen years or less.
Mortgage loans originated for portfolio in the first nine months of 2021 increased $1.1 million compared to the same period in 2020, from $29.3 million in the first nine months of 2020 to $30.4 million in the same period in 2021. However, this
increase in volume was not enough to offset paydowns on mortgage portfolio loans.
The volume of residential mortgage loans originated for sale in the first nine months of 2021 decreased $12.3 million compared to the same period in 2020. Residential mortgage loans originated
for sale were $107.8 million in the first nine months of 2021 compared to $120.2 million in the first nine months of 2020.
The following table shows our loan origination activity for loans to be held in portfolio during the first nine months of 2021 and 2020, broken out by loan type and also shows average originated
loan size (dollars in thousands):
|
Nine months ended September 30, 2021
|
Nine months ended September 30, 2020
|
|||||||||||||||||||||||
|
Portfolio
Originations
|
Percent of
Total
Originations
|
Average
Loan Size
|
Portfolio
Originations
|
Percent of
Total
Originations
|
Average
Loan Size
|
|||||||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||||||
|
Residential developed
|
$
|
6,369
|
1.4
|
%
|
$ |
490
|
$
|
3,035
|
0.5
|
%
|
$ |
217
|
||||||||||||
|
Unsecured to residential developers
|
—
|
—
|
—
|
170
|
—
|
170
|
||||||||||||||||||
|
Vacant and unimproved
|
8,345
|
1.9
|
642
|
23,943
|
3.7
|
2,394
|
||||||||||||||||||
|
Commercial development
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Residential improved
|
75,223
|
16.9
|
607
|
45,463
|
7.0
|
425
|
||||||||||||||||||
|
Commercial improved
|
54,609
|
12.2
|
1,187
|
45,493
|
7.0
|
1,379
|
||||||||||||||||||
|
Manufacturing and industrial
|
24,962
|
5.6
|
960
|
12,098
|
1.9
|
432
|
||||||||||||||||||
|
Total commercial real estate
|
169,508
|
38.0
|
764
|
130,202
|
20.1
|
675
|
||||||||||||||||||
|
Commercial and industrial, excluding PPP
|
77,019
|
17.3
|
770
|
112,312
|
17.3
|
913
|
||||||||||||||||||
|
PPP loans
|
128,052
|
28.7
|
127
|
346,276
|
53.4
|
199
|
||||||||||||||||||
|
Total commercial and commercial real estate
|
374,579
|
84.0
|
282
|
588,790
|
90.9
|
287
|
||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||
|
Residential mortgage
|
30,415
|
6.8
|
295
|
29,327
|
4.5
|
333
|
||||||||||||||||||
|
Unsecured
|
—
|
—
|
—
|
21
|
—
|
11
|
||||||||||||||||||
|
Home equity
|
39,884
|
8.9
|
126
|
28,727
|
4.4
|
112
|
||||||||||||||||||
|
Other secured
|
1,452
|
0.3
|
25
|
1,003
|
0.2
|
15
|
||||||||||||||||||
|
Total consumer
|
71,751
|
16.0
|
150
|
59,078
|
9.1
|
142
|
||||||||||||||||||
|
Total loans
|
$
|
446,330
|
100.0
|
%
|
$ |
247
|
$
|
647,868
|
100.0
|
%
|
$ |
262
|
||||||||||||
The following table shows a breakout of our commercial loan activity during the first nine months of 2021 and 2020 (dollars in thousands):
|
Nine Months
Ended
September 30,
2021
|
Nine Months
Ended
September 30,
2020
|
|||||||
|
Commercial loans originated
|
$
|
374,579
|
$
|
588,790
|
||||
|
Repayments of commercial loans
|
(543,287
|
)
|
(288,049
|
)
|
||||
|
Change in undistributed - available credit
|
(87,282
|
)
|
(86,930
|
)
|
||||
|
Net increase (decrease) in total commercial loans
|
$
|
(255,990
|
)
|
$
|
213,811
|
|||
Overall, the commercial loan portfolio decreased $256.0 million in the first nine months of 2021. Our commercial and industrial portfolio decreased by $231.0 million while our commercial real
estate loans decreased by $25.0 million. As discussed above, included in the commercial production for the first nine months of 2021 is $128.1 million in PPP loans. Our overall production of commercial loans decreased by $214.2 million from
$588.8 million in the first nine months of 2020 to $374.6 million in the same period of 2021 mostly due to the significantly lower production of PPP loans (down $218.2 million). Beyond the effect of the PPP loan production, our commercial and
industrial portfolio was impacted by fluctuations in floor plan loan lines to vehicle dealers. The decline in borrowings in this sector was primarily the result of our dealers selling through their inventory but not being able to buy new inventory
due to supply shortages from the COVID-19 shutdown of the economy.
Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately 84.6% and 85.2% of the total loan portfolio at September 30, 2021 and December 31,
2020, respectively. Residential mortgage and consumer loans comprised approximately 15.4% and 14.8% of total loans at September 30, 2021 and December 31, 2020, respectively.
A further breakdown of the composition of the loan portfolio is shown in the table below (in thousands):
|
September 30, 2021
|
December 31, 2020
|
|||||||||||||||
|
Balance
|
Percent of
Total Loans
|
Balance
|
Percent of
Total Loans
|
|||||||||||||
|
Commercial real estate: (1)
|
||||||||||||||||
|
Residential developed
|
$
|
6,184
|
0.5
|
%
|
$
|
8,549
|
0.6
|
%
|
||||||||
|
Unsecured to residential developers
|
19
|
—
|
—
|
—
|
||||||||||||
|
Vacant and unimproved
|
36,616
|
3.2
|
47,122
|
3.3
|
||||||||||||
|
Commercial development
|
403
|
—
|
857
|
—
|
||||||||||||
|
Residential improved
|
100,608
|
8.9
|
114,392
|
8.0
|
||||||||||||
|
Commercial improved
|
267,910
|
23.6
|
266,006
|
18.6
|
||||||||||||
|
Manufacturing and industrial
|
115,470
|
10.2
|
115,247
|
8.1
|
||||||||||||
|
Total commercial real estate
|
527,210
|
46.4
|
552,173
|
38.6
|
||||||||||||
|
Commercial and industrial, excluding PPP
|
356,812
|
31.4
|
436,331
|
30.6
|
||||||||||||
|
PPP loans
|
77,571
|
6.8
|
229,079
|
16.0
|
||||||||||||
|
Total commercial and commercial real estate
|
961,593
|
84.6
|
1,217,583
|
85.2
|
||||||||||||
|
Consumer
|
||||||||||||||||
|
Residential mortgage
|
119,106
|
10.5
|
149,556
|
10.5
|
||||||||||||
|
Unsecured
|
103
|
—
|
161
|
—
|
||||||||||||
|
Home equity
|
52,127
|
4.6
|
57,975
|
4.0
|
||||||||||||
|
Other secured
|
3,684
|
0.3
|
4,056
|
0.3
|
||||||||||||
|
Total consumer
|
175,020
|
15.4
|
211,748
|
14.8
|
||||||||||||
|
Total loans
|
$
|
1,136,613
|
100.0
|
%
|
$
|
1,429,331
|
100.0
|
%
|
||||||||
| (1) |
Includes both owner occupied and non-owner occupied commercial real estate.
|
Commercial real estate loans accounted for 46.4% and 38.6% of the total loan portfolio at September 30, 2021 and December 31, 2020, respectively, and consisted primarily of loans to business
owners and developers of owner and non-owner occupied commercial properties and loans to developers of single and multi-family residential properties. In the table above, we show our commercial real estate portfolio by loans secured by residential
and commercial real estate, and by stage of development. Improved loans are generally secured by properties that are under construction or completed and placed in use. Development loans are secured by properties that are in the process of
development or fully developed. Vacant and unimproved loans are secured by raw land for which development has not yet begun and agricultural land.
Our consumer residential mortgage loan portfolio, which also includes residential construction loans made to individual homeowners, comprised 10.5% of portfolio loans at September 30, 2021 and
10.5% at December 31, 2020. We expect to continue to retain in our loan portfolio certain types of residential mortgage loans (primarily high quality, low loan-to-value loans) in an effort to continue to diversify our credit risk and deploy our
excess liquidity.
Our portfolio of other consumer loans includes loans secured by personal property and home equity fixed term and line of credit loans. This portfolio decreased by $6.3 million to $55.9 million at
September 30, 2021 from $62.2 million at December 31, 2020, due primarily to a decrease in home equity loans. These other consumer loans comprised 4.9% of our portfolio loans at September 30, 2021 and 4.3% at December 31, 2020.
Our loan portfolio is reviewed regularly by our senior management, our loan officers, and an internal loan review team that is independent of our loan originators and credit administration. An
administrative loan committee consisting of senior management and seasoned lending and collections personnel meets quarterly to manage our internal watch list and proactively manage high risk loans.
When reasonable doubt exists concerning collectability of interest or principal of one of our loans, the loan is placed in nonaccrual status. Any interest previously accrued but not collected is
reversed and charged against current earnings.
Nonperforming assets are comprised of nonperforming loans, foreclosed assets and repossessed assets. At September 30, 2021, nonperforming assets totaled $2.8 million compared to $3.1 million at
December 31, 2020. There were no additions to other real estate owned in the first nine months of 2021 or in the first nine months of 2020. At September 30, 2021, there were no loans in foreclosure, so we expect there to be few, if any, additions
to other real estate owned in the remainder of 2021. Proceeds from sales of foreclosed properties were $170,000 in the first nine months of 2021, resulting in net realized loss on sales of $20,000. Proceeds from sales of foreclosed properties
were $92,000 in the first nine months of 2020 with no realized gains or losses.
Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. Nonperforming loans at September 30, 2021 consisted of $332,000 of commercial
real estate loans and $88,000 of consumer and residential mortgage loans. As of September 30, 2021, nonperforming loans totaled $420,000, or 0.04% of total portfolio loans, compared to $533,000, or 0.04% of total portfolio loans, at December 31,
2020.
Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $2.3 million at September 30, 2021 and $2.5 million at December 31, 2020. The entire
balance at September 30, 2021 was comprised of one commercial real estate property. All properties acquired through or in lieu of foreclosure are initially transferred at their fair value less estimated costs to sell and then evaluated monthly for
impairment after transfer using a lower of cost or market approach. Updated property valuations are obtained at least annually on all foreclosed assets.
The following table shows the composition and amount of our nonperforming assets (dollars in thousands):
|
September 30,
2021
|
December 31,
2020
|
|||||||
|
Nonaccrual loans
|
$
|
420
|
$
|
533
|
||||
|
Loans 90 days or more delinquent and still accruing
|
—
|
—
|
||||||
|
Total nonperforming loans (NPLs)
|
420
|
533
|
||||||
|
Foreclosed assets
|
2,343
|
2,537
|
||||||
|
Repossessed assets
|
—
|
—
|
||||||
|
Total nonperforming assets (NPAs)
|
$
|
2,763
|
$
|
3,070
|
||||
|
NPLs to total loans
|
0.04
|
%
|
0.04
|
%
|
||||
|
NPAs to total assets
|
0.10
|
%
|
0.12
|
%
|
||||
The following table shows the composition and amount of our troubled debt restructurings (TDRs) at September 30, 2021 and December 31, 2020 (dollars in thousands):
|
September 30, 2021
|
December 31, 2020
|
|||||||||||||||||||||||
|
Commercial
|
Consumer
|
Total
|
Commercial
|
Consumer
|
Total
|
|||||||||||||||||||
|
Performing TDRs
|
$
|
1,802
|
$
|
3,296
|
$
|
5,098
|
$
|
4,959
|
$
|
4,049
|
$
|
9,008
|
||||||||||||
|
Nonperforming TDRs (1)
|
332
|
—
|
332
|
437
|
—
|
437
|
||||||||||||||||||
|
Total TDRs
|
$
|
2,134
|
$
|
3,296
|
$
|
5,430
|
$
|
5,396
|
$
|
4,049
|
$
|
9,445
|
||||||||||||
|
(1)
|
Included in nonperforming asset table above
|
We had a total of $5.4 million and $9.4 million of loans whose terms have been modified in TDRs as of September 30, 2021 and December 31, 2020, respectively. These loans may have involved the
restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market
rates for comparable credit. For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be
successful and whether cash flows will be sufficient to support the restructured debt. An analysis is also performed to determine whether the restructured loan should be on accrual status. Generally, if the loan is on accrual at the time of
restructure, it will remain on accrual after the restructuring. In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms.
After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status. In situations where there is a subsequent modification or renewal and the loan is brought to market
terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired designations may be removed. Total TDRs decreased by $4.0 million from December 31, 2020
to September 30, 2021 due to payoffs and paydowns on existing TDRs. There were 59 loans identified as TDRs at September 30, 2021 compared to 76 loans at December 31, 2020.
As with other impaired loans, an allowance for loan loss is estimated for each TDR based on the most likely source of repayment for each loan. For impaired commercial real estate loans that are
collateral dependent, the allowance is computed based on the fair value of the underlying collateral, less estimated costs to sell. For impaired commercial loans where repayment is expected from cash flows from business operations, the allowance
is computed based on a discounted cash flow computation. Certain groups of TDRs, such as residential mortgages, have common characteristics and for them the allowance is computed based on a discounted cash flow computation on the change in
weighted rate for the pool. The allowance allocations for commercial TDRs where we have reduced the contractual interest rate are computed by measuring cash flows using the new payment terms discounted at the original contractual rate.
On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with
Customers Affected by the Coronavirus”. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to
explain that in consultation with the FASB staff that the federal banking agencies conclude that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program
are not Troubled Debt Restructurings (“TDRs”). The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified
that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. The Economic Aid Act passed by Congress on December 27, 2020 extended the date for such modifications to not be treated as TDRs to the earlier of
60 days after date on which the national emergency declared as a result of COVID-19 is terminated or January 1, 2022. Through September 30, 2021, the Bank had applied this guidance and modified 726 individual loans with aggregate principal
balances totaling $337.2 million. The majority of these modifications involved three-month extensions. By September 30, 2021, all of these modifications had expired and the loans returned to their contractual payment terms.
Allowance for loan losses: The
allowance for loan losses at September 30, 2021 was $16.5 million, a decrease of $876,000 from December 31, 2020. The allowance for loan losses represented 1.45% of total portfolio loans at September 30, 2021 and 1.22% at December 31, 2020. The
ratios at September 30, 2021 and December 31, 2020 are impacted by $77.6 million and $229.1 million of remaining PPP loans which are fully guaranteed and receive no allowance allocation. The ratios excluding these loans were 1.56% and 1.45% at
September 30, 2021 and December 31, 2020, respectively. The allowance for loan losses to nonperforming loan coverage ratio increased from 3266.0% at December 31, 2020 to 3936.2% at September 30, 2021.
The table below shows the changes in certain credit metrics over the past five quarters (dollars in thousands):
|
Quarter Ended
September 30,
2021
|
Quarter Ended
June 30,
2021
|
Quarter Ended
March 31,
2021
|
Quarter Ended
December 31,
2020
|
Quarter Ended
September 30,
2020
|
||||||||||||||||
|
Nonperforming loans
|
$ |
420
|
$ |
433
|
$ |
525
|
$ |
533
|
$ |
195
|
||||||||||
|
Other real estate owned and repo assets
|
2,343
|
2,343
|
2,371
|
2,537
|
2,624
|
|||||||||||||||
|
Total nonperforming assets
|
2,763
|
2,776
|
2,896
|
3,070
|
2,819
|
|||||||||||||||
|
Net charge-offs (recoveries)
|
(276
|
)
|
(104
|
)
|
(44
|
)
|
(50
|
)
|
(203
|
)
|
||||||||||
|
Total delinquencies
|
437
|
126
|
217
|
581
|
524
|
|||||||||||||||
At September 30, 2021, we had net loan recoveries in twenty-five of the past twenty-seven quarters. Our total delinquencies were $437,000 at September 30, 2021 and $581,000 at December 31,
2020. Our delinquency percentage at September 30, 2021 was 0.04%.
These factors all impact our necessary level of allowance for loan losses and our provision for loan losses. The allowance for loan losses decreased $876,000 in the first nine months of 2021. We
recorded a provision for loan losses benefit of $1.3 million for the nine months ended September 30, 2021 compared to $2.2 million in provision expense for the same period of 2020. Net loan recoveries were $424,000 for the nine months ended
September 30, 2021, compared to net loan charge-offs of $2.8 million for the same period in 2020. The ratio of net charge-offs (recoveries) to average loans was -0.04% on an annualized basis for the first nine months of 2021 and 0.25% for the first
nine months of 2020.
Despite the large charge-off taken in the second quarter of 2020, we are encouraged by the reduced level of gross charge-offs over recent quarters. We do, however, recognize that future
charge-offs and resulting provisions for loan losses are expected to be impacted by the timing and extent of changes in the overall economy and the real estate markets.
Our allowance for loan losses is maintained at a level believed appropriate based upon our assessment of the probable estimated losses inherent in the loan portfolio. Our methodology for
measuring the appropriate level of allowance and related provision for loan losses relies on several key elements, which include specific allowances for loans considered impaired, general allowance for commercial loans not considered impaired based
upon applying our loan rating system, and general allocations based on historical trends for homogeneous loan groups with similar risk characteristics.
Overall, impaired loans declined by $5.2 million to $5.4 million at September 30, 2021 compared to $10.6 million at December 31, 2020. The specific allowance for impaired loans decreased
$636,000 to $574,000 at September 30, 2021, compared to $1.2 million at December 31, 2020. The specific allowance for impaired loans represented 10.6% of total impaired loans at September 30, 2021 and 11.4% at December 31, 2020.
The general allowance allocated to commercial loans that were not considered to be impaired was based upon the internal risk grade of such loans. We use a loan rating method based upon an eight
point system. Loans are stratified between real estate secured and non-real estate secured. The real estate secured portfolio is further stratified by the type of real estate. Each stratified portfolio is assigned a loss allocation factor. A
higher numerical grade assigned to a loan category generally results in a greater allocation percentage. Changes in risk grade of loans affect the amount of the allowance allocation.
The determination of our loss factors is based upon our actual loss history by loan grade and adjusted for significant factors that, in management's judgment, affect the collectability of the
portfolio as of the analysis date. We use a rolling 18 month actual net charge-off history as the base for our computation. Over the past few years, the 18 month period computations have reflected sizeable decreases in net charge-off experience.
We addressed this volatility in the qualitative factor considerations applied in our allowance for loan losses computation. We also considered the extended period of strong asset quality in assessing the overall qualitative component.
We also have considered the effect of COVID-19 on our loan borrowers and our local economy. While significant stimulus and mitigation efforts were expected to soften the impact, we believed a
downgrade to our economic qualitative factor was appropriate and we added 7 basis points to this qualitative factor at March 31, 2020. Additional allocations were provided in the second, third and fourth quarters of 2020. In the first quarter of
2021, this factor was decreased by 2 basis points in recognition of improved economic conditions but additional allocations were made to other factors for a net increase of 8 basis points in the quarter. In the second quarter 2021, we added 20
basis points to our consumer loan portfolio qualitative factors to address the risk that economic impact payments may be masking consumer delinquency and default. We maintained these qualitative factors in the third quarter of 2021.
Certain industry sectors have been more negatively impacted by the economic effects of COVID-19 than others such as hospitality, restaurants and sporting events. We believe our commercial
portfolio is adequately diversified, with our largest commercial concentrations in Real Estate, Rental and Leasing (28.6%), followed by Manufacturing (15.0%) and Retail Trade (8.1%).
The table below breaks down our commercial loan portfolio by industry type at September 30, 2021 and identifies the percentage of loans in each type that have a pass rating within our grading
system (4 or better) and criticized rating (5 or worse) (dollars in thousands):
|
September 30, 2021
|
||||||||||||||||||||||||
|
Excluding PPP
|
PPP Loans
|
Total
|
Percent of
Total Loans
|
Percent Grade
4 or Better
|
Percent Grade
5 or Worse
|
|||||||||||||||||||
|
Industry:
|
||||||||||||||||||||||||
|
Agricultural Products
|
$
|
41,605
|
$
|
394
|
$
|
41,999
|
4.37
|
%
|
98.71
|
%
|
1.29
|
%
|
||||||||||||
|
Mining and Oil Extraction
|
947
|
63
|
1,010
|
0.11
|
%
|
100.00
|
%
|
0.00
|
%
|
|||||||||||||||
|
Construction
|
68,309
|
8,803
|
77,112
|
8.02
|
%
|
98.60
|
%
|
1.40
|
%
|
|||||||||||||||
|
Manufacturing
|
128,466
|
16,682
|
145,148
|
15.09
|
%
|
97.51
|
%
|
2.49
|
%
|
|||||||||||||||
|
Wholesale Trade
|
61,267
|
704
|
61,971
|
6.44
|
%
|
100.00
|
%
|
0.00
|
%
|
|||||||||||||||
|
Retail Trade
|
75,009
|
2,744
|
77,753
|
8.09
|
%
|
99.89
|
%
|
0.11
|
%
|
|||||||||||||||
|
Transportation and Warehousing
|
43,367
|
3,998
|
47,365
|
4.93
|
%
|
98.11
|
%
|
1.89
|
%
|
|||||||||||||||
|
Information
|
682
|
323
|
1,005
|
0.10
|
%
|
37.21
|
%
|
62.79
|
%
|
|||||||||||||||
|
Finance and Insurance
|
32,592
|
187
|
32,779
|
3.41
|
%
|
100.00
|
%
|
0.00
|
%
|
|||||||||||||||
|
Real Estate and Rental and Leasing
|
274,304
|
900
|
275,204
|
28.62
|
%
|
99.77
|
%
|
0.23
|
%
|
|||||||||||||||
|
Professional, Scientific and Technical Services
|
7,042
|
3,241
|
10,283
|
1.07
|
%
|
97.77
|
%
|
2.23
|
%
|
|||||||||||||||
|
Management of Companies and Enterprises
|
—
|
—
|
—
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
|||||||||||||||
|
Administrative and Support Services
|
17,265
|
10,187
|
27,452
|
2.85
|
%
|
99.62
|
%
|
0.38
|
%
|
|||||||||||||||
|
Education Services
|
2,645
|
1,882
|
4,527
|
0.47
|
%
|
98.08
|
%
|
1.92
|
%
|
|||||||||||||||
|
Health Care and Social Assistance
|
50,709
|
16,366
|
67,075
|
6.98
|
%
|
100.00
|
%
|
0.00
|
%
|
|||||||||||||||
|
Arts, Entertainment and Recreation
|
7,720
|
473
|
8,193
|
0.85
|
%
|
96.01
|
%
|
3.99
|
%
|
|||||||||||||||
|
Accommodations and Food Services
|
40,830
|
6,326
|
47,156
|
4.90
|
%
|
86.85
|
%
|
13.15
|
%
|
|||||||||||||||
|
Other Services
|
31,265
|
4,296
|
35,561
|
3.70
|
%
|
99.47
|
%
|
0.53
|
%
|
|||||||||||||||
|
Total commercial loans
|
$
|
884,024
|
$
|
77,569
|
$
|
961,593
|
100.00
|
%
|
98.48
|
%
|
1.52
|
%
|
||||||||||||
Considering the change in our qualitative factors and our commercial loan portfolio balances, the general allowance allocated to commercial loans was $13.2 million at September 30, 2021 and $13.8
million at December 31, 2020. The qualitative component of our allowance allocated to commercial loans was $13.3 million at September 30, 2021, down $399,000 from $13.7 million at December 31, 2020.
Groups of homogeneous loans, such as residential real estate and open- and closed-end consumer loans, receive allowance allocations based on loan type. A rolling 12 month (four quarter)
historical loss experience period was applied to residential mortgage and consumer loan portfolios. As with commercial loans that are not considered impaired, the determination of the allowance allocation percentage is based principally on our
historical loss experience. These allocations are adjusted for consideration of general economic and business conditions, credit quality and delinquency trends, collateral values, and recent loss experience for these similar pools of loans. The
homogeneous loan allowance was $2.5 million at September 30, 2021 and $2.4 million at December 31, 2020.
The allowance allocations are not intended to imply limitations on usage of the allowance for loan losses. The entire allowance for loan losses is available for any loan losses without regard to
loan type.
Bank-Owned Life Insurance:
Bank-owned life insurance increased $10.3 million from December 31, 2020 to September 30, 2021 due to an additional $10.0 million in policies acquired in the second quarter of 2021 and earnings on the underlying policies.
Premises and Equipment: Premises
and equipment totaled $42.3 million at September 30, 2021, down $911,000 from $43.3 million at December 31, 2020.
Deposits and Other Borrowings: Total
deposits increased $254.6 million to $2.55 billion at September 30, 2021, as compared to $2.30 billion at December 31, 2020. Non-interest checking account balances increased $125.0 million during the first nine months of 2021. Interest bearing
demand account balances increased $63.3 million and savings and money market account balances increased $75.8 million in the first nine months of 2021 as municipal and business customers have held higher balances during the COVID-19 pandemic.
Certificates of deposits decreased by $9.6 million in the first nine months of 2021 reflecting the continued low market interest rates. We believe our success in maintaining the balances of personal and business checking and savings accounts was
primarily attributable to our focus on quality customer service, the desire of customers to deal with a local bank, the convenience of our branch network and the breadth and depth of our sophisticated product line.
Noninterest bearing demand accounts comprised 36% of total deposits at September 30, 2021 and 35% of total deposits at December 31, 2020. These balances typically increase at year end for many
of our commercial customers, then decline in the first half of the next year. This didn’t happen in the first half of 2021 due to customers of all types holding higher balances during the COVID-19 pandemic. In addition, because of the generally
low rates paid on interest bearing account alternatives, many of our business customers chose to keep their balances in these more liquid noninterest bearing demand account types. We also see a seasonal increase in deposits in the third quarter
each year from municipal customers from property tax collections. Interest bearing demand, including money market and savings accounts, comprised 60% of total deposits at September 30, 2021 and 60% at December 31, 2020. Time accounts as a
percentage of total deposits were 4% at September 30, 2021 and 5% at December 31, 2020.
Borrowed funds at September 30, 2021 consisted of $85.0 million of Federal Home Loan Bank (“FHLB”) advances. Borrowed funds totaled $90.6 million at December 31, 2020, including $70.0 million of
FHLB advances and $20.6 million in long-term debt associated with trust preferred securities. On July 7, 2021, the Company redeemed all of the long-term debt associated with trust preferred securities.
CAPITAL RESOURCES
Total shareholders' equity of $252.2 million at September 30, 2021 represented an increase of $12.4 million from $239.8 million at December 31, 2020. The increase was primarily a result of net
income of $22.8 million earned in the first nine months of 2021, partially offset by a decrease of $2.7 million in accumulated other comprehensive income and a payment of $8.2 million in cash dividends to shareholders. The Bank was categorized as
“well capitalized” at September 30, 2021.
Capital guidelines for U.S. banks are commonly known as Basel III guidelines. The rules include a common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital
conservation buffer of 2.5% of risk-weighted assets, effectively resulting in a minimum CET1 ratio of 7.0%. The Basel III minimum ratio of Tier 1 capital to risk-weighted assets is 6.0% (which, with the capital conservation buffer, effectively
results in a minimum Tier 1 capital ratio of 8.5%), and the minimum total capital to risk-weighted assets ratio is 10.5% (with the capital conservation buffer), and Basel III requires a minimum leverage ratio of 4.0%. The capital ratios for the
Company and the Bank under Basel III have continued to exceed the well capitalized minimum capital requirements.
The following table shows our regulatory capital ratios (on a consolidated basis) for the past several quarters:
|
Macatawa Bank Corporation
|
Sept 30,
2021
|
June 30,
2021
|
March 31,
2021
|
Dec 31,
2020
|
Sept 30,
2020
|
|||||||||||||||
|
Total capital to risk weighted assets
|
18.6
|
%
|
19.7
|
%
|
19.3
|
%
|
18.3
|
%
|
17.7
|
%
|
||||||||||
|
Common Equity Tier 1 to risk weighted assets
|
17.4
|
17.1
|
16.7
|
15.8
|
15.3
|
|||||||||||||||
|
Tier 1 capital to risk weighted assets
|
17.4
|
18.5
|
18.1
|
17.1
|
16.6
|
|||||||||||||||
|
Tier 1 capital to average assets
|
8.5
|
9.5
|
9.8
|
9.9
|
9.8
|
|||||||||||||||
On July 7, 2021, the Company redeemed all of the remaining outstanding trust preferred securities.
LIQUIDITY
Liquidity of Macatawa Bank: The
liquidity of a financial institution reflects its ability to manage a variety of sources and uses of funds. Our Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We
primarily focus on developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for our investment and loan portfolios. Our sources of liquidity include our borrowing capacity with the FRB's
discount window, the Federal Home Loan Bank, federal funds purchased lines of credit and other secured borrowing sources with our correspondent banks, loan payments by our borrowers, maturity and sales of our securities available for sale, growth
of our deposits, federal funds sold and other short-term investments, and the various capital resources discussed above.
Liquidity management involves the ability to meet the cash flow requirements of our customers. Our customers may be either borrowers with credit needs or depositors wanting to withdraw funds. Our
liquidity management involves periodic monitoring of our assets considered to be liquid and illiquid, and our funding sources considered to be core and non-core and short-term (less than 12 months) and long-term. We have established parameters that
monitor, among other items, our level of liquid assets to short-term liabilities, our level of non-core funding reliance and our level of available borrowing capacity. We maintain a diversified wholesale funding structure and actively manage our
maturing wholesale sources to reduce the risk to liquidity shortages. We have also developed a contingency funding plan to stress test our liquidity requirements arising from certain events that may trigger liquidity shortages, such as rapid loan
growth in excess of normal growth levels or the loss of deposits and other funding sources under extreme circumstances.
We have actively pursued initiatives to maintain a strong liquidity position. The Bank has reduced its reliance on non-core funding sources, including brokered deposits, and focused on achieving
a non-core funding dependency ratio below its peer group average. We have had no brokered deposits on our balance sheet since December 2011. We continue to maintain significant on-balance sheet liquidity. At September 30, 2021, the Bank held
$1.24 billion of federal funds sold and other short-term investments. In addition, the Bank had available borrowing capacity from correspondent banks of approximately $242.5 million as of September 30, 2021.
In the normal course of business, we enter into certain contractual obligations, including obligations which are considered in our overall liquidity management. The table below summarizes our
significant contractual obligations at September 30, 2021 (dollars in thousands):
|
Less than
1 year
|
1-3 years
|
3-5 years
|
More than
5 years
|
|||||||||||||
|
Long term debt
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||
|
Time deposit maturities
|
77,814
|
14,807
|
1,247
|
58
|
||||||||||||
|
Other borrowed funds
|
—
|
30,000
|
20,000
|
35,000
|
||||||||||||
|
Operating lease obligations
|
310
|
364
|
144
|
—
|
||||||||||||
|
Total
|
$
|
78,124
|
$
|
45,171
|
$
|
21,391
|
$
|
35,058
|
||||||||
In addition to normal loan funding, we also maintain liquidity to meet customer financing needs through unused lines of credit, unfunded loan commitments and standby letters of credit. The level
and fluctuation of these commitments is also considered in our overall liquidity management. At September 30, 2021, we had a total of $691.9 million in unused lines of credit, $103.6 million in unfunded loan commitments and $11.8 million in
standby letters of credit.
Liquidity of Holding Company: The
primary sources of liquidity for the Company are dividends from the Bank, existing cash resources and the capital markets if the need to raise additional capital arises. Banking regulations and the laws of the State of Michigan in which our Bank
is chartered limit the amount of dividends the Bank may declare and pay to the Company in any calendar year. Under the state law limitations, the Bank is restricted from paying dividends to the Company in excess of retained earnings. In 2020,
the Bank paid dividends to the Company totaling $11.7 million. In the same period, the Company paid $10.9 million in dividends to its shareholders. On February 24, 2021, the Bank paid a dividend totaling $3.7 million to the Company in
anticipation of the common share cash dividend of $0.08 per share paid on February 25, 2021 to shareholders of record on February 10, 2021. The cash distributed for this cash dividend payment totaled $2.7 million. On May 26, 2021, the Bank paid
a dividend totaling $3.2 million to the Company in anticipation of the common share cash dividend of $0.08 per share paid on May 27, 2021 to shareholders of record on May 12, 2021. The cash distributed for this cash dividend payment totaled $2.7
million. On July 6, 2021, the Bank paid a dividend totaling $20.0 million to the Company in anticipation of the redemption of its trust preferred securities. On July 7, 2021, the Company redeemed all of the outstanding trust preferred
securities. On August 25, 2021, the Bank paid a dividend totaling $3.2 million to the Company in anticipation of the common share cash dividend of $0.08 per share paid on August 26, 2021 to shareholders of record on August 11, 2021. The cash
distributed for this cash dividend payment totaled $2.7 million. The Company retained the remaining balance in each period for general corporate purposes. At September 30, 2021, the Bank had a retained earnings balance of $79.7 million.
The Company’s cash balance at September 30, 2021 was $7.9 million. The Company believes that it has sufficient liquidity to meet its cash flow obligations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the financial statements and future results could differ. The allowance for loan losses, other real estate owned valuation, loss contingencies, revenue recognition and
income taxes are deemed critical due to the required level of management judgment and the use of estimates, making them particularly subject to change.
Our methodology for determining the allowance for loan losses and the related provision for loan losses is described above in the "Allowance for Loan Losses" discussion. This area of accounting
requires significant judgment due to the number of factors which can influence the collectability of a loan. Unanticipated changes in these factors could significantly change the level of the allowance for loan losses and the related provision for
loan losses. Although, based upon our internal analysis, and in our judgment, we believe that we have provided an adequate allowance for loan losses, there can be no assurance that our analysis has properly identified all of the probable losses in
our loan portfolio. As a result, we could record future provisions for loan losses that may be significantly different than the levels that we recorded in the first nine months of 2021.
Assets acquired through or instead of foreclosure, primarily other real estate owned, are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost
basis. New real estate appraisals are generally obtained at the time of foreclosure and are used to establish fair value. If fair value declines, a valuation allowance is recorded through expense. Estimating the initial and ongoing fair value of
these properties involves a number of factors and judgments including holding time, costs to complete, holding costs, discount rate, absorption and other factors.
Loss contingencies are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. This, too, is an accounting area that involves
significant judgment. Although, based upon our judgment, internal analysis, and consultations with legal counsel we believe that we have properly accounted for loss contingencies, future changes in the status of such contingencies could result in
a significant change in the level of contingent liabilities and a related impact to operating earnings.
Noninterest revenue is recognized in accordance with contractual requirements and as we fulfill our obligations under contractual terms. Most of our noninterest revenue comes from services that
are transaction based and such revenue is recognized as the related service is provided.
Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of the recognition of revenues and expenses for
financial reporting and tax purposes. At September 30, 2021, we had gross deferred tax assets of $4.5 million and gross deferred tax liabilities of $2.3 million resulting in a net deferred tax asset of $2.1 million. Accounting standards require
that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard. We concluded at September 30, 2021 that no
valuation allowance on our net deferred tax asset was required. Changes in tax laws, changes in tax rates, changes in ownership and our future level of earnings can impact the ultimate realization of our net deferred tax asset.
| Item 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of our transactions are denominated in U.S. dollars with no specific foreign exchange exposure.
Macatawa Bank has only limited agricultural-related loan assets, and therefore has no significant exposure to changes in commodity prices.
Our balance sheet has sensitivity, in various categories of assets and liabilities, to changes in prevailing rates in the U.S. for prime rate, mortgage rates, U.S. Treasury rates and various
money market indexes. Our asset/liability management process aids us in providing liquidity while maintaining a balance between interest earning assets and interest bearing liabilities.
We utilize a simulation model as our primary tool to assess the direction and magnitude of variations in net interest income and the economic value of equity (“EVE”) resulting from potential
changes in market interest rates. Key assumptions in the model include contractual cash flows and maturities of interest-sensitive assets and interest-sensitive liabilities, prepayment speeds on certain assets, and changes in market conditions
impacting loan and deposit pricing. We also include pricing floors on discretionary priced liability products which limit how low various checking and savings products could go under declining interest rates. These floors reflect our pricing
philosophy in response to changing interest rates.
We forecast the next twelve months of net interest income under an assumed environment of gradual changes in market interest rates under various scenarios. The resulting change in net interest
income is an indication of the sensitivity of our earnings to directional changes in market interest rates. The simulation also measures the change in EVE, or the net present value of our assets and liabilities, under an immediate shift, or shock,
in interest rates under various scenarios, as calculated by discounting the estimated future cash flows using market-based discount rates.
The following table shows the impact of changes in interest rates on net interest income over the next twelve months and EVE based on our balance sheet as of September 30, 2021 (dollars in
thousands):
|
Interest Rate Scenario
|
Economic
Value of
Equity
|
Percent
Change
|
Net Interest
Income
|
Percent
Change
|
||||||||||||
|
Interest rates up 200 basis points
|
$
|
326,003
|
9.20
|
%
|
$
|
54,796
|
19.82
|
%
|
||||||||
|
Interest rates up 100 basis points
|
312,041
|
4.52
|
50,116
|
9.58
|
||||||||||||
|
No change
|
298,538
|
—
|
45,733
|
—
|
||||||||||||
|
Interest rates down 100 basis points
|
276,628
|
(7.34
|
)
|
44,824
|
(1.99
|
)
|
||||||||||
|
Interest rates down 200 basis points
|
276,703
|
(7.31
|
)
|
44,547
|
(2.59
|
)
|
||||||||||
If interest rates were to increase, this analysis suggests that we are positioned for an improvement in net interest income over the next twelve months. If interest rates were to decrease, this
analysis suggests we would experience a reduction in net interest income over the next twelve months.
We also forecast the impact of immediate and parallel interest rate shocks on net interest income under various scenarios to measure the sensitivity of our earnings under extreme conditions.
The quarterly simulation analysis is monitored against acceptable interest rate risk parameters by the Asset/Liability Committee and reported to the Board of Directors.
In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of
loans, deposits, and other earning assets and interest-bearing liabilities; economic and competitive conditions; potential changes in lending, investing and deposit gathering strategies; and client preferences.
| Item 4: |
CONTROLS AND PROCEDURES
|
| (a) |
Evaluation of Disclosure Controls and Procedures. Under the
supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we conducted an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Exchange Act Rule 13a-15(e) as of September 30, 2021, the end of the period covered by this report.
|
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives, as the Company's are designed to do, and management necessarily was required to apply its judgment in evaluating whether the benefits of the controls
and procedures that the Company adopts outweigh their costs.
Our CEO and CFO, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of
the end of the period covered by this report, have concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.
| (b) |
Changes in Internal Controls. During the period covered by
this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
|
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds.
|
The following table provides information regarding the Company’s purchase of its own common stock during the third quarter of 2021. All employee transactions are under stock compensation plans.
These include shares of Macatawa Bank Corporation common stock surrendered to satisfy tax withholding obligations that occur upon the vesting of restricted shares. The value of the shares withheld is determined based on the closing price of
Macatawa Bank Corporation common stock at the date of vesting. The Company has no publicly announced repurchase plans or programs.
|
Total
Number of
Shares
Purchased
|
Average
Price Paid
Per Share
|
|||||||
|
Period
|
||||||||
|
July 1 - July 31, 2021
|
||||||||
|
Employee Transactions
|
2,518
|
$
|
8.55
|
|||||
|
August 1 - August 31, 2021
|
||||||||
|
Employee Transactions
|
—
|
—
|
||||||
|
September 1 - September 30, 2021
|
||||||||
|
Employee Transactions
|
—
|
—
|
||||||
|
Total for Third Quarter ended September 30, 2021
|
||||||||
|
Employee Transactions
|
2,518
|
$
|
8.55
|
|||||
| Item 6. |
EXHIBITS.
|
|
Restated Articles of Incorporation. Previously filed with the Commission on
October 27, 2016 in Macatawa Bank Corporation’s Quarterly Report on Form 10-Q, Exhibit 3.1. Here incorporated by reference.
|
|
|
Bylaws. Previously filed with the Commission on February 19, 2015 in
Macatawa Bank Corporation's Annual Report on Form 10-K for the year ended December 31, 2014, Exhibit 3.2. Here incorporated by reference.
|
|
|
Restated Articles of Incorporation. Exhibit 3.1 is here incorporated by reference.
|
|
|
Bylaws. Exhibit 3.2 is here incorporated by reference.
|
|
|
4.3
|
Long-Term Debt. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant's total consolidated assets. The
registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the SEC upon request.
|
|
Certification of Chief Executive Officer.
|
|
|
Certification of Chief Financial Officer.
|
|
|
Certification pursuant to 18 U.S.C. Section 1350.
|
|
|
101.INS
|
Inline XBRL Instance Document
|
|
101.SCH
|
Inline XBRL Taxonomy Extension Schema Document
|
|
101.CAL
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
Inline XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB
|
Inline XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document
|
|
104
|
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
|
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.
|
MACATAWA BANK CORPORATION
|
|
|
/s/ Ronald L. Haan
|
|
|
Ronald L. Haan
|
|
|
Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
/s/ Jon W. Swets
|
|
|
Jon W. Swets
|
|
|
Senior Vice President and
|
|
|
Chief Financial Officer
|
|
|
(Principal Financial and Accounting Officer)
|
|
|
Dated: October 28, 2021
|
|
-55-