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, 2017
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 checkmarkcheck mark 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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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. (Check one):
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: 33,941,20334,291,487 shares of the Company's Common Stock (no par value) were outstanding as of October 26, 2017.2023.
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 future levels of earning assets, statements related to stabilizationfuture composition of our loan portfolio, trends in credit quality metrics, future capital levels and capital needs, including the impact of Basel III, 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 loancredit 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 FDIC assessmentinterest rate levels, future net interest margin levels, building and improving our investment portfolio, diversifying our credit risk, the effects on earnings of changes in interest rates, future economic conditions, future effects of new or changed accounting standards, future loss recoveries, future balances of short-term investments, future loan demand and loan growth, future levelsamounts of mortgage banking revenue andunrecognized tax benefits, the future level of other revenue sources.sources and future amounts of unrealized gains or losses in our investment securities portfolio. Management's determination of the provision and allowance for loancredit 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. Our ability to sell other real estate owned at its carrying value or at all, successfully implement new programs and initiatives, increase efficiencies, maintain our current levels of deposits and other sources of funding, maintain liquidity, respond to declines in collateral values and credit quality, respond to a changing interest rate environment, increase loan volume, originate high quality loans, maintain or improve mortgage banking income, realize the benefit of our deferred tax assets, continue payment of dividends and improve profitability is not entirely within our control and is not assured. The future effect of changes in the real estate, financial and credit markets, interest rates 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, 2016.2022. 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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |||
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Part I Financial Information Item 1. MACATAWA BANK CORPORATION As of September 30, (Dollars in thousands, except per share data) September 30, December 31, 2023 2022 ASSETS Cash and due from banks Federal funds sold and other short-term investments Cash and cash equivalents Debt securities available for sale, at fair value Debt securities held to maturity (fair value 2023 - $314,458 and 2022 - $332,650) Federal Home Loan Bank (FHLB) stock Loans held for sale, at fair value Total loans Allowance for credit losses Net loans Premises and equipment – net Accrued interest receivable Bank-owned life insurance Other real estate owned - net Net deferred tax asset Other assets Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing Interest-bearing Total deposits Other borrowed funds Accrued expenses and other liabilities Total liabilities Commitments and contingent liabilities Shareholders' equity Common stock, no par value, 200,000,000 shares authorized; 34,291,487 and 34,298,640 shares issued and outstanding at September 30, 2023 and December 31, 2022 Retained earnings Accumulated other comprehensive loss Total shareholders' equity Total liabilities and shareholders' equity MACATAWA BANK CORPORATION CONSOLIDATED STATEMENTS OF INCOME Three and (unaudited) (Dollars in thousands, except per share data) Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2023 2022 2023 2022 Interest income Loans, including fees Securities Taxable Tax-exempt FHLB Stock Federal funds sold and other short-term investments Total interest income Interest expense Deposits Other borrowings Total interest expense Net interest income Provision for credit losses Net interest income after provision for credit losses Noninterest income Service charges and fees Net gains on mortgage loans Trust fees ATM and debit card fees Bank owned life insurance ("BOLI") income Other Total noninterest income Noninterest expense Salaries and benefits Occupancy of premises Furniture and equipment Legal and professional Marketing and promotion Data processing FDIC assessment Interchange and other card expense Bond and D&O Insurance Other Total noninterest expenses Income before income tax Income tax expense Net income Basic earnings per common share Diluted earnings per common share Cash dividends per common share MACATAWA BANK CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three and (unaudited) (Dollars in thousands) Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2023 2022 2023 2022 Net income Other comprehensive income (loss): Unrealized gains (losses): Net change in unrealized gains (losses) on debt securities available for sale Net unrealized gain at time of transfer on securities transferred to held-to-maturity Amortization of net unrealized gains on securities transferred to held-to-maturity Tax effect Net change in unrealized gains (losses) on debt securities available for sale, net of tax 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 Comprehensive income (loss) MACATAWA BANK CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Three and nine month periods ended September 30, (unaudited) (Dollars in thousands, except per share data) Accumulated Other Total Common Retained Comprehensive Shareholders' Stock Earnings Income (Loss) Equity Balance, July 1, 2022 Net income for the three months ended September 30, 2022 Cash dividends at $0.08 per share Repurchase of 1,662 shares for taxes withheld on vested restricted stock Other comprehensive loss, net of tax Stock compensation expense Balance, September 30, 2022 Balance, July 1, 2023 Net income for the three months ended September 30, 2023 Cash dividends at $0.08 per share Repurchase of shares for taxes withheld on vested restricted stock Other comprehensive loss, net of tax Stock compensation expense Balance, September 30, 2023 Accumulated Other Total Common Retained Comprehensive Shareholders' Stock Earnings Income (Loss) Equity Balance, January 1, 2022 Net income for the nine months ended September 30, 2022 Cash dividends at $0.24 per share Repurchase of 3,815 shares for taxes withheld on vested restricted stock Other comprehensive loss, net of tax Stock compensation expense Balance, September 30, 2022 Balance, January 1, 2023 Adoption of ASU 2016-13, net of tax Net income for the nine months ended September 30, 2023 Cash dividends at $0.24 per share Repurchase of 2,145 shares for taxes withheld on vested restricted stock Other comprehensive income, net of tax Stock compensation expense Balance, September 30, 2023 MACATAWA BANK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Nine (unaudited) (Dollars in thousands) Nine Months Nine Months Ended Ended September 30, September 30, 2023 2022 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization Stock compensation expense Provision for credit losses Origination of loans for sale Proceeds from sales of loans originated for sale Net gains on mortgage loans Net gain on sales of other real estate Deferred income tax expense Earnings in bank-owned life insurance Change in accrued interest receivable and other assets Change in accrued expenses and other liabilities Net cash from operating activities Cash flows from investing activities Loan originations and payments, net Purchases of securities available for sale Purchases of securities held to maturity Proceeds from: Maturities and calls of securities available for sale Maturities and calls of securities held to maturity Principal paydowns on securities available for sale Principal paydowns on securities held to maturity Sales of other real estate Redemption of FHLB stock Additions to premises and equipment Net cash for investing activities Cash flows from financing activities Change in deposits Repayments and maturities of other borrowed funds Proceeds from other borrowed funds Repurchase of shares for taxes withheld on vested restricted stock Cash dividends paid Net cash for financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Nine (unaudited) (Dollars in thousands) Nine Months Nine Months Ended Ended September 30, September 30, 2023 2022 Supplemental cash flow information Interest paid Income taxes paid Supplemental noncash disclosures: Security settlement Transfer of securities from available for sale to held to maturity See accompanying notes to consolidated financial statements. Principles of Consolidation Macatawa Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Basis of Operating results for the three and nine month periods ended September 30, Use of Estimates FASB issued ASU No. The Company adopted these standards as required on January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the probable incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance for loans of $1.5 million and an increase of $62,000 to establish a reserve for unfunded commitments, with a $1.2 million decrease to retained earnings, with the $323,000 income tax portion being recorded as part of the deferred tax asset in the Company's Consolidated Balance Sheet. NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Credit Losses ("ACL") - Loans: The allowance for credit losses (allowance) is a valuation account that is deducted from the loan portfolios' amortized cost basis to present the net amount expected to be collected on loans. The allowance is increased by the provision for credit losses and recoveries, and decreased by charge-offs of loans. Management believes the allowance 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, current and forecasted 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 uncollectability of a loan balance is confirmed. Management continues its collection efforts on previously charged-off balances and applies recoveries as additions to the allowance. The allowance is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogeneous classes, or pools, for allowance calculation. Commercial loans are divided into eight classes based primarily on property type and risk characteristics. They are further segmented based on commercial loan risk grade. Retail loans are segmented into categories including residential mortgage, home equity, unsecured and other secured and then further segmented based on delinquency status. The Company's loan portfolio classes as of September 30, 2023 were as follows: Commercial Loans: Commercial and Industrial - Risks to this category include industry concentration and limitations associated with monitoring the adequacy and condition of collateral which can include inventory, accounts receivable, and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Residential developed - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area, inadequate long-term financing arrangements and velocity of sales. Loans in this category are susceptible to weakening general economic conditions and increases in unemployment rates as well as market demand and supply of similar property. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category. Unsecured to residential developers - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Vacant and unimproved - Risks to this category include industry concentration, valuation of farm land, agricultural properties and residential properties as well as velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category. Commercial development - Risks to this category include industry concentration, valuation of commercial properties, lease terms, occupancy/vacancy rates and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category. Residential improved - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category. Commercial improved - Risks to this category include industry concentration, valuation of commercial properties, lease terms, occupancy/vacancy rates, cost overruns, changes in market demand for property or services and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category. NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Manufacturing and industrial - Risks to this category include industry concentration, valuation of commercial properties, changes in market demand for products produced and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category. Consumer Loans: Residential mortgage - Residential mortgage loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values. Unsecured - Unsecured loans are susceptible to weakening general economic conditions and increases in unemployment rates. Home equity - Home equity loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values. Other secured - Other secured loans are susceptible to weakening general economic conditions and increases in unemployment rates, regulatory risks as well as the inability to monitor collateral consisting of personal property. The remaining life methodology is used for all loan pools. This nondiscounted cash flow approach projects an estimated future amortized cost basis based on current loan balance and repayment terms. Given the bank's limited loss history over the past twelve years, a loss rate computed for a comparable sized peer group (banks with assets between $1-3 billion) is then applied to future loan balances at the instrument level based on the remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. The baseline lifetime loss is adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast period and reversion periods. Reasonable and supportable economic forecasts have to be incorporated in determining expected losses. The forecast period represents the time frame from the current period end through the point in time that the Company can reasonably forecast. Ideally, the economic forecast period would cover the contractual terms of all loans; however, the ability to produce a forecast that is both reasonable and supportable becomes more difficult the longer the period is projected. For periods beyond the forecast period, the loss rate reverts back to the baseline lifetime loss. As of September 30, 2023, the Company used a one-year reasonable and supportable economic forecast period, with a nine-month straight-line reversion period for all loan classes. In determining the reasonable and supportable economic forecast period, the Company used a consensus economic forecast from a third-party provider that provided forecasts from twenty five leading economists. The Company considered the September 2023 report's consensus/mean estimates for gross domestic product and unemployment rates and selected a loss period for the reasonable and supportable forecast period that most closely matched that consensus ( December 2006 to June 2007). The forecast period used at September 30, 2023 was not materially different from the one used in the June 30, 2023 calculation. A number of qualitative factors are considered including economic forecast uncertainty, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, impact of rising interest rates, external factors and other considerations. During each reporting period, management also considers the need to adjust the baseline lifetime loss rates for factors that may cause expected losses to differ from those experienced in the historical loss periods. The Company is also required to consider expected credit losses associated with loan commitments over the contractual period in which it is exposed to credit risk on the underlying commitments. Any allowance for off-balance sheet credit exposures is reported as an other liability on the Company's Consolidated Balance Sheet and is increased or decreased via other noninterest expense on the Company's Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the respective term of the loan using the level-yield method without anticipating prepayments. Accrued interest on loans totaled $4.8 million at September 30, 2023 and $4.0 million at December 31, 2022. Accrued interest receivable for loans is included as a separate line item on the Company's Consolidated Balance Sheet. The Company elected not to measure an allowance for accrued interest receivable and instead elected to reverse accrued interest income on loans that are placed on nonaccrual status. The Company believes this policy results in the timely reversal of uncollectible interest. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Securities: Securities are classified as held to maturity ("HTM") and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities available for sale ("AFS") consist of those securities which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as AFS are reported at their fair value and the related unrealized gain or loss is reported in other comprehensive income, net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level yield method without anticipating prepayments. Gains and losses on sales are based on the amortized cost of the security sold. Accrued interest receivable on securities totaled $4.4 million at September 30, 2023 and $3.4 million at December 31, 2022. ACL - Securities Available for Sale - For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income with an allowance being established under CECL. For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses ("ACL") is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. The Company has never experienced a loss on any debt securities NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ACL - Securities Held to Maturity - Since the adoption of CECL, the Company measures credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be 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, The Company recognizes a tax position as a Revenue From Contracts With Customers: The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers" ("Topic 606"). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) it satisfies a performance obligation. No revenue has been recognized in the current reporting period that results from performance obligations satisfied in previous periods. The Company's primary sources of revenue are derived from interest and dividends earned on loans, securities and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally satisfies its performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. 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, 2023 and December 31, 2022, the total notional amount of such agreements was $110.7 million and $125.3 million, respectively, and resulted in a derivative asset with a fair value of $6.8 million and $6.5 million, respectively, which were included in other assets and a derivative liability of $6.8 million and $6.5 million, respectively, which were included in other liabilities. NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 $(2,000) at September 30, 2023 and $0 at December 31, 2022. The net fair value of mortgage backed security derivatives was $2,000 at September 30, 2023 and $0 at December 31, 2022. Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. As of September 30, 2023 and December 31, 2022, these loans had net unrealized gains of $0 and $4,000, respectively, which are reflected in their carrying value. Changes in fair value of loans held for sale are included in net gains on mortgage loans. Loans are sold with servicing released; therefore no mortgage servicing right assets are established. Newly Issued Not Yet Effective Standards: FASB issued ASU2023-01,Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This standard allows entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. This election allows the entity to record a writedown of investment to federal income tax expense where income tax credits are recorded. This also aligns the treatment of other tax equity investments with that allowed for low income housing tax credit investments. The standard is effective for the Company for fiscal years beginning after December 15, FASB issued ASU NOTE The amortized cost and fair value of securities at period-end were as follows (dollars in thousands): Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value September 30, 2023 Available for Sale U.S. Treasury and federal agency securities U.S. Agency MBS and CMOs Tax-exempt state and municipal bonds Taxable state and municipal bonds Corporate bonds and other debt securities Held to Maturity U.S. Treasury Tax-exempt state and municipal bonds Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value December 31, 2022 Available for Sale: U.S. Treasury and federal agency securities U.S. Agency MBS and CMOs Tax-exempt state and municipal bonds Taxable state and municipal bonds Corporate bonds and other debt securities Held to Maturity U.S. Treasury Tax-exempt state and municipal bonds There were no NOTE 2– SECURITIES On January 1, 2022, the Company reclassified ten U.S. Treasury securities with an amortized cost of $123.5 million from available for sale to held to maturity, as it has the intent and ability to hold these securities to maturity. These securities had net unrealized gains of $113,000 at the date of transfer, which will continue to be reported in accumulated other comprehensive income, and will be amortized over the remaining life of the securities as an adjustment of yield. The effect on interest income of the amortization of net unrealized gains is offset by the amortization of the premium on the securities transferred. Contractual maturities of debt securities at September 30, Held–to-Maturity Securities Available-for-Sale Securities Amortized Fair Amortized Fair Cost Value Cost Value Due in one year or less Due from one to five years Due from five to ten years Due after ten years Securities with unrealized losses at September 30, Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized September 30, 2023 Value Loss Value Loss Value Loss Available for Sale U.S. Treasury and federal agency securities U.S. Agency MBS and CMOs Tax-exempt state and municipal bonds Taxable state and municipal bonds Corporate bonds and other debt securities Held to Maturity U.S. Treasury Tax-exempt state and municipal bonds NOTE 2– SECURITIES Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized December 31, 2022 Value Loss Value Loss Value Loss Available for Sale: U.S. Treasury and federal agency securities U.S. Agency MBS and CMOs Tax-exempt state and municipal bonds Taxable state and municipal bonds Corporate bonds and other debt securities Held to Maturity: U.S. Treasury Tax-exempt state and municipal bonds Management evaluates securities At September 30, 2023, 455 securities available for sale with fair values totaling $501.2 million had unrealized losses totaling $42.6 million. At December 31, 2022, 444 securities available for sale with fair values totaling $464.4 million had unrealized losses totaling $40.1 million. For securities available for sale with unrealized losses, management considered the financial condition of the issuer and the Company's intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. At September 30, 2023, 81 securities held to maturity with fair values totaling $307.0 million had unrealized losses totaling $15.6 million. At December 31, 2022, 76 securities held to maturity with fair values totaling $317.0 million had unrealized losses totaling $16.5 million. 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. Management determined that the unrealized losses for each period and each investment were attributable to changes in interest rates and not due to credit quality. As such, no Securities with a carrying value of approximately NOTE 3– LOANS Portfolio loans were as follows (dollars in thousands): September 30, December 31, 2023 2022 Commercial and industrial Commercial real estate: Residential developed Unsecured to residential developers Vacant and unimproved Commercial development Residential improved Commercial improved Manufacturing and industrial Total commercial real estate Consumer: Residential mortgage Unsecured Home equity Other secured Total consumer Total loans Allowance for credit losses The totals above are shown net of deferred fees and costs. Deferred fees on loans totaled $1.4 million and $1.3 million at September 30, 2023 and December 31, 2022, respectively. Deferred costs on loans totaled $1.5 million and $1.4 million at September 30, 2023 and December 31, 2022, respectively. NOTE 3– LOANS Activity in the allowance for Commercial and Commercial Three months ended September 30, 2023 Industrial Real Estate Consumer Unallocated Total Beginning balance Charge-offs Recoveries Provision for credit losses (1) Ending Balance Commercial and Commercial Nine months ended September 30, 2023 Industrial Real Estate Consumer Unallocated Total Beginning balance, prior to adoption of ASU 2016-03 Impact of adoption of ASU 2016-03 Charge-offs Recoveries Provision for credit losses (1) Ending Balance Commercial and Commercial Three months ended September 30, 2022 Industrial Real Estate Consumer Unallocated Total Beginning balance Charge-offs Recoveries Provision for credit losses (1) Ending Balance Commercial and Commercial Nine months ended September 30, 2022 Industrial Real Estate Consumer Unallocated Total Beginning balance Charge-offs Recoveries Provision for credit losses (1) Ending Balance (1) Beginning January 1, 2023, calculation is based on CECL methodology. Prior to January 1, 2023, calculation was based on probable incurred loss methodology. NOTE 3– LOANS (Continued) The following table presents gross chargeoffs for the nine months ended September 30, 2023 by portfolio class and origination year (dollars in thousands): Term Loans By Origination Year Revolving September 30, 2023 2023 2022 2021 2020 2019 Prior Loans Total Commercial and industrial Commercial development Commercial improved Manufacturing and industrial Residential development Residential improved Vacant and unimproved Total commercial Residential mortgage Consumer unsecured Home equity Other Total consumer Total loans Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Under CECL for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance on the fair value of collateral. The allowance is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and the loan's amortized cost. If the fair value of the collateral exceeds the loan's amortized cost, no allowance is necessary. The Company's policy is to obtain appraisals on any significant pieces of collateral. For real estate collateral that is in industries that are undergoing significant stress, or properties that are specialized use or have limited marketability, higher discounts are applied in determining fair value. NOTE 3– LOANS(Continued) There have been no significant changes to the types of collateral securing our collateral dependent loans. The amortized cost of collateral-dependent loans by class as of September 30, 2023 was as follows (dollars in thousands): Collateral Type Allowance September 30, 2023 Real Estate Other Allocated Commercial and industrial Commercial real estate: Residential developed Unsecured to residential developers Vacant and unimproved Commercial development Residential improved Commercial improved Manufacturing and industrial Consumer Residential mortgage Unsecured Home equity Other secured Consumer Total The following table presents the balance in the allowance for Commercial and Commercial December 31, 2022 Industrial Real Estate Consumer Unallocated Total Allowance for credit losses: Ending allowance attributable to loans: Individually reviewed for impairment Collectively evaluated for impairment Total ending allowance balance Loans: Individually reviewed for impairment Collectively evaluated for impairment Total ending loans balance NOTE 3– LOANS The following table presents loans individually evaluated for impairment by class of loans as of Unpaid Year-To-Date Principal Recorded Allowance Average Recorded December 31, 2022 Balance Investment Allocated Investment With no related allowance recorded: Commercial and industrial Commercial real estate: Residential improved Consumer Total with no related allowance recorded With an allowance recorded: Commercial and industrial Commercial real estate: Commercial improved Manufacturing and industrial Consumer: Residential mortgage Unsecured Home equity Total with an allowance recorded Total NOTE 3– 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, Over 90 Total Nonaccrual with Nonaccrual with days Nonperforming September 30, 2023 No Allowance Allowance Total Nonaccrual Accruing Loans Commercial and industrial Commercial real estate: Residential developed Unsecured to residential developers Vacant and unimproved Commercial development Residential Improved Commercial improved Manufacturing and industrial Consumer: Residential mortgage Unsecured Home equity Other secured Total NOTE 3– LOANS (Continued) Over 90 Total Nonaccrual with Nonaccrual with days Nonperforming December 31, 2022 No Allowance Allowance Total Nonaccrual Accruing Loans Commercial and industrial Commercial real estate: Residential developed Unsecured to residential developers Vacant and unimproved Commercial development Residential improved Commercial improved Manufacturing and industrial Consumer: Residential mortgage Unsecured Home equity Other secured Total No interest income was recognized on nonaccrual loans during the three and nine months ended September 30, 2023. NOTE 3– LOANS (Continued) The following table presents the aging of the recorded investment in past due loans as of September 30, 20172023 (unaudited) and December 31, 2016 $ 40,687 $ 51,215 469,786 703,955 510,473 755,170 503,277 499,257 330,003 348,765 10,211 10,211 — 215 1,291,290 1,177,748 (17,001 ) (15,285 ) 1,274,289 1,162,463 39,399 40,306 9,957 7,606 54,043 53,345 — 2,343 10,226 9,712 17,832 17,526 $ 2,759,710 $ 2,906,919 $ 653,052 $ 834,879 1,792,534 1,780,263 2,445,586 2,615,142 30,000 30,000 14,247 14,739 2,489,833 2,659,881 — — 220,089 219,578 83,349 59,036 (33,561 ) (31,576 ) 269,877 247,038 $ 2,759,710 $ 2,906,919 ASSETS Cash and due from banks $ 28,318 $ 27,690 Federal funds sold and other short-term investments 131,571 62,129 Cash and cash equivalents 159,889 89,819 Securities available for sale, at fair value 214,182 184,433 Securities held to maturity (fair value 2017 - $62,854 and 2016 - $69,849) 61,927 69,378 Federal Home Loan Bank (FHLB) stock 11,558 11,558 Loans held for sale, at fair value 2,199 2,181 Total loans 1,260,037 1,280,812 Allowance for loan losses (16,434 ) (16,962 ) Net loans 1,243,603 1,263,850 Premises and equipment – net 46,822 50,026 Accrued interest receivable 4,532 4,092 Bank-owned life insurance 40,042 39,274 Other real estate owned - net 6,661 12,253 Net deferred tax asset 5,992 8,863 Other assets 5,639 5,286 Total assets $ 1,803,046 $ 1,741,013 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 497,310 $ 501,478 Interest-bearing 1,008,868 947,246 Total deposits 1,506,178 1,448,724 Other borrowed funds 72,118 84,173 Long-term debt 41,238 41,238 Accrued expenses and other liabilities 10,048 4,639 Total liabilities 1,629,582 1,578,774 Commitments and contingent liabilities --- --- Shareholders' equity Common stock, no par value, 200,000,000 shares authorized; 33,941,953 and 33,940,788 shares issued and outstanding at September 30, 2017 and December 31, 2016 217,099 216,731 Retained deficit (43,307 ) (53,008 ) Accumulated other comprehensive income (loss) (328 ) (1,484 ) Total shareholders' equity 173,464 162,239 Total liabilities and shareholders' equity $ 1,803,046 $ 1,741,013 Nine Month Periods Endednine month periods ended September 30, 20172023 and 2016 $ 18,065 $ 12,164 $ 50,900 $ 32,905 4,565 3,323 13,643 7,375 671 668 2,048 2,102 80 53 217 155 6,406 4,667 17,366 6,915 29,787 20,875 84,174 49,452 7,383 944 17,693 1,346 160 160 474 827 7,543 1,104 18,167 2,173 22,244 19,771 66,007 47,279 (150 ) — 150 (1,500 ) 22,394 19,771 65,857 48,779 1,061 1,263 3,072 3,693 5 166 37 673 1,109 969 3,277 3,153 1,675 1,724 5,077 5,084 239 217 660 687 527 550 1,633 1,695 4,616 4,889 13,756 14,985 6,949 6,639 20,490 19,331 1,024 989 3,260 3,232 1,050 1,014 3,145 3,017 355 268 973 733 225 196 648 586 1,002 984 2,963 2,792 330 201 990 578 426 405 1,212 1,184 123 129 366 389 1,305 1,302 3,580 3,936 12,789 12,127 37,627 35,778 14,221 12,533 41,986 27,986 2,808 2,488 8,257 5,372 $ 11,413 $ 10,045 $ 33,729 $ 22,614 $ 0.33 $ 0.29 $ 0.98 $ 0.66 $ 0.33 $ 0.29 $ 0.98 $ 0.66 $ 0.08 $ 0.08 $ 0.24 $ 0.24 2017 2016 2017 2016 Interest income Loans, including fees $ 12,804 $ 11,838 $ 37,800 $ 35,228 Securities Taxable 741 584 2,025 1,699 Tax-exempt 574 451 1,658 1,325 FHLB Stock 122 122 367 368 Federal funds sold and other short-term investments 385 127 666 383 Total interest income 14,626 13,122 42,516 39,003 Interest expense Deposits 732 431 1,770 1,333 Other borrowings 314 418 1,053 1,318 Long-term debt 442 371 1,267 1,104 Total interest expense 1,488 1,220 4,090 3,755 Net interest income 13,138 11,902 38,426 35,248 Provision for loan losses (350) (250) (1,350) (1,100) Net interest income after provision for loan losses 13,488 12,152 39,776 36,348 Noninterest income Service charges and fees 1,172 1,152 3,342 3,312 Net gains on mortgage loans 369 1,175 1,273 2,235 Trust fees 801 790 2,412 2,286 ATM and debit card fees 1,324 1,272 3,863 3,715 Gain on sales of securities --- --- 3 99 Bank owned life insurance ("BOLI") income 249 146 730 748 Other 385 540 1,386 1,824 Total noninterest income 4,300 5,075 13,009 14,219 Noninterest expense Salaries and benefits 6,211 6,166 18,363 18,521 Occupancy of premises 922 901 2,939 2,784 Furniture and equipment 797 772 2,278 2,476 Legal and professional 199 153 621 500 Marketing and promotion 226 275 678 825 Data processing 655 741 2,068 2,089 FDIC assessment 134 166 404 638 Interchange and other card expense 333 334 970 927 Bond and D&O Insurance 119 132 353 395 Net (gains) losses on repossessed and foreclosed properties (190) 115 (575) 409 Administration and disposition of problem assets 113 210 435 787 Other 1,237 1,308 3,900 3,943 Total noninterest expenses 10,756 11,273 32,434 34,294 Income before income tax 7,032 5,954 20,351 16,273 Income tax expense 2,157 1,350 6,253 4,429 Net income $ 4,875 $ 4,604 $ 14,098 $ 11,844 Basic earnings per common share $ 0.14 $ 0.14 $ 0.42 $ 0.35 Diluted earnings per common share $ 0.14 $ 0.14 $ 0.42 $ 0.35 Cash dividends per common share $ 0.05 $ 0.03 $ 0.13 $ 0.09 Nine Month Periods Endednine month periods ended September 30, 20172023 and 2016 $ 11,413 $ 10,045 $ 33,729 $ 22,614 (3,540 ) (17,714 ) (2,496 ) (41,085 ) — — — 113 (5 ) (5 ) (16 ) (16 ) 744 3,721 527 8,608 (2,801 ) (13,998 ) (1,985 ) (32,380 ) — — — — — — — — — — — — (2,801 ) (13,998 ) (1,985 ) (32,380 ) $ 8,612 $ (3,953 ) $ 31,744 $ (9,766 ) 2017 2016 2017 2016 Net income $ 4,875 $ 4,604 $ 14,098 $ 11,844 Other comprehensive income: Unrealized gains (losses): Net change in unrealized gains (losses) on securities available for sale (53) 120 1,782 1,774 Tax effect 19 (42) (624) (621) Net change in unrealized gains (losses) on securities available for sale, net of tax (34) 78 1,158 1,153 Less: reclassification adjustments: Reclassification for gains included in net income --- --- 3 99 Tax effect --- --- (1) (35) Reclassification for gains included in net income, net of tax --- --- 2 64 Other comprehensive income (loss), net of tax (34) 78 1,156 1,089 Comprehensive income $ 4,841 $ 4,682 $ 15,254 $ 12,933 Nine Month Periods Ended20172023 and 2016 $ 219,456 $ 42,332 $ (18,679 ) $ 243,109 — 10,045 — 10,045 — (2,729 ) — (2,729 ) (15 ) — — (15 ) — — (13,998 ) (13,998 ) 142 — — 142 $ 219,583 $ 49,648 $ (32,677 ) $ 236,554 $ 219,909 $ 74,670 $ (30,760 ) $ 263,819 — 11,413 — 11,413 — (2,734 ) — (2,734 ) — — — — — — (2,801 ) (2,801 ) 180 — — 180 $ 220,089 $ 83,349 $ (33,561 ) $ 269,877 $ 219,082 $ 35,220 $ (297 ) $ 254,005 — 22,614 — 22,614 — (8,186 ) — (8,186 ) (35 ) — — (35 ) — — (32,380 ) (32,380 ) 536 — — 536 $ 219,583 $ 49,648 $ (32,677 ) $ 236,554 $ 219,578 $ 59,036 $ (31,576 ) $ 247,038 — (1,215 ) — (1,215 ) — 33,729 — 33,729 — (8,201 ) — (8,201 ) (22 ) — — (22 ) — — (1,985 ) (1,985 ) 533 — — 533 $ 220,089 $ 83,349 $ (33,561 ) $ 269,877 Balance, January 1, 2016 $ 216,540 $ (64,910) $ 347 $ 151,977 Net income for the nine months ended September 30, 2016 --- 11,844 --- 11,844 Cash dividends at $.09 per share --- (3,042) --- (3,042) Repurchase of 4,373 shares for taxes withheld on vested restricted stock (31) --- --- (31) Net change in unrealized gain on securities available for sale, net of tax --- --- 1,089 1,089 Stock compensation expense 408 --- --- 408 Balance, September 30, 2016 $ 216,917 $ (56,108) $ 1,436 $ 162,245 Balance, January 1, 2017 $ 216,731 $ (53,008) $ (1,484) $ 162,239 Net income for the nine months ended September 30, 2017 --- 14,098 --- 14,098 Cash dividends at $.13 per share --- (4,397) --- (4,397) Repurchase of 533 shares for taxes withheld on vested restricted stock (5) --- --- (5) Issuance of 4,000 shares for stock option exercise 34 --- --- 34 Net change in unrealized loss on securities available for sale, net of tax --- --- 1,156 1,156 Stock compensation expense 339 --- --- 339 Balance, September 30, 2017 $ 217,099 $ (43,307) $ (328) $ 173,464 Month Periods Endedmonth periods ended September 30, 20172023 and 2016 $ 33,729 $ 22,614 266 1,493 533 536 150 (1,500 ) (2,904 ) (25,009 ) 3,156 26,855 (37 ) (673 ) (356 ) (47 ) 336 585 (660 ) (687 ) (2,657 ) (5,536 ) (554 ) 1,499 31,002 20,130 (113,452 ) (29,220 ) (24,072 ) (232,108 ) (9,613 ) (160,481 ) 8,160 17,486 23,300 37,998 10,740 12,003 5,016 33,149 2,699 47 — 1,347 (698 ) (605 ) (97,920 ) (320,384 ) (169,556 ) (21,761 ) — (80,000 ) — 25,000 (22 ) (35 ) (8,201 ) (8,186 ) (177,779 ) (84,982 ) (244,697 ) (385,236 ) 755,170 1,151,788 $ 510,473 $ 766,552 Cash flows from operating activities Net income $ 14,098 $ 11,844 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 1,435 2,149 Stock compensation expense 339 408 Provision for loan losses (1,350 ) (1,100 ) Origination of loans for sale (45,018 ) (76,096 ) Proceeds from sales of loans originated for sale 46,273 79,094 Net gains on mortgage loans (1,273 ) (2,235 ) Gain on sales of securities (3 ) (99 ) Write-down of other real estate 85 774 Net gain on sales of other real estate (660 ) (365 ) Net loss on sale of premises and equipment 240 --- Deferred income tax expense (benefit) 2,249 (167 ) Change in accrued interest receivable and other assets (794 ) (1,142 ) Earnings in bank-owned life insurance (730 ) (748 ) Change in accrued expenses and other liabilities 4,041 1,341 Net cash from operating activities 18,932 13,658 Cash flows from investing activities Loan originations and payments, net 21,537 (37,699 ) Change in interest-bearing deposits in other financial institutions --- 20,000 Purchases of securities available for sale (48,409 ) (72,107 ) Purchases of securities held to maturity (16,411 ) (21,977 ) Purchase of bank-owned life insurance --- (10,000 ) Proceeds from: Maturities and calls of securities 35,763 59,680 Sales of securities available for sale 5,807 9,648 Principal paydowns on securities 4,585 3,027 Sales of other real estate 6,227 4,155 Sales of premises and equipment 1,742 --- Death benefit from bank-owned life insurance --- 518 Additions to premises and equipment (734 ) (674 ) Net cash from investing activities 10,107 (45,429 ) Cash flows from financing activities Change in deposits 57,454 (76,885 ) Repayments and maturities of other borrowed funds (32,055 ) (21,996 ) Proceeds from other borrowed funds 20,000 10,000 Proceeds from issuance of common stock 34 --- Repurchase of shares for taxes withheld on vested restricted stock (5 ) (31 ) Cash dividends paid (4,397 ) (3,042 ) Net cash from financing activities 41,031 (91,954 ) Net change in cash and cash equivalents 70,070 (123,725 ) Cash and cash equivalents at beginning of period 89,819 181,476 Cash and cash equivalents at end of period $ 159,889 $ 57,751 Month Periods Endedmonth periods ended September 30, 20172023 and 2016 $ 17,499 $ 2,204 7,400 5,000 — 1,000 — 123,469 2017 2016 Supplemental cash flow information Interest paid $ 3,827 $ 3,770 Income taxes paid 3,525 4,960 Supplemental noncash disclosures: Transfers from loans to other real estate 60 102 Security settlement (1,368) (1,315) Corporation.Corporation ("FDIC"). 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 owns all of the common stock of Macatawa Statutory Trust I and Macatawa Statutory Trust II. These are grantor trusts that issued trust preferred securities and are not consolidated with the Company under accounting principles generally accepted in the United States of America.Presentation:10-Q10-Q and Article 10 of Regulation S-X.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.20172023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 2023. For further information, refer to the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K10-K for the year ended December 31, 2016.loancredit 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.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, 2017, 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.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.NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)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.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.We recognize 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. We recognize interest and penalties related to income tax matters in income tax expense.Derivatives: Certain of our 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, both of which are carried at fair value. As the terms mirror each other, there is no income statement impact to the Bank. At September 30, 2017 and December 31, 2016, the total notional amount of such agreements was $42.7 million and $48.1 million and resulted in a derivative asset with a fair value of $351,000 and $494,000, respectively, which were included in other assets and a derivative liability of $351,000 and $494,000, respectively, which were included in other liabilities.Reclassifications: Some items in the prior period financial statements were reclassified to conform to the current presentation.Adoption of New Accounting Standards: The Financial Accounting Standards Board “FASB” issued Accounting Standards Update (“ASU”) ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the following: Accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The amendments are effective for annual periods beginning after December 15, 2016, and for interim periods within those annual periods. The impact of adoption of this ASU by the Company was not material. 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU changes generally accepted accounting principles (“GAAP”) to require premiums on purchased callable debt securities to be amortized to the earliest call date. Previous GAAP allowed entities to amortize to contractual maturity or to call date. The amendments in this ASU are effective for annual periods beginning after December 15, 2018, with early adoption permitted. As the Company has consistently amortized premiums on its purchased callable debt securities to the earliest call date, the Company has elected to early adopt this ASU effective January 1, 2017. There was no impact of adoption of this ASU by the Company.MACATAWA BANK CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Newly Issued Not Yet Effective Standards: FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this Update create a new topic in the Codification, Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such2016-13, as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. This ASU may require the Company to change how it recognizes certain recurring revenue streams within trust and investment management fees and interchange income. Certain fees are currently recognized annually or semi-annually and may need to be accrued monthly under the new standard. The timing of revenue recognition is expected to change nominally. The total annual revenue for such fees amounts to less than $60,000. amended, Financial disclosures relative to revenue will be expanded as a result of this ASU.FASB issued ASU 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. As the Company owns most of its branch locations, this ASU will apply primarily to operating leases and the impact of adoption of this ASU by the Company is not expected to be material.FASB issued ASU No. 2016-13, Financial Instruments—Instruments—Credit Losses (Topic 326)326): Measurement of Credit Losses on Financial Instruments. This ASU, commonly referred to as Current Expected Credit Loss ("CECL"), 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,FASB also issued ASU 2022-02,Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross chargeoffs by year of origination. It also prescribes guidance for reporting modifications of loans to borrowers experiencing financial difficulty.available-for-salecommitments expected to be funded over their estimated lives. The allowance is calculated using the same methodology, inputs and assumptions as the funded portion of loans at the segment level applied to the amount of commitments expected to be funded.will now haveAFS. At September 30, 2023, there was no ACL related to debt securities AFS. Accrued interest receivable on debt securities was excluded from the estimate of credit losses.presented ascollected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in the Company's Consolidated Statements of Income in the provision for credit losses. Accrued interest receivable on HTM securities is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities. With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. The Company has never experienced any loss on HTM securities. At September 30, 2023, there was no ACL related to securities HTM.rather thanif needed, reduces deferred tax assets to the amount expected to be realized.write-down.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.2019, and for2023, including interim periods within thosethese fiscal years. The Company is currently evaluatingalready utilizes the impactproportional amortization method for its investments in low income housing tax credit investments and as it has no other types of investments in tax credit structures, adoption of this new ASU on its consolidated financial statements.No. 2016-15, Statement of Cash Flows2023-01,Leases (Topic 230)842): Classification of Certain Cash Receipts and Cash Payments (a consensus ofCommon Control Arrangements. This standard requires entities to amortize leasehold improvements associated with common control leases over the FASB Emerging Issues Task Force). This ASU addresses concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified inuseful life to the statement of cash flows. In particular, this ASU addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.common control group. The amendments arestandard is effective for annual periodsthe Company for fiscal years beginning after December 15, 2017, and for2023, including interim periods within those annual periods. The impact ofthese fiscal years. As the Company does not have any such common control leases, adoption of this ASU by the Company is standard will not expected to be material.-12-1 2– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. This ASU simplifies and expands the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplifies the application of Topic 815, Derivatives and Hedging, through targeted improvements in key practice areas. This includes expanding the list of items eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships. In addition, the ASU prescribes how hedging results should be presented and requires incremental disclosures. These changes are intended to allow preparers more flexibility and to enhance the transparency of how hedging results are presented and disclosed. Further, the ASU provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings in the current period. The ASU is effective for years beginning after December 15, 2018, and interim periods within those years. The Company does not expect the impact of adoption of this ASU to be material.MACATAWA BANK CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)NOTE 2 – SECURITIES U.S. Treasury and federal agency securities $ 98,386 $ 58 $ (709) $ 97,735 U.S. Agency MBS and CMOs 20,281 13 (161) 20,133 Tax-exempt state and municipal bonds 41,255 677 (133) 41,799 Taxable state and municipal bonds 43,100 89 (315) 42,874 Corporate bonds and other debt securities 10,165 16 (20) 10,161 Other equity securities 1,500 --- (20) 1,480 $ 214,687 $ 853 $ (1,358) $ 214,182 Tax-exempt state and municipal bonds $ 61,927 $ 927 $ --- $ 62,854 U.S. Treasury and federal agency securities $ 85,582 $ 49 $ (1,281) $ 84,350 U. S. Agency MBS and CMOs 12,037 11 (231) 11,817 Tax-exempt state and municipal bonds 39,578 212 (603) 39,187 Taxable state and municipal bonds 34,255 65 (437) 33,883 Corporate bonds and other debt securities 13,765 16 (55) 13,726 Other equity securities 1,500 --- (30) 1,470 $ 186,717 $ 353 $ (2,637) $ 184,433 Tax-exempt state and municipal bonds $ 69,378 $ 573 $ (102) $ 69,849 $ 255,887 $ — $ (15,774 ) $ 240,113 127,040 — (17,078 ) 109,962 34,614 — (1,365 ) 33,249 116,132 4 (7,927 ) 108,209 12,161 — (417 ) 11,744 $ 545,834 $ 4 $ (42,561 ) $ 503,277 $ 251,248 $ — $ (12,277 ) $ 238,971 78,755 55 (3,323 ) 75,487 $ 330,003 $ 55 $ (15,600 ) $ 314,458 $ 240,921 $ 23 $ (16,310 ) $ 224,634 128,165 — (14,347 ) 113,818 37,198 10 (498 ) 36,710 120,647 49 (8,525 ) 112,171 12,387 — (463 ) 11,924 $ 539,318 $ 82 $ (40,143 ) $ 499,257 $ 251,307 $ — $ (13,677 ) $ 237,630 97,458 415 (2,853 ) 95,020 $ 348,765 $ 415 $ (16,530 ) $ 332,650 sale of securities available for sale in the three month periods ended September 30, 2017 and 2016. Proceeds from the sale of securities were $5.8 million in the nine month period ended September 30, 2017 resulting in net gains of $3,000, as reported in the Consolidated Statements of Income. This resulted in reclassifications of $3,000 ($2,000 net of tax) from accumulated other comprehensive income to gain on salesales of securities in the Consolidated Statements of Income in the three and nine month periodperiods ended September 30, 2017. Proceeds from the sale2023 and 2022.20172023 were as follows (dollars in thousands): Held–to-Maturity Securities Available-for-Sale Securities Due in one year or less $ 14,012 $ 14,019 $ 18,486 $ 18,493 Due from one to five years 13,622 14,055 115,857 115,387 Due from five to ten years 10,687 11,019 55,693 55,805 Due after ten years 23,606 23,761 23,151 23,017 $ 61,927 $ 62,854 $ 213,187 $ 212,702 $ 133,471 $ 131,195 $ 96,702 $ 95,025 179,098 166,829 304,828 283,371 17,434 16,434 18,656 16,224 — — 125,648 108,657 $ 330,003 $ 314,458 $ 545,834 $ 503,277 20172023 and December 31, 2016,2022, 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 U.S. Treasury and federal agency securities $ 60,225 $ (472) $ 15,497 $ (237) $ 75,722 $ (709) U.S. Agency MBS and CMOs 16,883 (129) 1,087 (32) 17,970 (161) Tax-exempt state and municipal bonds 7,428 (79) 2,124 (54) 9,552 (133) Taxable state and municipal bonds 20,469 (239) 3,199 (76) 23,668 (315) Corporate bonds and other debt securities 4,269 (9) 1,507 (11) 5,776 (20) Other equity securities 1,480 (20) --- --- 1,480 (20) Total temporarily impaired $ 110,754 $ (948) $ 23,414 $ (410) $ 134,168 $ (1,358) Less than 12 Months 12 Months or More Total U.S. Treasury and federal agency securities $ 59,129 $ (1,271) $ 3,053 $ (10) $ 62,182 $ (1,281) U.S. Agency MBS and CMOs 10,702 (231) --- --- 10,702 (231) Tax-exempt state and municipal bonds 49,508 (698) 1,672 (7) 51,180 (705) Taxable state and municipal bonds 22,633 (437) --- --- 22,633 (437) Corporate bonds and other debt securities 5,745 (50) 500 (5) 6,245 (55) Other equity securities 1,470 (30) --- --- 1,470 (30) Total temporarily impaired $ 149,187 $ (2,717) $ 5,225 $ (22) $ 154,412 $ (2,739) $ 32,037 $ (293 ) $ 208,077 $ (15,481 ) $ 240,114 $ (15,774 ) 27,594 (646 ) 82,369 (16,432 ) 109,963 (17,078 ) 18,452 (692 ) 14,796 (673 ) 33,248 (1,365 ) 12,611 (153 ) 93,537 (7,774 ) 106,148 (7,927 ) 460 (10 ) 11,284 (407 ) 11,744 (417 ) $ 91,154 $ (1,794 ) $ 410,063 $ (40,767 ) $ 501,217 $ (42,561 ) $ — $ — $ 238,972 $ (12,277 ) $ 238,972 $ (12,277 ) 14,869 (206 ) 53,122 (3,117 ) 67,991 (3,323 ) $ 14,869 $ (206 ) $ 292,094 $ (15,394 ) $ 306,963 $ (15,600 ) -15-Other-Than-Temporary-Impairment $ 144,796 $ (6,230 ) $ 66,008 $ (10,080 ) $ 210,804 $ (16,310 ) 64,427 (4,789 ) 41,340 (9,558 ) 105,767 (14,347 ) 31,337 (498 ) — — 31,337 (498 ) 71,165 (3,337 ) 33,452 (5,188 ) 104,617 (8,525 ) 10,668 (357 ) 1,256 (106 ) 11,924 (463 ) $ 322,393 $ (15,211 ) $ 142,056 $ (24,932 ) $ 464,449 $ (40,143 ) $ 237,630 $ (13,677 ) $ — $ — $ 237,630 $ (13,677 ) 57,671 (2,314 ) 21,721 (539 ) 79,392 (2,853 ) $ 295,301 $ (15,991 ) $ 21,721 $ (539 ) $ 317,022 $ (16,530 ) for other-than-temporary impairment ("OTTI")in an unrealized loss position at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In analyzing an issuer's financial condition, Management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer's financial condition.OTTI charges were necessary during the three and nine month periods ended allowance for credit losses on securities available for sale or held to maturity have been established as of September 30, 2017 and 2016.$2.0$3.6 million and $3.5 million were pledged as security for public deposits, letters of credit and for other purposes required or permitted by law at September 30, 20172023 and December 31, 2016.2022, respectively. Commercial and industrial $ 418,838 $ 449,342 Commercial real estate: Residential developed 9,077 11,970 Unsecured to residential developers 2,410 4,734 Vacant and unimproved 38,677 40,286 Commercial development 486 378 Residential improved 83,441 75,348 Commercial improved 295,924 289,478 Manufacturing and industrial 100,347 95,787 Total commercial real estate 530,362 517,981 Consumer Residential mortgage 221,829 217,614 Unsecured 254 396 Home equity 82,296 88,113 Other secured 6,458 7,366 Total consumer 310,837 313,489 Total loans 1,260,037 1,280,812 Allowance for loan losses (16,434 ) (16,962 ) $ 1,243,603 $ 1,263,850 $ 488,224 $ 441,716 5,040 7,234 800 — 37,084 36,270 89 103 116,407 112,791 257,673 259,281 150,192 121,924 567,285 537,603 180,420 139,148 113 121 51,798 56,321 3,450 2,839 235,781 198,429 1,291,290 1,177,748 (17,001 ) (15,285 ) $ 1,274,289 $ 1,162,463 -16-loancredit losses by portfolio segment was as follows (dollars in thousands): Consumer Unallocated Total Beginning balance $ 6,336 $ 6,583 $ 3,621 $ 30 $ 16,570 Charge-offs --- --- (55) --- (55) Recoveries 32 199 38 --- 269 Provision for loan losses (212) (94) (43) (1) (350) Ending Balance $ 6,156 $ 6,688 $ 3,561 $ 29 $ 16,434 Consumer Unallocated Total Beginning balance $ 4,960 $ 8,065 $ 3,894 $ 40 $ 16,959 Charge-offs --- --- (46) --- (46) Recoveries 50 95 39 --- 184 Provision for loan losses 515 (548) (190) (27) (250) Ending Balance $ 5,525 $ 7,612 $ 3,697 $ 13 $ 16,847 Consumer Unallocated Total Beginning balance $ 6,345 $ 6,703 $ 3,871 $ 43 $ 16,962 Charge-offs (108) --- (113) --- (221) Recoveries 96 818 129 --- 1,043 Provision for loan losses (177) (833) (326) (14) (1,350) Ending Balance $ 6,156 $ 6,688 $ 3,561 $ 29 $ 16,434 Consumer Unallocated Total Beginning balance $ 4,826 $ 8,457 $ 3,761 $ 37 $ 17,081 Charge-offs --- --- (158) --- (158) Recoveries 123 772 129 --- 1,024 Provision for loan losses 576 (1,617) (35) (24) (1,100) Ending Balance $ 5,525 $ 7,612 $ 3,697 $ 13 $ 16,847 $ 7,011 $ 6,928 $ 3,099 $ 71 $ 17,109 — — (41 ) — (41 ) 8 50 25 — 83 (398 ) 114 177 (43 ) (150 ) $ 6,621 $ 7,092 $ 3,260 $ 28 $ 17,001 $ 5,596 $ 7,180 $ 2,458 $ 51 $ 15,285 1,299 (212 ) 389 — 1,476 — — (84 ) — (84 ) 24 56 94 — 174 (298 ) 68 403 (23 ) 150 $ 6,621 $ 7,092 $ 3,260 $ 28 $ 17,001 $ 5,256 $ 7,022 $ 2,316 $ 37 $ 14,631 — — (46 ) — (46 ) 175 5 56 — 236 179 (147 ) (14 ) (18 ) — $ 5,610 $ 6,880 $ 2,312 $ 19 $ 14,821 $ 5,176 $ 8,051 $ 2,633 $ 29 $ 15,889 (38 ) — (103 ) — (141 ) 185 276 112 — 573 287 (1,447 ) (330 ) (10 ) (1,500 ) $ 5,610 $ 6,880 $ 2,312 $ 19 $ 14,821 -17- $ — $ — $ — $ — $ — $ — $ — $ — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 84 84 — — — — — — 84 84 — — — — — — 84 84 $ 584 $ — $ — — — — — — — — — — — — — 27 — — 296 — — 546 — — 869 — — — — — — — — — — — — — — — — — $ 1,453 $ — $ — loancredit losses and the recorded investment in loans by portfolio segment and based on impairment method (dollars in thousands): Consumer Unallocated Total Allowance for loan losses: Ending allowance attributable to loans: Individually reviewed for impairment $ 568 $ 244 $ 534 $ --- $ 1,346 Collectively evaluated for impairment 5,588 6,444 3,027 29 15,088 Total ending allowance balance $ 6,156 $ 6,688 $ 3,561 $ 29 $ 16,434 Loans: Individually reviewed for impairment $ 4,555 $ 8,742 $ 8,663 $ --- $ 21,960 Collectively evaluated for impairment 414,283 521,620 302,174 --- 1,238,077 Total ending loans balance $ 418,838 $ 530,362 $ 310,837 $ --- $ 1,260,037 Consumer Unallocated Total Allowance for loan losses: Ending allowance attributable to loans: Individually reviewed for impairment $ 605 $ 368 $ 723 $ --- $ 1,696 Collectively evaluated for impairment 5,740 6,335 3,148 43 15,266 Total ending allowance balance $ 6,345 $ 6,703 $ 3,871 $ 43 $ 16,962 Loans: Individually reviewed for impairment $ 5,994 $ 11,934 $ 11,726 $ --- $ 29,654 Collectively evaluated for impairment 443,348 506,047 301,763 --- 1,251,158 Total ending loans balance $ 449,342 $ 517,981 $ 313,489 $ --- $ 1,280,812 $ 55 $ 20 $ 220 $ — $ 295 5,541 7,160 2,238 51 14,990 $ 5,596 $ 7,180 $ 2,458 $ 51 $ 15,285 $ 3,603 $ 518 $ 2,886 $ — $ 7,007 438,113 537,085 195,543 — 1,170,741 $ 441,716 $ 537,603 $ 198,429 $ — $ 1,177,748 -18-September 30, 2017December 31, 2022 (dollars in thousands): With no related allowance recorded: Commercial and industrial $ 1,414 $ 1,414 $ --- Commercial real estate: Residential developed --- --- --- Unsecured to residential developers --- --- --- Vacant and unimproved --- --- --- Commercial development 190 190 --- Residential improved 5 5 --- Commercial improved --- --- --- Manufacturing and industrial --- --- --- 195 195 --- Consumer: Residential mortgage --- --- --- Unsecured --- --- --- Home equity --- --- --- Other secured --- --- --- --- --- --- Total with no related allowance recorded $ 1,609 $ 1,609 $ --- With an allowance recorded: Commercial and industrial $ 3,141 $ 3,141 $ 568 Commercial real estate: Residential developed 181 181 4 Unsecured to residential developers --- --- --- Vacant and unimproved 361 361 12 Commercial development --- --- --- Residential improved 2,212 2,212 88 Commercial improved 5,609 5,609 139 Manufacturing and industrial 184 184 1 8,547 8,547 244 Consumer: Residential mortgage 6,865 6,846 422 Unsecured --- --- --- Home equity 1,817 1,817 112 Other secured --- --- --- 8,682 8,663 534 Total with an allowance recorded $ 20,370 $ 20,351 $ 1,346 Total $ 21,979 $ 21,960 $ 1,346 $ 3,278 $ 3,278 $ — $ 2,338 31 31 — 33 31 31 — 33 — — — — $ 3,309 $ 3,309 $ — $ 2,371 $ 325 $ 325 $ 55 $ 365 307 307 9 313 180 180 11 185 487 487 20 498 2,653 2,653 202 2,619 29 29 2 29 204 204 16 234 2,886 2,886 220 2,882 $ 3,698 $ 3,698 $ 295 $ 3,745 $ 7,007 $ 7,007 $ 295 $ 6,116 -19-The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2016 (dollars in thousands): With no related allowance recorded: Commercial and industrial $ 2,298 $ 2,298 $ --- Commercial real estate: Residential developed --- --- --- Unsecured to residential developers --- --- --- Vacant and unimproved --- --- --- Commercial development --- --- --- Residential improved 27 27 --- Commercial improved 350 350 --- Manufacturing and industrial --- --- --- 377 377 --- Consumer: Residential mortgage --- --- --- Unsecured --- --- --- Home equity --- --- --- Other secured --- --- --- --- --- --- Total with no related allowance recorded $ 2,675 $ 2,675 $ --- With an allowance recorded: Commercial and industrial $ 3,696 $ 3,696 $ 605 Commercial real estate: Residential developed 187 187 4 Unsecured to residential developers --- --- --- Vacant and unimproved 387 387 9 Commercial development 189 189 6 Residential improved 4,687 4,687 216 Commercial improved 5,879 5,879 128 Manufacturing and industrial 228 228 5 11,557 11,557 368 Consumer: Residential mortgage 7,523 7,523 464 Unsecured --- --- --- Home equity 4,203 4,203 259 Other secured --- --- --- 11,726 11,726 723 Total with an allowance recorded $ 26,979 $ 26,979 $ 1,696 Total $ 29,654 $ 29,654 $ 1,696 MACATAWA BANK CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)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, 2017 and 2016 (dollars in thousands): 2017 2016 2017 2016 Average of impaired loans during the period: Commercial and industrial $ 4,047 $ 5,093 $ 5,410 $ 6,489 Commercial real estate: Residential developed 181 126 183 42 Unsecured to residential developers --- --- --- --- Vacant and unimproved 372 418 338 433 Commercial development 189 190 189 191 Residential improved 2,255 5,156 3,002 5,396 Commercial improved 5,925 6,627 6,026 7,660 Manufacturing and industrial 185 235 246 237 Consumer 8,793 12,501 10,366 12,828 Interest income recognized during impairment: Commercial and industrial 179 203 697 740 Commercial real estate 108 172 360 516 Consumer 80 112 306 350 Cash-basis interest income recognized Commercial and industrial 177 195 708 746 Commercial real estate 114 169 363 513 Consumer 79 111 306 346 MACATAWA BANK CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)NOTE 3 – LOANS (Continued)Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. 20172023 and December 31, 2016 (dollars in thousands)2022: Commercial and industrial $ 4 $ --- Commercial real estate: Residential developed --- --- Unsecured to residential developers --- --- Vacant and unimproved --- --- Commercial development 239 --- Residential improved 91 --- Commercial improved 110 --- Manufacturing and industrial --- --- 440 --- Consumer: Residential mortgage 58 --- Unsecured 7 --- Home equity --- --- Other secured 12 --- 77 --- Total $ 521 $ --- Commercial and industrial $ 36 $ --- Commercial real estate: Residential developed --- --- Unsecured to residential developers --- --- Vacant and unimproved --- --- Commercial development 49 --- Residential improved 6 --- Commercial improved 128 --- Manufacturing and industrial --- --- 183 --- Consumer: Residential mortgage 58 --- Unsecured 16 --- Home equity 7 --- Other secured --- --- 81 --- Total $ 300 $ --- $ — $ — $ — $ — $ — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1 1 — 1 — — — — — — — — — — — — — — — — 1 1 — 1 $ — $ 1 $ 1 $ — $ 1 -22- $ — $ — $ — $ — $ — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 78 78 — 78 — — — — — — — — — — — — — — — — 78 78 — 78 $ — $ 78 $ 78 $ — $ 78 20172023 and December 31, 20162022 by class of loans (dollars in thousands): Total Commercial and industrial $ 22 $ --- $ 22 $ 418,816 $ 418,838 Commercial real estate: Residential developed --- --- --- 9,077 9,077 Unsecured to residential developers --- --- --- 2,410 2,410 Vacant and unimproved 308 --- 308 38,369 38,677 Commercial development --- 239 239 247 486 Residential improved --- 91 91 83,350 83,441 Commercial improved 107 --- 107 295,817 295,924 Manufacturing and industrial --- --- --- 100,347 100,347 415 330 745 529,617 530,362 Consumer: Residential mortgage --- 56 56 221,773 221,829 Unsecured --- --- --- 254 254 Home equity 33 --- 33 82,263 82,296 Other secured 5 11 16 6,442 6,458 38 67 105 310,732 310,837 Total $ 475 $ 397 $ 872 $ 1,259,165 $ 1,260,037 Total Commercial and industrial $ 425 $ 28 $ 453 $ 448,889 $ 449,342 Commercial real estate: Residential developed --- --- --- 11,970 11,970 Unsecured to residential developers --- --- --- 4,734 4,734 Vacant and unimproved --- --- --- 40,286 40,286 Commercial development --- 49 49 329 378 Residential improved 74 5 79 75,269 75,348 Commercial improved 478 --- 478 289,000 289,478 Manufacturing and industrial --- --- --- 95,787 95,787 552 54 606 517,375 517,981 Consumer: Residential mortgage 64 56 120 217,494 217,614 Unsecured --- --- --- 396 396 Home equity 187 --- 187 87,926 88,113 Other secured 81 --- 81 7,285 7,366 332 56 388 313,101 313,489 Total $ 1,309 $ 138 $ 1,447 $ 1,279,365 $ 1,280,812
30-90 | Greater Than | Total | Loans Not | |||||||||||||||||
September 30, 2023 | Days | 90 Days | Past Due | Past Due | Total | |||||||||||||||
Commercial and industrial | $ | — | $ | — | $ | — | $ | 488,224 | $ | 488,224 | ||||||||||
Commercial real estate: | ||||||||||||||||||||
Residential developed | — | — | — | 5,040 | 5,040 | |||||||||||||||
Unsecured to residential developers | — | — | — | 800 | 800 | |||||||||||||||
Vacant and unimproved | — | — | — | 37,084 | 37,084 | |||||||||||||||
Commercial development | — | — | — | 89 | 89 | |||||||||||||||
Residential improved | — | — | — | 116,407 | 116,407 | |||||||||||||||
Commercial improved | — | — | — | 257,673 | 257,673 | |||||||||||||||
Manufacturing and industrial | — | — | — | 150,192 | 150,192 | |||||||||||||||
— | — | — | 567,285 | 567,285 | ||||||||||||||||
Consumer: | ||||||||||||||||||||
Residential mortgage | — | — | — | 180,420 | 180,420 | |||||||||||||||
Unsecured | — | — | — | 113 | 113 | |||||||||||||||
Home equity | — | — | — | 51,798 | 51,798 | |||||||||||||||
Other secured | — | — | — | 3,450 | 3,450 | |||||||||||||||
— | — | — | 235,781 | 235,781 | ||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 1,291,290 | $ | 1,291,290 |
30-90 | Greater Than | Total | Loans Not | |||||||||||||||||
December 31, 2022 | Days | 90 Days | Past Due | Past Due | Total | |||||||||||||||
Commercial and industrial | $ | — | $ | — | $ | — | $ | 441,716 | $ | 441,716 | ||||||||||
Commercial real estate: | ||||||||||||||||||||
Residential developed | — | — | — | 7,234 | 7,234 | |||||||||||||||
Unsecured to residential developers | — | — | — | — | — | |||||||||||||||
Vacant and unimproved | — | — | — | 36,270 | 36,270 | |||||||||||||||
Commercial development | — | — | — | 103 | 103 | |||||||||||||||
Residential improved | — | — | — | 112,791 | 112,791 | |||||||||||||||
Commercial improved | 71 | — | 71 | 259,210 | 259,281 | |||||||||||||||
Manufacturing and industrial | — | — | — | 121,924 | 121,924 | |||||||||||||||
71 | — | 71 | 537,532 | 537,603 | ||||||||||||||||
Consumer: | ||||||||||||||||||||
Residential mortgage | — | 77 | 77 | 139,071 | 139,148 | |||||||||||||||
Unsecured | — | — | — | 121 | 121 | |||||||||||||||
Home equity | 24 | — | 24 | 56,297 | 56,321 | |||||||||||||||
Other secured | — | — | — | 2,839 | 2,839 | |||||||||||||||
24 | 77 | 101 | 198,328 | 198,429 | ||||||||||||||||
Total | $ | 95 | $ | 77 | $ | 172 | $ | 1,177,576 | $ | 1,177,748 |
NOTE 3– LOANS
(Continued)At times, the Company had allocated $1,346,000 and $1,696,000will modify terms of specific reserves to customers whosea loan terms have been modified in troubled debt restructurings (“TDRs”) as of September 30, 2017 and December 31, 2016, respectively. These loans may have involved the restructuring of terms to allow customersthe customer 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 status at the time of restructure, it will remain on accrual status after the restructuring. In some cases, a nonaccrual loan may be placed on accrual status 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 accruingaccrual status.
As with other impairedindividually reviewed loans, an allowance for loancredit loss is estimated for each TDRsuch modification made to borrowers experiencing financial difficulty 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 impairedindividually reviewed 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 loans, 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 TDRsmodifications to borrowers experiencing financial difficulty 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 restructuringsmodifications to borrowers experiencing financial difficulty as of September 30, 2017 and December 31, 20162023 (dollars in thousands):
September 30, 2017 | December 31, 2016 | |||||||||||||||
Number of Loans | Outstanding Recorded Balance | Number of Loans | Outstanding Recorded Balance | |||||||||||||
Commercial and industrial | 20 | $ | 4,555 | 25 | $ | 5,994 | ||||||||||
Commercial real estate | 38 | 8,742 | 49 | 11,933 | ||||||||||||
Consumer | 103 | 8,663 | 116 | 12,059 | ||||||||||||
161 | $ | 21,960 | 190 | $ | 29,986 |
September 30, 2023 | ||||||||||||
Outstanding | Percentage to | |||||||||||
Number of | Recorded | Total | ||||||||||
Loans | Balance | Loans | ||||||||||
Commercial and industrial | 3 | $ | 266 | 0.05 | % | |||||||
Commercial real estate | 3 | 493 | 0.09 | % | ||||||||
Consumer | 31 | 2,690 | 1.14 | % | ||||||||
37 | $ | 3,449 | 0.27 | % |
NOTE 3– LOANS
(Continued)The following table presents information related to accruing troubled debt restructuringsmodifications to borrowers experiencing financial difficulty as of September 30, 2017 and December 31, 2016.2023. The table presents the amount of accruing troubled debt restructuringsmodifications that were on nonaccrual status prior to the restructuring,modification, accruing at the time of restructuringmodification and those that were upgraded to accruing status after receiving six consecutive monthly payments in accordance with the restructuredmodified terms as of eachthe period reported (dollars in thousands):
September 30, 2017 | December 31, 2016 | |||||||
Accruing TDR - nonaccrual at restructuring | $ | --- | $ | --- | ||||
Accruing TDR - accruing at restructuring | 18,526 | 25,665 | ||||||
Accruing TDR - upgraded to accruing after six consecutive payments | 3,057 | 4,172 | ||||||
$ | 21,583 | $ | 29,837 |
September 30, | ||||
2023 | ||||
Accruing - nonaccrual at modification | $ | — | ||
Accruing - accruing at modification | 3,449 | |||
Accruing - upgraded to accruing after six consecutive payments | — | |||
$ | 3,449 |
There was one commercial loan modification made to a borrower experiencing financial difficulty during the three month period ended September 30, 2023. The pre-modification balance of the loan was $584,000 and there was no writedown upon modification. There was one consumer loan and one commercial loan modification made to borrowers experiencing financial difficulty during the nine month period ended September 30, 2023. The pre-modification balance of these loans totaled $618,000 and there were no writedowns upon modification. There was one consumer loan modification made to a borrower experiencing financial difficulty during the three month period ended September 30, 2022. The pre-modification balance of this loan totaled $278,000 and there was no writedown upon modification. There were two consumer loan modifications during the nine month period ended September 30, 2022. The pre-modification balance of these loans totaled $377,000 and there were no writedowns upon modification.
There were no defaults on loans with modifications to borrowers experiencing financial difficulty during the three and nine month periods ended September 30, 20172023 and 2016 (dollars in thousands):
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | |||||||||||||||||||||||
# of Loans | Pre-TDR Balance | Writedown Upon TDR | # of Loans | Pre-TDR Balance | Writedown Upon TDR | |||||||||||||||||||
Commercial and industrial | --- | $ | --- | $ | --- | --- | $ | --- | $ | --- | ||||||||||||||
Commercial real estate | --- | --- | --- | 1 | 59 | --- | ||||||||||||||||||
Consumer | 2 | 222 | --- | --- | --- | --- | ||||||||||||||||||
2 | 222 | $ | --- | 1 | $ | 59 | $ | --- |
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||||||||||||
# of Loans | Pre-TDR Balance | Writedown Upon TDR | # of Loans | Pre-TDR Balance | Writedown Upon TDR | |||||||||||||||||||
Commercial and industrial | --- | $ | --- | $ | --- | --- | $ | --- | $ | --- | ||||||||||||||
Commercial real estate | 1 | 1,018 | --- | 1 | 59 | --- | ||||||||||||||||||
Consumer | 4 | 396 | --- | 6 | 277 | --- | ||||||||||||||||||
5 | 1,414 | $ | --- | 7 | $ | 336 | $ | --- |
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. The higher the risk grade, the stronger likelihood of loss. At grade 7, a loan is placed on nonaccrual status. 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 risk1. 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)
The following table summarizes loan ratings by grade for commercial loans (dollars in thousands):
Term Loans Amortized Cost Basis By Origination Year and Risk Grades | ||||||||||||||||||||||||||||||||
September 30, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Total | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||||||||||
Grades 1-3 | $ | 42,102 | $ | 56,819 | $ | 16,680 | $ | 5,488 | $ | 12,718 | $ | 41,434 | $ | 66,332 | $ | 241,573 | ||||||||||||||||
Grade 4 | 55,344 | 40,840 | 22,181 | 14,968 | 7,699 | 24,553 | 72,555 | 238,140 | ||||||||||||||||||||||||
Grade 5 | — | 415 | 59 | 284 | 72 | 1,232 | 5,820 | 7,882 | ||||||||||||||||||||||||
Grade 6 | 584 | — | 20 | — | — | 25 | — | 629 | ||||||||||||||||||||||||
Grade 7-8 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 98,030 | $ | 98,074 | $ | 38,940 | $ | 20,740 | $ | 20,489 | $ | 67,244 | $ | 144,707 | $ | 488,224 | |||||||||||||||||
Residential development | ||||||||||||||||||||||||||||||||
Grades 1-3 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Grade 4 | 399 | 612 | 679 | — | — | — | 3,350 | 5,040 | ||||||||||||||||||||||||
Grade 5 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Grade 6 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Grade 7-8 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 399 | $ | 612 | $ | 679 | $ | — | $ | — | $ | — | $ | 3,350 | $ | 5,040 | |||||||||||||||||
Unsecured to residential developers | ||||||||||||||||||||||||||||||||
Grades 1-3 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 800 | $ | — | $ | 800 | ||||||||||||||||
Grade 4 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Grade 5 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Grade 6 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Grade 7-8 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | — | $ | — | $ | — | $ | — | $ | — | $ | 800 | $ | — | $ | 800 | |||||||||||||||||
Vacant and unimproved | ||||||||||||||||||||||||||||||||
Grades 1-3 | $ | 449 | $ | 4,842 | $ | 8,144 | $ | 6,874 | $ | — | $ | 83 | $ | 150 | $ | 20,542 | ||||||||||||||||
Grade 4 | 1,548 | 2,498 | 2,671 | 7,987 | 157 | 110 | 239 | 15,210 | ||||||||||||||||||||||||
Grade 5 | 1,332 | — | — | — | — | — | — | 1,332 | ||||||||||||||||||||||||
Grade 6 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Grade 7-8 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 3,329 | $ | 7,340 | $ | 10,815 | $ | 14,861 | $ | 157 | $ | 193 | $ | 389 | $ | 37,084 | |||||||||||||||||
Commercial development | ||||||||||||||||||||||||||||||||
Grades 1-3 | $ | — | $ | 89 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 89 | ||||||||||||||||
Grade 4 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Grade 5 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Grade 6 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Grade 7-8 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | — | $ | 89 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 89 | |||||||||||||||||
Residential improved | ||||||||||||||||||||||||||||||||
Grades 1-3 | $ | 4,635 | $ | 12,320 | $ | 1,359 | $ | 8,797 | $ | 251 | $ | 5,225 | $ | 789 | $ | 33,376 | ||||||||||||||||
Grade 4 | 974 | 553 | 33,253 | 1,795 | 7,092 | 15,454 | 23,882 | 83,003 | ||||||||||||||||||||||||
Grade 5 | — | — | 28 | — | — | — | — | 28 | ||||||||||||||||||||||||
Grade 6 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Grade 7-8 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 5,609 | $ | 12,873 | $ | 34,640 | $ | 10,592 | $ | 7,343 | $ | 20,679 | $ | 24,671 | $ | 116,407 | |||||||||||||||||
Commercial improved | ||||||||||||||||||||||||||||||||
Grades 1-3 | $ | 12,533 | $ | 22,410 | $ | 51,324 | $ | 19,385 | $ | 14,513 | $ | 15,695 | $ | 8,582 | $ | 144,442 | ||||||||||||||||
Grade 4 | 6,353 | 34,017 | 16,729 | 31,082 | 16,674 | 2,080 | 443 | 107,378 | ||||||||||||||||||||||||
Grade 5 | 269 | 26 | — | — | 2,164 | 3,098 | — | 5,557 | ||||||||||||||||||||||||
Grade 6 | — | — | 296 | — | — | — | — | 296 | ||||||||||||||||||||||||
Grade 7-8 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 19,155 | $ | 56,453 | $ | 68,349 | $ | 50,467 | $ | 33,351 | $ | 20,873 | $ | 9,025 | $ | 257,673 | |||||||||||||||||
Manufacturing and industrial | ||||||||||||||||||||||||||||||||
Grades 1-3 | $ | 7,062 | $ | 35,006 | $ | 5,425 | $ | 6,672 | $ | 4,240 | $ | 3,824 | $ | 880 | $ | 63,109 | ||||||||||||||||
Grade 4 | 16,712 | 26,539 | 12,692 | 7,603 | 5,641 | 13,138 | 1,665 | 83,990 | ||||||||||||||||||||||||
Grade 5 | 170 | — | — | — | — | 305 | — | 475 | ||||||||||||||||||||||||
Grade 6 | — | — | — | — | — | 2,618 | — | 2,618 | ||||||||||||||||||||||||
Grade 7-8 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 23,944 | $ | 61,545 | $ | 18,117 | $ | 14,275 | $ | 9,881 | $ | 19,885 | $ | 2,545 | $ | 150,192 | |||||||||||||||||
Total Commercial | ||||||||||||||||||||||||||||||||
Grades 1-3 | $ | 66,781 | $ | 131,486 | $ | 82,932 | $ | 47,216 | $ | 31,722 | $ | 67,061 | $ | 76,733 | $ | 503,931 | ||||||||||||||||
Grade 4 | 81,330 | 105,059 | 88,205 | 63,435 | 37,263 | 55,335 | 102,134 | 532,761 | ||||||||||||||||||||||||
Grade 5 | 1,771 | 441 | 87 | 284 | 2,236 | 4,635 | 5,820 | 15,274 | ||||||||||||||||||||||||
Grade 6 | 584 | — | 316 | — | — | 2,643 | — | 3,543 | ||||||||||||||||||||||||
Grade 7-8 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 150,466 | $ | 236,986 | $ | 171,540 | $ | 110,935 | $ | 71,221 | $ | 129,674 | $ | 184,687 | $ | 1,055,509 |
NOTE 3– LOANS (Continued)
As of September 30, 2017 and December 31, 2016,2022, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):
September 30, 2017 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | Total | |||||||||||||||||||||||||||
Commercial and industrial | $ | --- | $ | 15,104 | $ | 103,220 | $ | 281,082 | $ | 15,603 | $ | 3,825 | $ | 4 | $ | --- | $ | 418,838 | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||
Residential developed | --- | --- | 1,173 | 7,119 | 785 | --- | --- | --- | 9,077 | |||||||||||||||||||||||||||
Unsecured to residential developers | --- | --- | --- | 2,410 | --- | --- | --- | --- | 2,410 | |||||||||||||||||||||||||||
Vacant and unimproved | --- | --- | 16,252 | 18,975 | 3,450 | --- | --- | --- | 38,677 | |||||||||||||||||||||||||||
Commercial development | --- | --- | 110 | 137 | --- | --- | 239 | --- | 486 | |||||||||||||||||||||||||||
Residential improved | --- | --- | 5,218 | 75,297 | 1,579 | 1,256 | 91 | --- | 83,441 | |||||||||||||||||||||||||||
Commercial improved | --- | 1,287 | 63,600 | 226,190 | 3,798 | 939 | 110 | --- | 295,924 | |||||||||||||||||||||||||||
Manufacturing & industrial | --- | 961 | 44,416 | 52,150 | 2,301 | 519 | --- | --- | 100,347 | |||||||||||||||||||||||||||
$ | --- | $ | 17,352 | $ | 233,989 | $ | 663,360 | $ | 27,516 | $ | 6,539 | $ | 444 | $ | --- | $ | 949,200 |
December 31, 2016 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | Total | |||||||||||||||||||||||||||
Commercial and industrial | $ | --- | $ | 27,619 | $ | 118,243 | $ | 282,527 | $ | 14,610 | $ | 6,307 | $ | 36 | $ | --- | $ | 449,342 | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||
Residential developed | --- | --- | 2,328 | 8,786 | 856 | --- | --- | --- | 11,970 | |||||||||||||||||||||||||||
Unsecured to residential developers | --- | --- | --- | 4,734 | --- | --- | --- | --- | 4,734 | |||||||||||||||||||||||||||
Vacant and unimproved | --- | --- | 17,672 | 19,028 | 3,586 | --- | --- | --- | 40,286 | |||||||||||||||||||||||||||
Commercial development | --- | --- | --- | 140 | --- | 189 | 49 | --- | 378 | |||||||||||||||||||||||||||
Residential improved | --- | --- | 7,100 | 63,957 | 2,628 | 1,657 | 6 | --- | 75,348 | |||||||||||||||||||||||||||
Commercial improved | --- | 2,433 | 66,259 | 210,449 | 9,084 | 1,125 | 128 | --- | 289,478 | |||||||||||||||||||||||||||
Manufacturing & industrial | --- | 1,665 | 38,719 | 51,718 | 3,076 | 609 | --- | --- | 95,787 | |||||||||||||||||||||||||||
$ | --- | $ | 31,717 | $ | 250,321 | $ | 641,339 | $ | 33,840 | $ | 9,887 | $ | 219 | $ | --- | $ | 967,323 |
September 30, 2017 | December 31, 2016 | |||||||
Not classified as impaired | $ | 1,247 | $ | 2,608 | ||||
Classified as impaired | 5,736 | 7,498 | ||||||
Total commercial loans classified substandard or worse | $ | 6,983 | $ | 10,106 |
December 31, 2022 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | Total | |||||||||||||||||||||||||||
Commercial and industrial | $ | 15,040 | $ | 21,451 | $ | 175,762 | $ | 220,987 | $ | 8,309 | $ | 167 | $ | — | $ | — | $ | 441,716 | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||
Residential developed | — | — | — | 7,234 | — | — | — | — | 7,234 | |||||||||||||||||||||||||||
Unsecured to residential developers | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Vacant and unimproved | — | 1,231 | 18,406 | 16,633 | — | — | — | — | 36,270 | |||||||||||||||||||||||||||
Commercial development | — | — | 103 | — | — | — | — | — | 103 | |||||||||||||||||||||||||||
Residential improved | — | — | 25,585 | 87,176 | 30 | — | — | — | 112,791 | |||||||||||||||||||||||||||
Commercial improved | — | 17,802 | 83,769 | 151,641 | 5,762 | 307 | — | — | 259,281 | |||||||||||||||||||||||||||
Manufacturing & industrial | — | 11,422 | 32,977 | 73,566 | 1,646 | 2,313 | — | — | 121,924 | |||||||||||||||||||||||||||
$ | 15,040 | $ | 51,906 | $ | 336,602 | $ | 557,237 | $ | 15,747 | $ | 2,787 | $ | — | $ | — | $ | 979,319 |
NOTE 3– LOANS
(Continued)The Company considers the performance of the loan portfolio and its impact on the allowance for loancredit 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 by year of origination and based on delinquency status at September 30, 2023 (dollars in thousands):
Term Loans Amortized Cost Basis By Origination Year | ||||||||||||||||||||||||||||||||
September 30, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Total | ||||||||||||||||||||||||
Retail | ||||||||||||||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||||||||||||||
Performing | $ | 57,860 | $ | 40,375 | $ | 26,324 | $ | 9,800 | $ | 4,936 | $ | 29,136 | $ | 11,989 | $ | 180,420 | ||||||||||||||||
Nonperforming | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 57,860 | $ | 40,375 | $ | 26,324 | $ | 9,800 | $ | 4,936 | $ | 29,136 | $ | 11,989 | $ | 180,420 | |||||||||||||||||
Consumer unsecured | ||||||||||||||||||||||||||||||||
Performing | $ | — | $ | — | $ | — | $ | 12 | $ | 13 | $ | — | $ | 88 | $ | 113 | ||||||||||||||||
Nonperforming | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | — | $ | — | $ | — | $ | 12 | $ | 13 | $ | — | $ | 88 | $ | 113 | |||||||||||||||||
Home equity | ||||||||||||||||||||||||||||||||
Performing | $ | 256 | $ | 701 | $ | 223 | $ | 461 | $ | 219 | $ | 1,989 | $ | 47,949 | $ | 51,798 | ||||||||||||||||
Nonperforming | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 256 | $ | 701 | $ | 223 | $ | 461 | $ | 219 | $ | 1,989 | $ | 47,949 | $ | 51,798 | |||||||||||||||||
Other | ||||||||||||||||||||||||||||||||
Performing | $ | 1,658 | $ | 745 | $ | 607 | $ | 251 | $ | 50 | $ | 139 | $ | — | $ | 3,450 | ||||||||||||||||
Nonperforming | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 1,658 | $ | 745 | $ | 607 | $ | 251 | $ | 50 | $ | 139 | $ | — | $ | 3,450 | |||||||||||||||||
Total Retail | $ | 59,774 | $ | 41,821 | $ | 27,154 | $ | 10,524 | $ | 5,218 | $ | 31,264 | $ | 60,026 | $ | 235,781 |
The following table presents the recorded investment in consumer loans based on payment activitystatus at December 31, 2022 (dollars in thousands):
September 30, 2017 | Residential Mortgage | Consumer Unsecured | Home Equity | Consumer Other | ||||||||||||
Performing | $ | 221,773 | $ | 254 | $ | 82,296 | $ | 6,447 | ||||||||
Nonperforming | 56 | --- | --- | 11 | ||||||||||||
Total | $ | 221,829 | $ | 254 | $ | 82,296 | $ | 6,458 |
December 31, 2016 | Residential Mortgage | Consumer Unsecured | Home Equity | Consumer Other | ||||||||||||
Performing | $ | 217,558 | $ | 396 | $ | 88,113 | $ | 7,366 | ||||||||
Nonperforming | 56 | --- | --- | --- | ||||||||||||
Total | $ | 217,614 | $ | 396 | $ | 88,113 | $ | 7,366 |
Nine Months Ended September 30, 2017 | Year Ended December 31, 2016 | Nine Months Ended September 30, 2016 | ||||||||||
Beginning balance | $ | 22,864 | $ | 28,377 | $ | 28,377 | ||||||
Additions, transfers from loans | 60 | 339 | 102 | |||||||||
Proceeds from sales of other real estate owned | (6,227 | ) | (5,339 | ) | (4,155 | ) | ||||||
Valuation allowance reversal upon sale | (7,003 | ) | (1,158 | ) | (533 | ) | ||||||
Gain on sales of other real estate owned | 660 | 645 | 365 | |||||||||
10,354 | 22,864 | 24,156 | ||||||||||
Less: valuation allowance | (3,693 | ) | (10,611 | ) | (11,046 | ) | ||||||
Ending balance | $ | 6,661 | $ | 12,253 | $ | 13,110 |
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||
Beginning balance | $ | 10,611 | $ | 10,805 | ||||
Additions charged to expense | 85 | 774 | ||||||
Reversals upon sale | (7,003 | ) | (533 | ) | ||||
Ending balance | $ | 3,693 | $ | 11,046 |
Residential | Consumer | Home | Consumer | |||||||||||||
December 31, 2022 | Mortgage | Unsecured | Equity | Other | ||||||||||||
Performing | $ | 139,071 | $ | 121 | $ | 56,321 | $ | 2,839 | ||||||||
Nonperforming | 77 | — | — | — | ||||||||||||
Total | $ | 139,148 | $ | 121 | $ | 56,321 | $ | 2,839 |
NOTE 5 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:
Loans Held for Sale:
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 aOther 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:
NOTE 5 4– FAIR VALUE
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Fair | Assets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
September 30, 2023 | ||||||||||||||||
Available for sale securities | ||||||||||||||||
U.S. Treasury and federal agency securities | $ | 240,113 | $ | — | $ | 240,113 | $ | — | ||||||||
U.S. Agency MBS and CMOs | 109,962 | — | 109,962 | — | ||||||||||||
Tax-exempt state and municipal bonds | 33,249 | — | 33,249 | — | ||||||||||||
Taxable state and municipal bonds | 108,209 | — | 108,209 | — | ||||||||||||
Corporate bonds and other debt securities | 11,744 | — | 11,744 | — | ||||||||||||
Other equity securities | 1,260 | — | 1,260 | — | ||||||||||||
Loans held for sale | — | — | — | — | ||||||||||||
Interest rate swaps | 6,812 | — | 6,812 | — | ||||||||||||
Total assets measured at fair value on recurring basis | $ | 511,349 | $ | — | $ | 511,349 | $ | — | ||||||||
Interest rate swaps | $ | (6,812 | ) | $ | — | $ | (6,812 | ) | $ | — | ||||||
Total liabilities measured at fair value on recurring basis | $ | (6,812 | ) | $ | — | $ | (6,812 | ) | $ | — | ||||||
December 31, 2022 | ||||||||||||||||
Available for sale securities | ||||||||||||||||
U.S. Treasury and federal agency securities | $ | 224,634 | $ | — | $ | 224,634 | $ | — | ||||||||
U.S. Agency MBS and CMOs | 113,818 | — | 113,818 | — | ||||||||||||
Tax-exempt state and municipal bonds | 36,710 | — | 36,710 | — | ||||||||||||
Taxable state and municipal bonds | 112,171 | — | 112,171 | — | ||||||||||||
Corporate bonds and other debt securities | 11,924 | — | 11,924 | — | ||||||||||||
Other equity securities | 1,304 | — | 1,304 | — | ||||||||||||
Loans held for sale | 215 | — | 215 | — | ||||||||||||
Interest rate swaps | 6,463 | — | 6,463 | — | ||||||||||||
Total assets measured at fair value on recurring basis | $ | 507,239 | $ | — | $ | 507,239 | $ | — | ||||||||
Interest rate swaps | $ | (6,463 | ) | $ | — | $ | (6,463 | ) | $ | — | ||||||
Total liabilities measured at fair value on recurring basis | $ | (6,463 | ) | $ | — | $ | (6,463 | ) | $ | — |
Fair | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
September 30, 2017 | ||||||||||||||||
U.S. Treasury and federal agency securities | $ | 97,735 | $ | --- | $ | 97,735 | $ | --- | ||||||||
U.S. Agency MBS and CMOs | 20,133 | --- | 20,133 | --- | ||||||||||||
Tax-exempt state and municipal bonds | 41,799 | --- | 41,799 | --- | ||||||||||||
Taxable state and municipal bonds | 42,874 | --- | 42,874 | --- | ||||||||||||
Corporate bonds and other debt securities | 10,161 | --- | 10,161 | --- | ||||||||||||
Other equity securities | 1,480 | --- | 1,480 | --- | ||||||||||||
Loans held for sale | 2,199 | --- | 2,199 | --- | ||||||||||||
Interest rate swaps | 351 | --- | --- | 351 | ||||||||||||
Interest rate swaps | (351 | ) | --- | --- | (351 | ) | ||||||||||
December 31, 2016 | ||||||||||||||||
U.S. Treasury and federal agency securities | $ | 84,350 | $ | --- | $ | 84,350 | $ | --- | ||||||||
U.S. Agency MBS and CMOs | 11,817 | --- | 11,817 | --- | ||||||||||||
Tax-exempt state and municipal bonds | 39,187 | --- | 39,187 | --- | ||||||||||||
Taxable state and municipal bonds | 33,883 | --- | 33,883 | --- | ||||||||||||
Corporate bonds and other debt securities | 13,726 | --- | 13,726 | --- | ||||||||||||
Other equity securities | 1,470 | --- | 1,470 | --- | ||||||||||||
Loans held for sale | 2,181 | --- | 2,181 | --- | ||||||||||||
Interest rate swaps | 494 | --- | --- | 494 | ||||||||||||
Interest rate swaps | (494 | ) | --- | --- | (494 | ) |
NOTE 4– FAIR VALUE (Continued)
Assets measured at fair value on a non-recurring basis are summarized below (in thousands):
Fair | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
September 30, 2017 | ||||||||||||||||
Impaired loans | $ | 2,775 | $ | --- | $ | --- | $ | 2,775 | ||||||||
Other real estate owned | 4,631 | --- | --- | 4,631 | ||||||||||||
December 31, 2016 | ||||||||||||||||
Impaired loans | $ | 3,436 | $ | --- | $ | --- | $ | 3,436 | ||||||||
Other real estate owned | 9,542 | --- | --- | 9,542 |
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Fair | Assets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
September 30, 2023 | ||||||||||||||||
Collateral dependent loans | $ | 27 | $ | — | $ | — | $ | 27 | ||||||||
December 31, 2022 | ||||||||||||||||
Impaired loans | $ | 328 | $ | — | $ | — | $ | 328 |
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, 2017 | |||||||||
Impaired Loans | $ | 2,775 | Sales comparison approach | Adjustment for differences between comparable sales | 4.0 to 15.0 | ||||
Income approach | Capitalization rate | 9.5 to 11.0 | |||||||
Other real estate owned | 4,631 | Sales comparison approach | Adjustment for differences between comparable sales | 3.0 to 22.0 | |||||
Income approach | Capitalization rate | 9.5 to 11.0 | |||||||
Asset Fair Value | Valuation Technique | Unobservable Inputs | Range (%) | ||||||
December 31, 2016 | |||||||||
Impaired Loans | $ | 3,436 | Sales comparison approach | Adjustment for differences between comparable sales | 1.0 to 35.0 | ||||
Income approach | Capitalization rate | 9.5 to 11.5 | |||||||
Other real estate owned | 9,542 | Sales comparison approach | Adjustment for differences between comparable sales | 2.0 to 32.5 | |||||
Income approach | Capitalization rate | 9.5 to 11.5 |
Asset Fair | Valuation | Unobservable | |||||||||
Value | Technique | Inputs | Range (%) | ||||||||
September 30, 2023 | |||||||||||
Collateral dependent loans | $ | 27 | Sales comparison approach | Adjustment for differences between comparable sales | 2.0 to 41.0 | ||||||
Income approach | Capitalization rate | 7.5 to 8.5 |
Asset Fair | Valuation | Unobservable | |||||||||
Value | Technique | Inputs | Range (%) | ||||||||
December 31, 2022 | |||||||||||
Impaired Loans | $ | 328 | Sales comparison approach | Adjustment for differences between comparable sales | 1.5 to 20.0 | ||||||
Income approach | Capitalization rate | 9.5 to 11.0 |
NOTE 5 4– FAIR VALUE
The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at September 30, 20172023 and December 31, 20162022 (dollars in thousands):
Level in Fair Value Hierarchy | September 30, 2017 | December 31, 2016 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||
Financial assets | |||||||||||||||||
Cash and due from banks | Level 1 | $ | 28,318 | $ | 28,318 | $ | 27,690 | $ | 27,690 | ||||||||
Cash equivalents | Level 2 | 131,571 | 131,571 | 62,129 | 62,129 | ||||||||||||
Securities held to maturity | Level 3 | 61,927 | 62,854 | 69,378 | 69,849 | ||||||||||||
FHLB stock | 11,558 | NA | 11,558 | NA | |||||||||||||
Loans, net | Level 2 | 1,240,828 | 1,237,274 | 1,260,414 | 1,247,842 | ||||||||||||
Bank owned life insurance | Level 3 | 40,042 | 40,042 | 39,274 | 39,274 | ||||||||||||
Accrued interest receivable | Level 2 | 4,532 | 4,532 | 4,092 | 4,092 | ||||||||||||
Financial liabilities | |||||||||||||||||
Deposits | Level 2 | (1,506,178 | ) | (1,506,115 | ) | (1,448,724 | ) | (1,448,692 | ) | ||||||||
Other borrowed funds | Level 2 | (72,118 | ) | (71,946 | ) | (84,173 | ) | (84,051 | ) | ||||||||
Long-term debt | Level 2 | (41,238 | ) | (36,562 | ) | (41,238 | ) | (36,112 | ) | ||||||||
Accrued interest payable | Level 2 | (545 | ) | (545 | ) | (282 | ) | (282 | ) | ||||||||
Off-balance sheet credit-related items | |||||||||||||||||
Loan commitments | --- | --- | --- | --- |
Level in | September 30, 2023 | December 31, 2022 | |||||||||||||||
Fair Value | Carrying | Fair | Carrying | Fair | |||||||||||||
Hierarchy | Amount | Value | Amount | Value | |||||||||||||
Financial assets | |||||||||||||||||
Cash and due from banks | Level 1 | $ | 40,687 | $ | 40,687 | $ | 51,215 | $ | 51,215 | ||||||||
Federal funds sold and other short-term investments | Level 1 | 469,786 | 469,786 | 703,955 | 703,955 | ||||||||||||
Securities held to maturity - U.S. Treasury | Level 2 | 251,248 | 238,971 | 251,307 | 237,630 | ||||||||||||
Securities held to maturity - tax-exempt and municipal | Level 3 | 78,755 | 75,487 | 97,458 | 95,020 | ||||||||||||
FHLB stock | Level 3 | 10,211 | 10,211 | 10,211 | 10,211 | ||||||||||||
Loans, net | Level 2 | 1,274,262 | 1,249,319 | 1,162,135 | 1,131,387 | ||||||||||||
Bank owned life insurance | Level 3 | 54,043 | 54,043 | 53,345 | 53,345 | ||||||||||||
Accrued interest receivable | Level 2 | 9,957 | 9,957 | 7,606 | 7,606 | ||||||||||||
Financial liabilities | |||||||||||||||||
Deposits | Level 2 | (2,445,586 | ) | (2,447,649 | ) | (2,615,142 | ) | (2,615,860 | ) | ||||||||
Other borrowed funds | Level 2 | (30,000 | ) | (29,006 | ) | (30,000 | ) | (28,666 | ) | ||||||||
Accrued interest payable | Level 2 | (554 | ) | (554 | ) | (114 | ) | (114 | ) | ||||||||
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.transferability, so fair value approximates its cost. The fair value of off-balance sheet credit-related items is not significant.
The estimated fair values of financial instruments disclosed above 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 6 – PREMISES AND EQUIPMENT – NET
Derivatives not designated as hedges are not speculative and equipment wereresult from a service provided to certain commercial loan borrowers. The Company executes interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with a correspondent bank to offset the impact of the interest rate swaps with the commercial banking customers. The net result is the desired floating rate loans and a minimization of the risk exposure of the interest rate swap transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent bank are recognized directly to earnings. Since they offset perfectly, there is no net impact to earnings.
The notional and fair value of derivative instruments as followsof September 30, 2023 and December 31, 2022 are reflected in the following table (dollars in thousands):
September 30, 2017 | December 31, 2016 | |||||||
Land | $ | 16,384 | $ | 18,227 | ||||
Building | 43,625 | 43,600 | ||||||
Leasehold improvements | 782 | 779 | ||||||
Furniture and equipment | 21,243 | 20,576 | ||||||
Construction in progress | 240 | 358 | ||||||
82,274 | 83,540 | |||||||
Less accumulated depreciation | (35,452 | ) | (33,514 | ) | ||||
$ | 46,822 | $ | 50,026 |
Notional Amount | Balance Sheet Location | Fair Value | |||||||
September 30, 2023 | |||||||||
Derivative assets | |||||||||
Interest rate swaps | $ | 55,349 | Other Assets | $ | 6,812 | ||||
Derivative liabilities | |||||||||
Interest rate swaps | 55,349 | Other Liabilities | 6,812 |
Notional Amount | Balance Sheet Location | Fair Value | |||||||
December 31, 2022 | |||||||||
Derivative assets | |||||||||
Interest rate swaps | $ | 62,661 | Other Assets | $ | 6,463 | ||||
Derivative liabilities | |||||||||
Interest rate swaps | 62,661 | Other Liabilities | 6,463 |
The fair value of interest rate swaps in a net loss on saleliability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $6.8 million and $6.5 million as of $70,000. The other location was in southwest Grand Rapids (Metro Village) and was sold for $1.2 million, resulting in a net loss on sale of $176,000. These losses are included in other noninterest income in the Consolidated Statements of Income for the three and nine month periods ended September 30, 2017.2023 and December 31, 2022, respectively. The Bank has a master netting arrangement with the correspondent bank and has the right to offset, however it has elected to present the assets and liabilities gross. The Bank is required to pledge collateral to the correspondent bank equal to or in excess of the net liability position. The Bank's derivative liability with the correspondent bank was $0 at September 30, 2023 and $0 at December 31, 2022. Securities pledged as collateral with fair values totaling $1.7 million and $1.7 million were provided to the counterparty correspondent bank as of September 30, 2023 and December 31, 2022, respectively.
Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $55.3 million as of September 30, 2023 and $62.7 million at December 31, 2022. Associated credit exposure is generally mitigated by securing the interest rate swaps with the underlying collateral of the loan instrument that has been hedged.
NOTE 7 6– DEPOSITS
Deposits are summarized as follows (dollars in thousands):
September 30, 2017 | December 31, 2016 | |||||||
Noninterest-bearing demand | $ | 497,310 | $ | 501,478 | ||||
Interest bearing demand | 351,742 | 340,715 | ||||||
Savings and money market accounts | 564,883 | 532,853 | ||||||
Certificates of deposit | 92,243 | 73,678 | ||||||
$ | 1,506,178 | $ | 1,448,724 |
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
Noninterest-bearing demand | $ | 653,052 | $ | 834,879 | ||||
Interest bearing demand | 660,714 | 760,889 | ||||||
Savings and money market accounts | 847,429 | 922,418 | ||||||
Certificates of deposit | 284,391 | 96,956 | ||||||
$ | 2,445,586 | $ | 2,615,142 |
Time deposits that exceedexceeded the FDIC insurance limit of $250,000$250,000 were approximately $28.1$85.1 million at September 30, 20172023 and $17.4$29.7 million at December 31, 2016.
NOTE 87 - 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, 2017 | |||||||||
Single maturity fixed rate advances | $ | 70,000 | February 2018 to April 2021 | 1.59 | % | ||||
Amortizable mortgage advances | 2,118 | March 2018 to July 2018 | 3.78 | % | |||||
$ | 72,118 |
Principal Terms | Advance Amount | Range of Maturities | Weighted Average Interest Rate | ||||||
December 31, 2016 | |||||||||
Single maturity fixed rate advances | $ | 80,000 | February 2018 to April 2021 | 1.60 | % | ||||
Amortizable mortgage advances | 4,173 | March 2018 to July 2018 | 3.78 | % | |||||
$ | 84,173 |
Weighted | |||||||||
Advance | Average | ||||||||
Principal Terms | Amount | Range of Maturities | Interest Rate | ||||||
September 30, 2023 | |||||||||
Single maturity fixed rate advance | $ | 10,000 | February 2024 | 2.63 | % | ||||
Putable advance | 20,000 | November 2024 | 1.81 | % | |||||
$ | 30,000 |
Weighted | |||||||||
Advance | Average | ||||||||
Principal Terms | Amount | Range of Maturities | Interest Rate | ||||||
December 31, 2022 | |||||||||
Single maturity fixed rate advance | $ | 10,000 | February 2024 | 2.63 | % | ||||
Putable advance | 20,000 | November 2024 | 1.81 | % | |||||
$ | 30,000 |
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 $443.5$463.5 million and $425.0$446.1 million under a blanket lien arrangement at September 30, 20172023 and December 31, 2016,2022, respectively.
NOTE 87 - OTHER BORROWED FUNDS
Scheduled repayments of FHLB advances as of September 30, 20172023 were as follows (in thousands):
2017 | $ | --- | ||
2018 | 52,118 | |||
2019 | 10,000 | |||
2020 | --- | |||
2021 | 10,000 | |||
Thereafter | --- | |||
$ | 72,118 |
2023 | $ | — | ||
2024 | 30,000 | |||
2025 | — | |||
2026 | — | |||
2027 | — | |||
Thereafter | — | |||
$ | 30,000 |
Federal Reserve Bank borrowings
The Company has a financing arrangement with the Federal Reserve Bank. There were no borrowings outstanding at September 30, 20172023 and December 31, 2016,2022, and the Company had approximately $12.6$1.3 million and $18.1$5.5 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling $15.1$1.4 million and $20.7$5.8 million at September 30, 20172023 and December 31, 2016,2022, respectively. In March 2023, the Federal Reserve Bank implemented a new lending facility called the Bank Term Funding Program. This program allows a bank to borrow against its investment portfolio, at par value, with no reduction for unrealized losses. The term is for one year and the interest rate is fixed at the time the advance is taken and there is no prepayment penalty. Allowable investments for pledge are those the Federal Reserve Bank can own. This would include all of the Company's investments except municipal securities and corporate bonds. At September 30, 2023, the Company had no advances under this program and had $634.4 million in unused borrowing capacity under this program. The program expires on March 11, 2024.
NOTE 98 - 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, 2017 2023 and 20162022 are as follows (dollars in thousands, except per share data):
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
Net income available to common shares | $ | 4,875 | $ | 4,604 | $ | 14,098 | $ | 11,844 | ||||||||
Weighted average shares outstanding, including participating stock awards - Basic | 33,942,248 | 33,921,599 | 33,942,318 | 33,923,067 | ||||||||||||
Dilutive potential common shares: | ||||||||||||||||
Stock options | 5,021 | --- | 6,101 | --- | ||||||||||||
Stock warrants | --- | --- | --- | --- | ||||||||||||
Weighted average shares outstanding - Diluted | 33,947,269 | 33,921,599 | 33,948,419 | 33,923,067 | ||||||||||||
Basic earnings per common share | $ | 0.14 | $ | 0.14 | $ | 0.42 | $ | 0.35 | ||||||||
Diluted earnings per common share | $ | 0.14 | $ | 0.14 | $ | 0.42 | $ | 0.35 |
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Net income available to common shares | $ | 11,413 | $ | 10,045 | $ | 33,729 | $ | 22,614 | ||||||||
Weighted average shares outstanding, including participating stock awards - Basic | 34,291,487 | 34,251,792 | 34,293,531 | 34,253,459 | ||||||||||||
Dilutive potential common shares: | ||||||||||||||||
Stock options | — | — | — | — | ||||||||||||
Weighted average shares outstanding - Diluted | 34,291,487 | 34,251,792 | 34,293,531 | 34,253,459 | ||||||||||||
Basic earnings per common share | $ | 0.33 | $ | 0.29 | $ | 0.98 | $ | 0.66 | ||||||||
Diluted earnings per common share | $ | 0.33 | $ | 0.29 | $ | 0.98 | $ | 0.66 |
There were no antidilutive shares of common stock in the three and nine month periods ended September 30, 2017.
NOTE 109 - FEDERAL INCOME TAXES
Income tax expense was as follows (dollars in thousands):
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
Current | $ | 2,261 | $ | 1,370 | $ | 4,004 | $ | 4,596 | ||||||||
Deferred | (104 | ) | (20 | ) | 2,249 | (167 | ) | |||||||||
$ | 2,157 | $ | 1,350 | $ | 6,253 | $ | 4,429 |
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Current | $ | 2,654 | $ | 2,436 | $ | 7,921 | $ | 4,787 | ||||||||
Deferred | 154 | 52 | 336 | 585 | ||||||||||||
$ | 2,808 | $ | 2,488 | $ | 8,257 | $ | 5,372 |
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, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
Statutory rate | 35 | % | 35 | % | 35 | % | 35 | % | ||||||||
Statutory rate applied to income before taxes | $ | 2,461 | $ | 2,083 | $ | 7,123 | $ | 5,695 | ||||||||
Deduct | ||||||||||||||||
Tax-exempt interest income | (195 | ) | (154 | ) | (564 | ) | (451 | ) | ||||||||
Bank-owned life insurance | (88 | ) | (51 | ) | (256 | ) | (262 | ) | ||||||||
Tax return credits and other adjustments | (5 | ) | (512 | ) | (5 | ) | (512 | ) | ||||||||
Other, net | (16 | ) | (16 | ) | (45 | ) | (41 | ) | ||||||||
$ | 2,157 | $ | 1,350 | $ | 6,253 | $ | 4,429 |
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Statutory rate | 21 | % | 21 | % | 21 | % | 21 | % | ||||||||
Statutory rate applied to income before taxes | $ | 2,986 | $ | 2,632 | $ | 8,817 | $ | 5,877 | ||||||||
Deduct | ||||||||||||||||
Tax-exempt interest income | (114 | ) | (137 | ) | (362 | ) | (434 | ) | ||||||||
Bank-owned life insurance | (51 | ) | (45 | ) | (139 | ) | (144 | ) | ||||||||
Other, net | (13 | ) | 38 | (59 | ) | 73 | ||||||||||
$ | 2,808 | $ | 2,488 | $ | 8,257 | $ | 5,372 |
The realization of deferred tax assets (net of a recorded valuation allowance) 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. No valuation allowance was necessaryManagement believes it is more likely than not that all of the deferred tax assets at September 30, 2017 or December 31, 2016.
NOTE 109 - FEDERAL INCOME TAXES (Continued)
The net deferred tax asset recorded included the following amounts of deferred tax assets and liabilities (dollars in thousands):
September 30, 2017 | December 31, 2016 | |||||||
Deferred tax assets | ||||||||
Allowance for loan losses | $ | 5,752 | $ | 5,937 | ||||
Nonaccrual loan interest | 598 | 718 | ||||||
Valuation allowance on other real estate owned | 1,292 | 3,714 | ||||||
Unrealized loss on securities available for sale | 177 | 799 | ||||||
Other | 539 | 176 | ||||||
Gross deferred tax assets | 8,358 | 11,344 | ||||||
Valuation allowance | --- | --- | ||||||
Total net deferred tax assets | 8,358 | 11,344 | ||||||
Deferred tax liabilities | ||||||||
Depreciation | (1,608 | ) | (1,705 | ) | ||||
Prepaid expenses | (349 | ) | (399 | ) | ||||
Other | (409 | ) | (377 | ) | ||||
Gross deferred tax liabilities | (2,366 | ) | (2,481 | ) | ||||
Net deferred tax asset | $ | 5,992 | $ | 8,863 |
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
Deferred tax assets | ||||||||
Allowance for credit losses | $ | 3,570 | $ | 3,210 | ||||
Net deferred loan fees | — | — | ||||||
Nonaccrual loan interest | 13 | 12 | ||||||
Valuation allowance on other real estate owned | — | — | ||||||
Unrealized loss on securities available for sale and transferred to held to maturity | 8,921 | 8,394 | ||||||
Other | 388 | 257 | ||||||
Gross deferred tax assets | 12,892 | 11,873 | ||||||
Valuation allowance | — | — | ||||||
Total net deferred tax assets | 12,892 | 11,873 | ||||||
Deferred tax liabilities | ||||||||
Depreciation | (1,032 | ) | (1,098 | ) | ||||
Net deferred loan fees | (15 | ) | (309 | ) | ||||
Prepaid expenses | (303 | ) | (21 | ) | ||||
Other | (1,316 | ) | (733 | ) | ||||
Gross deferred tax liabilities | (2,666 | ) | (2,161 | ) | ||||
Net deferred tax asset | $ | 10,226 | $ | 9,712 |
There were no unrecognized tax benefits at September 30, 20172023 or December 31, 20162022 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 examinationaudit by the Internal Revenue Service for years before 2013.2020.
NOTE 11 10– 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 partycustomer does not perform is represented by the contractual amount for commitments to extend credit and standby letters of credit. At September 30, 2023, the reserve for unfunded commitments was $73,000 and was included in other liabilities in the Company's consolidated balance sheet.
NOTE 10– COMMITMENTS AND OFF BALANCE-SHEET RISK (Continued)
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, 2017 | December 31, 2016 | |||||||
Commitments to make loans | $ | 121,797 | $ | 90,293 | ||||
Letters of credit | 12,117 | 13,823 | ||||||
Unused lines of credit | 495,151 | 437,435 |
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
Commitments to extend credit | $ | 83,509 | $ | 77,384 | ||||
Letters of credit | 10,034 | 13,455 | ||||||
Unused lines of credit | 715,072 | 745,674 |
The notional amount of commitments to fund mortgage loans to be sold into the secondary market was approximately $14.2 million$0 and $19.8 million$0 at September 30, 20172023 and December 31, 2016,2022, 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$250,000 and $0 at September 30, 2017,2023 and December 31, 2022, respectively.
At September 30, 2023, approximately 32.7%39.1% 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 LIBORterm SOFR and generally expire within 30 days. The majority of the unused lines of credit were at variable rates tied to prime.prime or SOFR.
NOTE 12 11– 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, 2017,2023, 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 13 12– 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.
NOTE 12– SHAREHOLDERS' EQUITY (Continued)
The regulatory capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1(CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III raises theThe minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% tois 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in)), which effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires abuffer). The minimum leverage ratio ofis 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures.
At September 30, 20172023 and December 31, 2016,2022, actual capital levels and minimum required levels were (dollars in thousands):
Actual | Minimum Capital Adequacy | Minimum Capital Adequacy With Capital Buffer | To Be Well Capitalized Under Prompt Corrective Action Regulations | |||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||
CET1 capital (to risk weighted assets) | ||||||||||||||||||||||||
Consolidated | $ | 173,779 | 11.7 | % | $ | 66,837 | 4.5 | % | $ | 85,403 | 5.8 | % | N/A | N/A | ||||||||||
Bank | 207,805 | 14.0 | 66,831 | 4.5 | 85,395 | 5.8 | $ | 96,533 | 6.5 | % | ||||||||||||||
Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||
Consolidated | 213,779 | 14.4 | 89,116 | 6.0 | 107,682 | 7.3 | N/A | N/A | ||||||||||||||||
Bank | 207,805 | 14.0 | 89,108 | 6.0 | 107,672 | 7.3 | 118,810 | 8.0 | ||||||||||||||||
Total capital (to risk weighted assets) | ||||||||||||||||||||||||
Consolidated | 230,213 | 15.5 | 118,821 | 8.0 | 137,387 | 9.3 | N/A | N/A | ||||||||||||||||
Bank | 224,239 | 15.1 | 118,810 | 8.0 | 137,374 | 9.3 | 148,513 | 10.0 | ||||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||
Consolidated | 213,779 | 12.0 | 71,008 | 4.0 | N/A | N/A | N/A | N/A | ||||||||||||||||
Bank | 207,805 | 11.7 | 70,945 | 4.0 | N/A | N/A | 88,682 | 5.0 | ||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
CET1 capital (to risk weighted assets) | ||||||||||||||||||||||||
Consolidated | $ | 163,663 | 11.0 | % | $ | 66,743 | 4.5 | % | $ | 76,013 | 5.1 | % | N/A | N/A | ||||||||||
Bank | 197,972 | 13.4 | 66,737 | 4.5 | 76,006 | 5.1 | $ | 96,398 | 6.5 | % | ||||||||||||||
Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||
Consolidated | 203,663 | 13.7 | 88,991 | 6.0 | 98,261 | 6.6 | N/A | N/A | ||||||||||||||||
Bank | 197,972 | 13.4 | 88,983 | 6.0 | 98,252 | 6.6 | 118,644 | 8.0 | ||||||||||||||||
Total capital (to risk weighted assets) | ||||||||||||||||||||||||
Consolidated | 220,625 | 14.9 | 118,655 | 8.0 | 127,925 | 8.6 | N/A | N/A | ||||||||||||||||
Bank | 214,934 | 14.5 | 118,644 | 8.0 | 127,913 | 8.6 | 148,305 | 10.0 | ||||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||
Consolidated | 203,663 | 12.0 | 67,810 | 4.0 | N/A | N/A | N/A | N/A | ||||||||||||||||
Bank | 197,972 | 11.7 | 67,742 | 4.0 | N/A | N/A | 84,677 | 5.0 |
To Be Well | ||||||||||||||||||||||||||||||||
Minimum | Minimum Capital | Capitalized Under | ||||||||||||||||||||||||||||||
Capital | Adequacy With | Prompt Corrective | ||||||||||||||||||||||||||||||
Actual | Adequacy | Capital Buffer | Action Regulations | |||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||
September 30, 2023 | ||||||||||||||||||||||||||||||||
CET1 capital (to risk weighted assets) | ||||||||||||||||||||||||||||||||
Consolidated | $ | 303,438 | 17.7 | % | $ | 77,330 | 4.5 | % | $ | 120,292 | 7.0 | % | N/A | N/A | ||||||||||||||||||
Bank | 294,503 | 17.1 | 77,329 | 4.5 | 120,289 | 7.0 | $ | 111,697 | 6.5 | % | ||||||||||||||||||||||
Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||||||||||
Consolidated | 303,438 | 17.7 | 103,107 | 6.0 | 146,068 | 8.5 | N/A | N/A | ||||||||||||||||||||||||
Bank | 294,503 | 17.1 | 103,105 | 6.0 | 146,065 | 8.5 | 137,473 | 8.0 | ||||||||||||||||||||||||
Total capital (to risk weighted assets) | ||||||||||||||||||||||||||||||||
Consolidated | 320,439 | 18.7 | 137,476 | 8.0 | 180,437 | 10.5 | N/A | N/A | ||||||||||||||||||||||||
Bank | 311,504 | 18.1 | 137,473 | 8.0 | 180,434 | 10.5 | 171,842 | 10.0 | ||||||||||||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||||||||||
Consolidated | 303,438 | 10.9 | 111,285 | 4.0 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||
Bank | 294,503 | 10.6 | 111,280 | 4.0 | N/A | N/A | 139,100 | 5.0 | ||||||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||
CET1 capital (to risk weighted assets) | ||||||||||||||||||||||||||||||||
Consolidated | $ | 278,615 | 16.9 | % | $ | 74,003 | 4.5 | % | $ | 115,116 | 7.0 | % | N/A | N/A | ||||||||||||||||||
Bank | 270,274 | 16.4 | 73,992 | 4.5 | 115,098 | 7.0 | $ | 106,877 | 6.5 | % | ||||||||||||||||||||||
Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||||||||||
Consolidated | 278,615 | 16.9 | 98,670 | 6.0 | 139,783 | 8.5 | N/A | N/A | ||||||||||||||||||||||||
Bank | 270,274 | 16.4 | 98,655 | 6.0 | 139,762 | 8.5 | 131,540 | 8.0 | ||||||||||||||||||||||||
Total capital (to risk weighted assets) | ||||||||||||||||||||||||||||||||
Consolidated | 293,900 | 17.9 | 131,561 | 8.0 | 172,673 | 10.5 | N/A | N/A | ||||||||||||||||||||||||
Bank | 285,559 | 17.4 | 131,540 | 8.0 | 172,647 | 10.5 | 164,426 | 10.0 | ||||||||||||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||||||||||
Consolidated | 278,615 | 9.7 | 114,589 | 4.0 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||
Bank | 270,274 | 9.4 | 114,582 | 4.0 | N/A | N/A | 143,227 | 5.0 |
The Bank was categorized as "well capitalized" at September 30, 20172023 and December 31, 2016.
Item2. 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 Statutory Trust I and Macatawa Statutory Trust II.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. Macatawa Statutory Trusts I and II are grantor trusts and issued $20.0 million each of pooled trust preferred securities. These trusts are not consolidated in our Consolidated Financial Statements. For further information regarding consolidation, see the Notes to Consolidated Financial Statements.
At September 30, 2017,2023, we had total assets of $1.80$2.76 billion, total loans of $1.26$1.29 billion, total deposits of $1.51$2.45 billion and shareholders' equity of $173.5$269.9 million. DuringFor the third quarter of 2017,three months ended September 30, 2023, we recognized net income of $4.9$11.4 million compared to net income of $4.6$10.0 million for the same period in the third quarter of 2016.2022. For the nine months ended September 30, 2017,2023, we recognized net income of $14.1$33.7 million compared to $11.8$22.6 million for the same period in 2016.2022. The Bank was categorized as “well capitalized” under regulatory capital standards at September 30, 2017.
We paid a dividend of $0.03$0.08 per share in each quarter in 2022 and in each of 2016.the first three quarters of 2023.
In early March 2023, three bank failures caused concern regarding the financial condition and stability of the banking industry in general. We increasedbelieve that, due to the dividend to $0.04 per sharestrength of Macatawa Bank Corporation's financial condition, there was little impact of this concern on the Company. While our deposits decreased by $284.2 million in the first quarter of 2023, most of the decline took place prior to the bank failures noted. Our deposits were stable in the second quarter of 2023, declining by $9.4 million and second quarters of 2017 and $0.05 per share inincreased by $124.8 million for the third quarter of 2017.
Regarding our liquidity position, at September 30, 2023, the Company had $469.8 million in federal funds sold and overnight balances and had total additional borrowing capacity of $964.5 million, including $263.7 million in unused availability with the FHLB, $65.0 million in available fed funds facilities with correspondent banks, $1.3 million in availability at the FRB's Discount Window and $634.4 million availability in the FRB Bank Term Funding Program. At September 30, 2023, our uninsured deposits totaled approximately $1.10 billion, or 45% of total deposits. At September 30, 2023, our liquidity sources exceeded the amount of uninsured deposit balances by $336.6 million.
Our deposit base is primarily made up of many small accounts, and balances at September 30, 2023 were comprised of 42% personal customers and 58% business customers. Our core deposits - which we define as deposits we have sourced within our local markets - represented 100% of our total deposits at September 30, 2023. Our total deposit balance of $2.45 billion at September 30, 2023 remains elevated, reflecting a $740.2 million increase, or 43%, over pre-pandemic totals of $1.71 billion as of March 31, 2020.
RESULTS OF OPERATIONS
Summary:
Net income for the three months ended September 30,The increase in earnings in the three and nine months ended September 30, 20172023 compared to the same periodperiods in 20162022 was due primarily to increasedhigher levels of net interest income partially offset by lower mortgage banking income. Throughout 2022, beginning in March, the Federal Reserve Bank increased the federal funds rate several times, bringing the high end of their rate range from 0.25% at the beginning of 2022 to 4.50% at the end of 2022. The Federal Reserve Bank raised this rate an additional 50 basis points to 5.00% during the three months ended March 31, 2023, another 25 basis points to 5.25% in the three months ended June 30, 2023 and reduced nonperforminganother 25 basis points to 5.50% in the three months ended September 30, 2023. Given our asset expenses.sensitive balance sheet posture, this had a significant positive impact on our net interest income. Net interest income increased to $13.1$22.2 million in the three months ended September 30, 20172023 compared to $11.9$19.8 million in the same period in 2016. Nonperforming asset expenses (including administration costs2022 and losses) wereto $66.0 million in the nine months ended September 30, 2023 compared to $47.3 million in the same period in 2022. The high interest rate environment had a negative $77,000 forimpact on our mortgage business as gains on sales of mortgage loans decreased to $5,000 in the three months ended September 30, 20172023 compared to $325,000 for$166,000 in the same period in 2016, primarily as a result2022. Gains on sales of a decreasemortgage loans decreased to $37,000 in the nine months ended September 30, 2023 compared to $673,000 in the same period in 2022.
The provision for loancredit losses was a negative $350,000benefit of $150,000 for the three months ended September 30, 2017,2023, compared to a negative $250,000$0 for the same period in 2016.2022. We again were in a net loan recovery position for the three months ended September 30, 2017,2023, with $214,000$42,000 in net loan recoveries, compared to $138,000$190,000 in net loan recoveries in the same period in 2016. Also, income tax expense2022. The provision for credit losses was reduced by $512,000 in September 2016 due to tax credits and other adjustments that did not recur in 2017.
Net Interest Income:
Net interest income totaledNet interest income for the threenine months ended September 30, 20172023 increased 18 basis points$18.7 million compared to the same period in 20162022. Of this increase, $617,000 was from 3.39% to 3.57%. Averagechanges in the volume of average interest earning assets totaled $1.65 billionand interest bearing liabilities and $18.1 million was from increases from changes in rates earned or paid. The largest changes occurred in interest income on commercial loans and in overnight funds. The net change in interest income for threecommercial loans was an increase of $14.9 million with an increase of $13.1 million due to rate and an increase of $1.8 million due to portfolio growth. Overnight funds contributed an increase of $10.5 million, with $15.4 million due to changes in rate, partially offset by a reduction of $4.9 million due to lower average balances compared to the nine months ended September 30, 2017 compared2022 as excess funds were deployed into loans and investment securities. The average balance of our investment portfolio grew by $181.1 million from $711.8 million in the nine months ended September 30, 2022 to $1.56 billion for$892.9 million in the same period in 2016. The net2023. This growth resulted in an additional $2.7 million of interest margin was 3.21% for the three months ended September 30, 2017 compared to 3.04% for the same period in 2016. An increase of $42.4 million in average securities between periods and an increase of $36.4 million in average loans were the primary drivers of the increase. Yield on commercial loans increased from 3.88% for three months ended September 30, 2016 to 4.11% for the same period in 2017. Yield on residential mortgage loans decreased from 3.51% for the three months ended September 30, 2016 to 3.47% for the same period in 2017, while yields on consumer loans increased from 3.93% for the third quarter of 2016 to 4.32% for the third quarter of 2017. The December 2016, March 2017 and June 2017 increases in the federal funds rate had a net positive impact on our net interest margin position as more loans repriced at the higher rate than our funding sources.
The cost of fundsinterest bearing liabilities increased to 0.53% and 0.50%1.69% in the three and nine month periodsthird quarter of 2017 from 0.45% and 0.47%2023 compared to 0.26% in the third quarter of 2022. For the first nine months of 2023, the cost of interest bearing liabilities increased to 1.40% compared to 0.17% for the same periods of 2016.period in 2022. Increases in the rates paid on our interest-bearing checking, savings, and money market and certificate of deposit accounts in response to the December 2016, March 2017 and June 2017 federal funds rate and market rate increases over the past year as well as significant growth in our certificate of deposit account balances caused the slight increase in our cost of funds.
The asset yield improvement to 4.48% in the third quarter of 2023 from 3.02% in the third quarter of 2022 far outweighed the increase in cost of funds. As a result, net interest margin improved to 3.35% for the third quarter 2023 compared to 2.86% for the third quarter of 2022. Similarly for the nine month periods ended September 30, 2023 and 2022, our asset yield improved from 2.41% in 2022 to 4.31% in 2023, resulting in an increase in our net interest margin from 2.30% for the nine months ended September 30, 2022 to 3.38% for the nine months ended September 30, 2023.
The following table shows an analysis of net interest margin for the three month periods ended September 30, 20172023 and 20162022 (dollars in thousands):
For the three months ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Average Balance | Interest Earned or Paid | Average Yield or Cost | Average Balance | Interest Earned or Paid | Average Yield or Cost | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Taxable securities | $ | 162,729 | $ | 741 | 1.83 | % | $ | 136,807 | $ | 584 | 1.71 | % | ||||||||||||
Tax-exempt securities (1) | 104,387 | 574 | 3.51 | 87,918 | 451 | 3.31 | ||||||||||||||||||
Commercial loans (2) | 946,105 | 9,930 | 4.11 | 903,484 | 8,965 | 3.88 | ||||||||||||||||||
Residential mortgage loans | 219,532 | 1,905 | 3.47 | 219,170 | 1,928 | 3.51 | ||||||||||||||||||
Consumer loans | 88,933 | 969 | 4.32 | 95,551 | 945 | 3.93 | ||||||||||||||||||
Federal Home Loan Bank stock | 11,558 | 122 | 4.15 | 11,558 | 122 | 4.13 | ||||||||||||||||||
Federal funds sold and other short-term investments | 118,784 | 385 | 1.27 | 101,062 | 127 | 0.49 | ||||||||||||||||||
Total interest earning assets (1) | 1,652,028 | 14,626 | 3.57 | 1,555,550 | 13,122 | 3.39 | ||||||||||||||||||
Noninterest earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 29,940 | 28,482 | ||||||||||||||||||||||
Other | 93,334 | 96,065 | ||||||||||||||||||||||
Total assets | $ | 1,775,302 | $ | 1,680,097 | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest bearing demand | $ | 352,661 | $ | 98 | 0.11 | % | $ | 313,624 | $ | 65 | 0.08 | % | ||||||||||||
Savings and money market accounts | 551,917 | 454 | 0.33 | 522,697 | 239 | 0.19 | ||||||||||||||||||
Time deposits | 88,933 | 180 | 0.81 | 81,769 | 126 | 0.62 | ||||||||||||||||||
Borrowings: | ||||||||||||||||||||||||
Other borrowed funds | 74,190 | 314 | 1.66 | 94,384 | 419 | 1.74 | ||||||||||||||||||
Long-term debt | 41,238 | 442 | 4.20 | 41,238 | 371 | 3.52 | ||||||||||||||||||
Total interest bearing liabilities | 1,108,939 | 1,488 | 0.53 | 1,053,712 | 1,220 | 0.45 | ||||||||||||||||||
Noninterest bearing liabilities: | ||||||||||||||||||||||||
Noninterest bearing demand accounts | 488,028 | 459,372 | ||||||||||||||||||||||
Other noninterest bearing liabilities | 6,348 | 6,817 | ||||||||||||||||||||||
Shareholders' equity | 171,987 | 160,196 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 1,775,302 | $ | 1,680,097 | ||||||||||||||||||||
Net interest income | $ | 13,138 | $ | 11,902 | ||||||||||||||||||||
Net interest spread (1) | 3.04 | % | 2.94 | % | ||||||||||||||||||||
Net interest margin (1) | 3.21 | % | 3.04 | % | ||||||||||||||||||||
Ratio of average interest earning assets to average interest bearing liabilities | 148.97 | % | 147.63 | % |
For the three months ended September 30, | ||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
Interest | Average | Interest | Average | |||||||||||||||||||||
Average | Earned | Yield | Average | Earned | Yield | |||||||||||||||||||
Balance | or Paid | or Cost | Balance | or Paid | or Cost | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Taxable securities | $ | 766,437 | $ | 4,565 | 2.38 | % | $ | 670,832 | $ | 3,323 | 1.98 | % | ||||||||||||
Tax-exempt securities (1) | 112,942 | 671 | 3.06 | 137,645 | 668 | 2.50 | ||||||||||||||||||
Commercial loans (2) | 1,044,065 | 15,096 | 5.66 | 937,125 | 10,223 | 4.27 | ||||||||||||||||||
PPP loans (3) | — | — | — | 1,745 | 94 | 21.08 | ||||||||||||||||||
Residential mortgage loans | 172,580 | 1,816 | 4.20 | 128,611 | 1,093 | 3.39 | ||||||||||||||||||
Consumer loans | 57,225 | 1,153 | 8.00 | 57,724 | 754 | 5.18 | ||||||||||||||||||
Federal Home Loan Bank stock | 10,211 | 80 | 3.08 | 10,211 | 53 | 2.04 | ||||||||||||||||||
Federal funds sold and other short-term investments | 467,434 | 6,406 | 5.36 | 803,082 | 4,667 | 2.27 | ||||||||||||||||||
Total interest earning assets (1) | 2,630,894 | 29,787 | 4.48 | 2,746,975 | 20,875 | 3.02 | ||||||||||||||||||
Noninterest earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 41,475 | 42,454 | ||||||||||||||||||||||
Other | 70,700 | 84,914 | ||||||||||||||||||||||
Total assets | $ | 2,743,069 | $ | 2,874,343 | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest bearing demand | $ | 625,963 | $ | 708 | 0.45 | % | $ | 713,913 | $ | 247 | 0.14 | % | ||||||||||||
Savings and money market accounts | 838,733 | 4,019 | 1.90 | 871,508 | 636 | 0.29 | ||||||||||||||||||
Time deposits | 272,883 | 2,656 | 3.86 | 83,192 | 61 | 0.29 | ||||||||||||||||||
Borrowings: | ||||||||||||||||||||||||
Other borrowed funds | 30,000 | 160 | 2.08 | 30,000 | 160 | 2.08 | ||||||||||||||||||
Total interest bearing liabilities | 1,767,579 | 7,543 | 1.69 | 1,698,613 | 1,104 | 0.26 | ||||||||||||||||||
Noninterest bearing liabilities: | ||||||||||||||||||||||||
Noninterest bearing demand accounts | 692,436 | 917,552 | ||||||||||||||||||||||
Other noninterest bearing liabilities | 16,715 | 13,321 | ||||||||||||||||||||||
Shareholders' equity | 266,339 | 244,857 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 2,743,069 | $ | 2,874,343 | ||||||||||||||||||||
Net interest income | $ | 22,244 | $ | 19,771 | �� | |||||||||||||||||||
Net interest spread (1) | 2.79 | % | 2.76 | % | ||||||||||||||||||||
Net interest margin (1) | 3.35 | % | 2.86 | % | ||||||||||||||||||||
Ratio of average interest earning assets to average interest bearing liabilities | 148.84 | % | 161.72 | % |
(1) | Yields are presented on a tax equivalent basis using |
(2) | Includes loan fees of |
(3) | Includes loan fees of $0 and $90,000 for the three months ended September 30, 2023 and 2022, respectively. |
The following table shows an analysis of net interest margin for the nine month periods ended September 30, 20172023 and 20162022 (dollars in thousands):
For the nine months ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Average Balance | Interest Earned or Paid | Average Yield or Cost | Average Balance | Interest Earned or Paid | Average Yield or Cost | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Taxable securities | $ | 152,043 | $ | 2,025 | 1.78 | % | $ | 132,941 | $ | 1,700 | 1.70 | % | ||||||||||||
Tax-exempt securities (1) | 106,481 | 1,658 | 3.29 | 85,682 | 1,324 | 3.29 | ||||||||||||||||||
Commercial loans (2) | 952,987 | 29,317 | 4.06 | 898,039 | 26,625 | 3.90 | ||||||||||||||||||
Residential mortgage loans | 217,223 | 5,649 | 3.47 | 217,185 | 5,730 | 3.51 | ||||||||||||||||||
Consumer loans | 91,141 | 2,834 | 4.16 | 96,975 | 2,873 | 3.96 | ||||||||||||||||||
Federal Home Loan Bank stock | 11,558 | 367 | 4.19 | 11,558 | 368 | 4.18 | ||||||||||||||||||
Federal funds sold and other short-term investments | 77,710 | 666 | 1.13 | 99,753 | 383 | 0.51 | ||||||||||||||||||
Total interest earning assets (1) | 1,609,143 | 42,516 | 3.58 | 1,542,133 | 39,003 | 3.41 | ||||||||||||||||||
Noninterest earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 28,911 | 26,690 | ||||||||||||||||||||||
Other | 97,371 | 97,232 | ||||||||||||||||||||||
Total assets | $ | 1,735,425 | $ | 1,666,055 | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest bearing demand | $ | 333,148 | $ | 237 | 0.09 | % | $ | 324,554 | $ | 227 | 0.09 | % | ||||||||||||
Savings and money market accounts | 552,903 | 1,094 | 0.27 | 515,041 | 708 | 0.19 | ||||||||||||||||||
Time deposits | 82,035 | 440 | 0.71 | 85,862 | 398 | 0.62 | ||||||||||||||||||
Borrowings: | ||||||||||||||||||||||||
Other borrowed funds | 86,945 | 1,053 | 1.60 | 97,637 | 1,318 | 1.77 | ||||||||||||||||||
Long-term debt | 41,238 | 1,266 | 4.05 | 41,238 | 1,104 | 3.52 | ||||||||||||||||||
Total interest bearing liabilities | 1,096,269 | 4,090 | 0.50 | 1,064,332 | 3,755 | 0.47 | ||||||||||||||||||
Noninterest bearing liabilities: | ||||||||||||||||||||||||
Noninterest bearing demand accounts | 465,191 | 437,943 | ||||||||||||||||||||||
Other noninterest bearing liabilities | 5,756 | 6,734 | ||||||||||||||||||||||
Shareholders' equity | 168,209 | 157,046 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 1,735,425 | $ | 1,666,055 | ||||||||||||||||||||
Net interest income | $ | 38,426 | $ | 35,248 | ||||||||||||||||||||
Net interest spread (1) | 3.08 | % | 2.94 | % | ||||||||||||||||||||
Net interest margin | 3.24 | % | 3.04 | % | ||||||||||||||||||||
Ratio of average interest earning assets to average interest bearing liabilities | 146.78 | % | 144.89 | % |
For the nine months ended September 30, | ||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
Interest | Average | Interest | Average | |||||||||||||||||||||
Average | Earned | Yield | Average | Earned | Yield | |||||||||||||||||||
Balance | or Paid | or Cost | Balance | or Paid | or Cost | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Taxable securities | $ | 768,250 | $ | 13,643 | 2.37 | % | $ | 554,670 | $ | 7,375 | 1.77 | % | ||||||||||||
Tax-exempt securities (1) | 124,610 | 2,048 | 2.82 | 157,095 | 2,101 | 2.30 | ||||||||||||||||||
Commercial loans (2) | 1,021,283 | 42,973 | 5.55 | 920,883 | 26,698 | 3.82 | ||||||||||||||||||
PPP loans (3) | — | — | — | 8,980 | 1,345 | 19.75 | ||||||||||||||||||
Residential mortgage loans | 157,593 | 4,692 | 3.96 | 122,029 | 3,019 | 3.29 | ||||||||||||||||||
Consumer loans | 56,828 | 3,235 | 7.61 | 55,912 | 1,843 | 4.41 | ||||||||||||||||||
Federal Home Loan Bank stock | 10,211 | 216 | 2.81 | 10,478 | 155 | 1.95 | ||||||||||||||||||
Federal funds sold and other short-term investments | 460,719 | 17,367 | 4.97 | 923,153 | 6,916 | 0.99 | ||||||||||||||||||
Total interest earning assets (1) | 2,599,494 | 84,174 | 4.31 | 2,753,200 | 49,452 | 2.41 | ||||||||||||||||||
Noninterest earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 36,844 | 36,979 | ||||||||||||||||||||||
Other | 72,274 | 89,392 | ||||||||||||||||||||||
Total assets | $ | 2,708,612 | $ | 2,879,571 | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest bearing demand | $ | 638,996 | $ | 2,175 | 0.46 | % | $ | 700,010 | $ | 341 | 0.06 | % | ||||||||||||
Savings and money market accounts | 856,884 | 10,426 | 1.63 | 879,368 | 846 | 0.13 | ||||||||||||||||||
Time deposits | 206,595 | 5,092 | 3.30 | 87,892 | 159 | 0.24 | ||||||||||||||||||
Borrowings: | ||||||||||||||||||||||||
Other borrowed funds | 30,000 | 474 | 2.08 | 56,234 | 827 | 1.94 | ||||||||||||||||||
Total interest bearing liabilities | 1,732,475 | 18,167 | 1.40 | 1,723,504 | 2,173 | 0.17 | ||||||||||||||||||
Noninterest bearing liabilities: | ||||||||||||||||||||||||
Noninterest bearing demand accounts | 699,666 | 896,989 | ||||||||||||||||||||||
Other noninterest bearing liabilities | 16,657 | 12,499 | ||||||||||||||||||||||
Shareholders' equity | 259,814 | 246,579 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 2,708,612 | $ | 2,879,571 | ||||||||||||||||||||
Net interest income | $ | 66,007 | $ | 47,279 | ||||||||||||||||||||
Net interest spread (1) | 2.91 | % | 2.24 | % | ||||||||||||||||||||
Net interest margin (1) | 3.38 | % | 2.30 | % | ||||||||||||||||||||
Ratio of average interest earning assets to average interest bearing liabilities | 150.05 | % | 159.74 | % |
(1) | Yields are presented on a tax equivalent basis using |
(2) | Includes loan fees of |
(3) | Includes loan fees of $0 and $1.3 million for the nine months ended September 30, 2023 and 2022, respectively. |
The following table presents the dollar amount of changes in net interest income due to changes in volume and rate for the three and nine month periods ended September 30, 2023 and 2022 (dollars in thousands):
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||||||||||
2023 vs 2022 | 2023 vs 2022 | |||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
Interest income | ||||||||||||||||||||||||
Taxable securities | $ | 513 | $ | 729 | $ | 1,242 | $ | 3,349 | $ | 2,919 | $ | 6,268 | ||||||||||||
Tax-exempt securities | (170 | ) | 173 | 3 | (611 | ) | 558 | (53 | ) | |||||||||||||||
Commercial loans, excluding PPP loans | 1,265 | 3,608 | 4,873 | 3,166 | 13,109 | 16,275 | ||||||||||||||||||
PPP loans | (94 | ) | — | (94 | ) | (1,345 | ) | — | (1,345 | ) | ||||||||||||||
Residential mortgage loans | 426 | 297 | 723 | 985 | 688 | 1,673 | ||||||||||||||||||
Consumer loans | (6 | ) | 405 | 399 | 31 | 1,361 | 1,392 | |||||||||||||||||
Federal Home Loan Bank stock | — | 27 | 27 | (4 | ) | 66 | 62 | |||||||||||||||||
Federal funds sold and other short-term investments | (2,509 | ) | 4,248 | 1,739 | (4,940 | ) | 15,390 | 10,450 | ||||||||||||||||
Total interest income | (575 | ) | 9,487 | 8,912 | 631 | 34,091 | 34,722 | |||||||||||||||||
Interest expense | ||||||||||||||||||||||||
Interest bearing demand | $ | (34 | ) | $ | 495 | $ | 461 | $ | (32 | ) | $ | 1,866 | 1,834 | |||||||||||
Savings and money market accounts | (25 | ) | 3,408 | 3,383 | (22 | ) | 9,602 | 9,580 | ||||||||||||||||
Time deposits | 407 | 2,188 | 2,595 | 477 | 4,456 | 4,933 | ||||||||||||||||||
Other borrowed funds | — | — | — | (409 | ) | 56 | (353 | ) | ||||||||||||||||
Total interest expense | 348 | 6,091 | 6,439 | 14 | 15,980 | 15,994 | ||||||||||||||||||
Net interest income | $ | (923 | ) | $ | 3,396 | $ | 2,473 | $ | 617 | $ | 18,111 | $ | 18,728 |
Provision for LoanCredit Losses: The provision for loancredit losses for the three months ended September 30, 20172023 was a negative $350,000benefit of $150,000 compared to a negative $250,000$0 for the same period in 2016. The negative provisions for loan losses for each period were the result of continued stabilization of real estate values on problem credits, continued improvement in asset quality metrics and net2022. Net loan recoveries of $214,000were $42,000 in the three months ended September 30, 2017 and $138,0002023 compared to net loan recoveries of $190,000 in the same period in 2016. At September 30, 2017, we had experienced net loan recoveries in each of the past eleven quarters.2022. The provision for loancredit losses for the first nine months of 2017ended September 30, 2023 was a negative $1.35 million$150,000 compared to a negative $1.1provision benefit of $1.5 million for the same period in 2016.
Gross loan recoveries were $269,000$83,000 for the three months ended September 30, 20172023 and $184,000$236,000 for the same period in 2016.2022. In the three months ended September 30, 2017,2023, we had $55,000$41,000 in gross loan charge-offs, compared to $46,000 in the same period in 2016. For the nine months ended September 30, 2017, we experienced gross2022. Gross loan recoveries of $1,043,000 compared to $1,024,000 for the same period in 2016. Loan charge-offs were $221,000$174,000 for the nine months ended September 30, 2017 compared to $158,0002023 and $573,000 for the same period in 2016. 2022. In the nine months ended September 30, 2023, we had $84,000 in gross loan charge-offs, compared to $141,000 in the same period in 2022.
We adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to experience positive results frombe reported in accordance with the probable incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance for credit losses of $1.5 million, $62,000 to establish a reserve for unfunded commitments and a $1.2 million decrease to retained earnings to reflect the cumulative effect of adoption of CECL, with the $323,000 tax impact portion being recorded as part of the deferred tax asset on our collection efforts as evidenced by our net loan recoveries. While we expect our collection efforts to produce further recoveries, they may not continue at the same level we have experienced the past several quarters.
Noninterest Income: Noninterest income for the three and nine month periods ended September 30, 20172023 was $4.3$4.6 million and $13.0$13.8 million compared to $5.1$4.9 million and $14.2$15.0 million for the same periods in 2016.2022, respectively. The components of noninterest income are shown in the table below (in thousands):
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
Service charges and fees on deposit accounts | $ | 1,172 | $ | 1,152 | $ | 3,342 | $ | 3,312 | ||||||||
Net gains on mortgage loans | 369 | 1,175 | 1,273 | 2,235 | ||||||||||||
Trust fees | 801 | 790 | 2,412 | 2,286 | ||||||||||||
Gain as sales of securities | --- | --- | 3 | 99 | ||||||||||||
ATM and debit card fees | 1,324 | 1,272 | 3,863 | 3,715 | ||||||||||||
Bank owned life insurance (“BOLI”) income | 249 | 146 | 730 | 748 | ||||||||||||
Investment services fees | 239 | 181 | 705 | 755 | ||||||||||||
Other income | 146 | 359 | 681 | 1,069 | ||||||||||||
Total noninterest income | $ | 4,300 | $ | 5,075 | $ | 13,009 | $ | 14,219 |
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Service charges and fees on deposit accounts | $ | 1,061 | $ | 1,263 | $ | 3,072 | $ | 3,693 | ||||||||
Net gains on mortgage loans | 5 | 166 | 37 | 673 | ||||||||||||
Trust fees | 1,109 | 969 | 3,277 | 3,153 | ||||||||||||
ATM and debit card fees | 1,675 | 1,724 | 5,077 | 5,084 | ||||||||||||
Bank owned life insurance (“BOLI”) income | 239 | 217 | 660 | 687 | ||||||||||||
Investment services fees | 406 | 339 | 1,096 | 997 | ||||||||||||
Other income | 121 | 211 | 537 | 698 | ||||||||||||
Total noninterest income | $ | 4,616 | $ | 4,889 | $ | 13,756 | $ | 14,985 |
Service charges on deposit accounts decreased by $202,000 in the three months ended September 30, 2023 as compared to the same period in 2022 and were down $621,000 in the nine months ended September 30, 2023 compared to the same period in 2022 largely due to higher earnings credit offsets for treasury management accounts. Net gains on mortgage loans were down $806,000$161,000 in the three months ended September 30, 20172023 compared to the same period in 20162022 and were down $636,000 in the nine months ended September 30, 2023 compared to the same period in 2022 as a result of an overall lower levelchanges in the volume of volume.loans originated for sale. Mortgage rates increased sharply throughout 2022 and throughout 2023, causing a reduction in mortgage volume compared to 2022. In addition, more of our origination volume in the first three and nine months of 2023 was held in portfolio. Mortgage loans originated for sale in the three months ended September 30, 20172023 were $11.4 million,$284,000, compared to $38.2$6.5 million in the same period in 2016. Mortgage2022. For the first nine months of 2023, mortgage loans originated for portfoliosale were $2.9 million, compared to $25.0 million for the same period in 2022.
Trust fees were up $140,000 in the three months ended September 30, 2017 were $16.2 million,2023 compared to $25.4 millionthe three months ended September 30, 2022 and were up $124,000 in the nine months ended September 30, 2023 compared to the same period in 2016. Mortgage loans originated for sale2022. The changes for the firstthree and nine months ended September 30, 2023 were largely due to changes in market valuations of 2017 were $45.0 million, down from $76.1 million in the first nine months of 2016.underlying trust investments. ATM and debit card fees were upstable in the three and nine months ended September 30, 20172023 as compared to the same periods in 2022. Investment services fees were up $67,000 in the three months ended September 30, 2023 compared to the same period in 2022 and were up $99,000 in the nine months ended September 30, 2023 compared to the same period in 2022. These variances were largely reflective of investment market conditions during these periods. Other income was down $90,000 in the three months ended September 30, 2023 compared to the same period in 2022 and was down $161,000 in the nine months ended September 30, 2023 compared to the same period in 2022. The decrease in both periods was due to higher volume of usage byno rental income from other real estate owned being recognized in the 2023 periods as we sold our customers. BOLI incomelast other real estate owned property in the first nine months of 2016 included $290,000 in net benefits from the distribution of a death claim on a covered former employee. Trust fees were up in the first nine months of 2017 due to investment market value changes and growth in trust assets. Other noninterest income for the three month period ended September 30, 2017 was reduced by a net loss of $176,000 on the sale of property in southwest Grand Rapids (Metro Village) during the quarter. This also impacted the nine month period ended September 30, 2017, along with a net loss of $70,000 on sale of property in northwest Grand Rapids (Walker) in the second quarter of 2017.
Noninterest Expense: Noninterest expense decreasedincreased by $662,000 to $10.8$12.8 million for the three month period ended September 30, 2017, from $11.32023 as compared to $12.1 million for the same period in 2016.2022. Noninterest expense decreasedincreased by $1.8 million to $32.4$37.6 million for the nine month period ended September 30, 20172023 compared to $34.3$35.8 million for the same period in 2016.2022. The components of noninterest expense are shown in the table below (in thousands):
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
Salaries and benefits | $ | 6,211 | $ | 6,166 | $ | 18,363 | $ | 18,521 | ||||||||
Occupancy of premises | 922 | 901 | 2,939 | 2,784 | ||||||||||||
Furniture and equipment | 797 | 772 | 2,278 | 2,476 | ||||||||||||
Legal and professional | 199 | 153 | 621 | 500 | ||||||||||||
Marketing and promotion | 226 | 275 | 678 | 825 | ||||||||||||
Data processing | 655 | 741 | 2,068 | 2,089 | ||||||||||||
FDIC assessment | 134 | 166 | 404 | 638 | ||||||||||||
Interchange and other card expense | 333 | 334 | 970 | 927 | ||||||||||||
Bond and D&O insurance | 119 | 132 | 353 | 395 | ||||||||||||
Net (gains) losses on repossessed and foreclosed properties | (190 | ) | 115 | (575 | ) | 409 | ||||||||||
Administration and disposition of problem assets | 113 | 210 | 435 | 787 | ||||||||||||
Outside services | 423 | 412 | 1,280 | 1,171 | ||||||||||||
Other noninterest expense | 814 | 896 | 2,620 | 2,772 | ||||||||||||
Total noninterest expense | $ | 10,756 | $ | 11,273 | $ | 32,434 | $ | 34,294 |
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Salaries and benefits | $ | 6,949 | $ | 6,639 | $ | 20,490 | $ | 19,331 | ||||||||
Occupancy of premises | 1,024 | 989 | 3,260 | 3,232 | ||||||||||||
Furniture and equipment | 1,050 | 1,014 | 3,145 | 3,017 | ||||||||||||
Legal and professional | 355 | 268 | 973 | 733 | ||||||||||||
Marketing and promotion | 225 | 196 | 648 | 586 | ||||||||||||
Data processing | 1,002 | 984 | 2,963 | 2,792 | ||||||||||||
FDIC assessment | 330 | 201 | 990 | 578 | ||||||||||||
Interchange and other card expense | 426 | 405 | 1,212 | 1,184 | ||||||||||||
Bond and D&O insurance | 123 | 129 | 366 | 389 | ||||||||||||
Outside services | 487 | 502 | 1,427 | 1,516 | ||||||||||||
Other noninterest expense | 818 | 800 | 2,153 | 2,420 | ||||||||||||
Total noninterest expense | $ | 12,789 | $ | 12,127 | $ | 37,627 | $ | 35,778 |
Most categories of noninterest expense were relatively flat or had reductionsunchanged compared to the three and nine months ended September 30, 20162022 due to our ongoing efforts to manage expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, increased by $45,000$310,000 in the three months ended September 30, 20172023 from the same period in 2016.2022. This increase is largelywas primarily due to a higher level ofbase compensation, higher variable compensation, higher medical costs associated with employeeand lower salary deferral from commercial loan originations partially offset by lower variable compensation tied to lower mortgage production. Salaries and benefits particularly medical insurance, which was up $25,000increased by $1.2 million for the nine months ended September 30, 2023 compared to the same period in 2022 due to the same combination of factors. The table below identifies the primary components of salaries and benefits (in thousands):
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Salaries and other compensation | $ | 6,138 | $ | 5,878 | $ | 18,117 | 17,277 | |||||||||
Salary deferral from commercial loan originations | (171 | ) | (211 | ) | (531 | ) | (644 | ) | ||||||||
Bonus accrual | 287 | 344 | 862 | 786 | ||||||||||||
Mortgage production - variable comp | 125 | 91 | 314 | 376 | ||||||||||||
401k matching contributions | 195 | 187 | 603 | 586 | ||||||||||||
Medical insurance costs | 375 | 350 | 1,125 | 950 | ||||||||||||
Total salaries and benefits | $ | 6,949 | $ | 6,639 | $ | 20,490 | $ | 19,331 |
Legal and professional fees were up $87,000 in the three months ended September 30, 2016. Variable based compensation was down $83,0002023 and were up $240,000 in the nine months ended September 30, 2023 compared to the same periods in 2022 due to costs associated with new accounting and proxy disclosures as well as regulatory compliance matters related to loan and deposit accounts referred to legal counsel during the period. Data processing expenses were up $18,000 in the three months ended September 30, 2016 and was down $210,000 for the first nine months of 20172023 compared to the same period in 2016 due to lower mortgage production and brokerage volume. We had 343 full-time equivalent employees at September 30, 2017 compared to 343 at September 30, 2016.
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
Legal and professional – nonperforming assets | $ | 39 | $ | 28 | $ | 74 | $ | 127 | ||||||||
Repossessed and foreclosed property administration | 74 | 182 | 361 | 660 | ||||||||||||
Net (gains) losses on repossessed and foreclosed properties | (190 | ) | 115 | (575 | ) | 409 | ||||||||||
Total | $ | (77 | ) | $ | 325 | $ | (140 | ) | $ | 1,196 |
Federal Income Tax Expense:We recorded $2.2$2.8 million and $6.3$8.3 million in federal income tax expense for the three and nine month periods ended September 30, 20172023 compared to $1.4$2.5 million and $4.4$5.4 million respectively, infor the same periods in 2016.2022. Our effective tax raterates for the three and nine month periods ended September 30, 2017 was 30.67%2023 were 19.75% and 30.73%,19.85% compared to 22.67%19.67% and 27.22%, respectively,19.20% for the same periods in 2016. Federal income tax expense and related effective tax rates were lower in the 2016 periods due to tax credits and other adjustments recognized in our 2015 federal tax return which was filed in the third quarter of 2016.
FINANCIAL CONDITION
Total assets were $1.80$2.76 billion at September 30, 2017, an increase2023, a decrease of $62.0$147.2 million from $1.74 billion at December 31, 2016.2022. This change reflected increasesdecrease was caused primarily by a decrease in total deposits of $70.1 million in cash and cash equivalents and $29.7 million in securities available for sale, offset by decreases of $20.8 million in our loan portfolio, $7.5 million in securities held to maturity and $6.0 million in other real estate owned. Total deposits increased by $57.5 million and other borrowed funds decreased by $12.1$169.6 million at September 30, 20172023 compared to December 31, 2016.
Cash and Cash Equivalents:
Our cash and cash equivalents, which include federal funds sold and short-term investments, wereSecurities:
We classify privately placed municipal bonds.
At September 30, 2023, the overall duration of our debt security available for sale portfolio was 2.83 years and the overall duration of our debt security held to maturity portfolio was 1.87 years and were similar to durations for these portfolios before the pandemic. Net unrealized losses on debt securities available for sale increased by $2.5 million from $40.1 million at December 31, 2022 to $42.6 million at September 30, 2023. Net unrealized losses on debt securities held to maturity decreased by $570,000 from $16.1 million at December 31, 2022 to $15.5 million at September 30, 2023. Our overall bond portfolio will provide $389.5 million in liquidity through maturities and scheduled paydowns over the next 24 months ending September 30, 2025.
Per U.S. generally accepted accounting principles, unrealized gains or losses on debt securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on debt securities held to maturity are not reflected on the balance sheet in accumulated other comprehensive income (loss).
Portfolio Loans and Asset Quality:
Total portfolio loansMortgage 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.
The volume of residential mortgage loans originated for sale in the first nine months of 2023 decreased $22.1 million compared to the same period in 2022. Residential mortgage loans originated for sale were $2.9 million in the first nine months of 2023 compared to $25.0 million in the first nine months of 2022.
The following table shows our loan origination activity for loans to be held in portfolio loans during the first nine months of 20172023 and 2016,2022, broken out by loan type and also shows average originated loan size (dollars in thousands):
Nine months ended September 30, 2017 | Nine months ended September 30, 2016 | |||||||||||||||||||||||
Portfolio Originations | Percent of Total Originations | Average Loan Size | Portfolio Originations | Percent of Total Originations | Average Loan Size | |||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Residential developed | $ | 7,227 | 3.1 | % | $ | 903 | $ | 5,227 | 2.1 | % | $ | 871 | ||||||||||||
Unsecured to residential developers | --- | --- | --- | --- | --- | --- | ||||||||||||||||||
Vacant and unimproved | 2,149 | 0.9 | 269 | 552 | --- | 184 | ||||||||||||||||||
Commercial development | 125 | --- | 125 | 2,342 | 1.0 | 1,171 | ||||||||||||||||||
Residential improved | 38,828 | 16.5 | 254 | 48,718 | 19.4 | 350 | ||||||||||||||||||
Commercial improved | 41,436 | 17.6 | 1,480 | 29,632 | 11.8 | 988 | ||||||||||||||||||
Manufacturing and industrial | 12,039 | 5.1 | 926 | 11,457 | 4.6 | 955 | ||||||||||||||||||
Total commercial real estate | 101,804 | 43.2 | 482 | 97,928 | 38.9 | 510 | ||||||||||||||||||
Commercial and industrial | 60,269 | 25.6 | 685 | 58,432 | 23.2 | 526 | ||||||||||||||||||
Total commercial | 162,073 | 68.8 | 542 | 156,360 | 62.1 | 516 | ||||||||||||||||||
Consumer | ||||||||||||||||||||||||
Residential mortgage | 37,439 | 15.9 | 234 | 62,616 | 24.9 | 204 | ||||||||||||||||||
Unsecured | --- | --- | --- | 20 | --- | 10 | ||||||||||||||||||
Home equity | 34,070 | 14.5 | 85 | 31,006 | 12.3 | 84 | ||||||||||||||||||
Other secured | 1,850 | 0.8 | 16 | 1,808 | 0.7 | 17 | ||||||||||||||||||
Total consumer | 73,359 | 31.2 | 108 | 95,450 | 37.9 | 121 | ||||||||||||||||||
Total loans | $ | 235,432 | 100.0 | % | 240 | $ | 251,810 | 100.0 | % | 231 |
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||
Commercial loans originated | $ | 162,073 | $ | 156,360 | ||||
Repayments of commercial loans | (125,828 | ) | (115,858 | ) | ||||
Change in undistributed - available credit | (54,368 | ) | (3,302 | ) | ||||
Net increase/(decrease) in total commercial loans | $ | (18,123 | ) | $ | 37,200 |
Nine months ended September 30, 2023 | Nine months ended September 30, 2022 | |||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Portfolio | Total | Average | Portfolio | Total | Average | |||||||||||||||||||
Originations | Originations | Loan Size | Originations | Originations | Loan Size | |||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Residential developed | $ | 5,216 | 1.6 | % | $ | 1,304 | $ | 6,177 | 1.7 | % | $ | 562 | ||||||||||||
Unsecured to residential developers | — | — | — | — | — | — | ||||||||||||||||||
Vacant and unimproved | 8,977 | 2.7 | 748 | 10,162 | 2.8 | 1,270 | ||||||||||||||||||
Commercial development | — | — | — | — | — | — | ||||||||||||||||||
Residential improved | 35,440 | 10.7 | 466 | 46,652 | 12.6 | 583 | ||||||||||||||||||
Commercial improved | 15,353 | 4.6 | 548 | 45,620 | 12.4 | 1,342 | ||||||||||||||||||
Manufacturing and industrial | 16,886 | 5.1 | 1,689 | 55,138 | 14.9 | 2,506 | ||||||||||||||||||
Total commercial real estate | 81,872 | 24.7 | 630 | 163,749 | 44.4 | 1,056 | ||||||||||||||||||
Commercial and industrial | 153,803 | 46.5 | 1,337 | 115,730 | 31.3 | 827 | ||||||||||||||||||
Total commercial and commercial real estate | 235,675 | 71.2 | 962 | 279,479 | 75.7 | 947 | ||||||||||||||||||
Consumer | ||||||||||||||||||||||||
Residential mortgage | 63,053 | 19.1 | 306 | 43,381 | 11.8 | 319 | ||||||||||||||||||
Unsecured | 5 | — | 5 | — | — | — | ||||||||||||||||||
Home equity | 30,175 | 9.1 | 119 | 44,765 | 12.1 | 129 | ||||||||||||||||||
Other secured | 2,135 | 0.6 | 44 | 1,616 | 0.4 | 39 | ||||||||||||||||||
Total consumer | 95,368 | 28.8 | 187 | 89,762 | 24.3 | 172 | ||||||||||||||||||
Total loans | $ | 331,043 | 100.0 | % | $ | 439 | $ | 369,241 | 100.0 | % | $ | 451 |
Overall, the commercial loan portfolio decreased $18.1increased $76.2 million in the first nine months of 2017.2023. Our commercial and industrial portfolio decreasedincreased by $30.5$46.5 million andwhile our commercial real estate loans increased by $12.4$29.7 million. However, our production of commercial loans increased by $5.7 million from $156.4 millionWhile overall originations as shown in the table above were down compared to the first nine months of 2016 compared to $162.12022, our on-balance-sheet commercial loan balances grew since year end 2022. This largely resulted from the funding of various construction projects originating in 2022, adding new commercial loan relationships in 2023, and higher usage of approved commercial lines by our commercial borrowers. This utilization was up $51.1 million in the same period of 2017. The decrease in ending portfolio balance from December 31, 20162022 to September 30, 2017 was due primarily2023.
We also have a significant amount of unfunded commercial lines of credit, that can be drawn on by our commercial loan customers. The table below shows the total commitment, the unused portion and the percentage of unused to changes in undistributed balances/available credit. Considering our pipeline of commercial creditstotal commitment at September 30, 2017, we expect2023 and December 31, 2022 (dollars in thousands):
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
Commercial - Lines of credit commitments | $ | 1,034,085 | $ | 1,021,795 | ||||
Commercial - Unused portion of lines of credit | 561,171 | 612,317 | ||||||
Commercial - Unused lines of credit to total commitment | 54.27 | % | 59.93 | % |
Total commercial lines of credit commitments increased by $12.3 million from December 31, 2022 to achieve measured, high quality loan portfolio growth throughout the remainder of 2017.
Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately 75.3%81.7% and 75.5%83.2% of the total loan portfolio at September 30, 20172023 and December 31, 2016.2022, respectively. Residential mortgage and consumer loans comprised approximately 24.7%18.3% and 24.5%16.8% of total loans at September 30, 20172023 and December 31, 2016.
A further breakdown of the composition of the loan portfolio is shown in the table below (in thousands):
September 30, 2017 | December 31, 2016 | |||||||||||||||
Balance | Percent of Total Loans | Balance | Percent of Total Loans | |||||||||||||
Commercial real estate: (1) | ||||||||||||||||
Residential developed | $ | 9,077 | 0.7 | % | $ | 11,970 | 0.9 | % | ||||||||
Unsecured to residential developers | 2,410 | 0.2 | 4,734 | 0.4 | ||||||||||||
Vacant and unimproved | 38,677 | 3.1 | 40,286 | 3.1 | ||||||||||||
Commercial development | 486 | --- | 378 | --- | ||||||||||||
Residential improved | 83,441 | 6.6 | 75,348 | 5.9 | ||||||||||||
Commercial improved | 295,924 | 23.5 | 289,478 | 22.6 | ||||||||||||
Manufacturing and industrial | 100,347 | 8.0 | 95,787 | 7.5 | ||||||||||||
Total commercial real estate | 530,362 | 42.1 | 517,981 | 40.4 | ||||||||||||
Commercial and industrial | 418,838 | 33.2 | 449,342 | 35.1 | ||||||||||||
Total commercial | 949,200 | 75.3 | 967,323 | 75.5 | ||||||||||||
Consumer | ||||||||||||||||
Residential mortgage | 221,829 | 17.6 | 217,614 | 17.0 | ||||||||||||
Unsecured | 254 | --- | 396 | --- | ||||||||||||
Home equity | 82,296 | 6.6 | 88,113 | 6.9 | ||||||||||||
Other secured | 6,458 | 0.5 | 7,366 | 0.6 | ||||||||||||
Total consumer | 310,837 | 24.7 | 313,489 | 24.5 | ||||||||||||
Total loans | $ | 1,260,037 | 100.0 | % | $ | 1,280,812 | 100.0 | % |
September 30, 2023 | December 31, 2022 | |||||||||||||||
Percent of | Percent of | |||||||||||||||
Balance | Total Loans | Balance | Total Loans | |||||||||||||
Commercial real estate: (1) | ||||||||||||||||
Residential developed | $ | 5,040 | 0.4 | % | $ | 7,234 | 0.6 | % | ||||||||
Unsecured to residential developers | 800 | — | — | — | ||||||||||||
Vacant and unimproved | 37,084 | 2.9 | 36,270 | 3.1 | ||||||||||||
Commercial development | 89 | — | 103 | — | ||||||||||||
Residential improved | 116,407 | 9.0 | 112,791 | 9.6 | ||||||||||||
Commercial improved | 257,673 | 20.0 | 259,281 | 22.0 | ||||||||||||
Manufacturing and industrial | 150,192 | 11.6 | 121,924 | 10.4 | ||||||||||||
Total commercial real estate | 567,285 | 43.9 | 537,603 | 45.7 | ||||||||||||
Commercial and industrial | 488,224 | 37.8 | 441,716 | 37.5 | ||||||||||||
Total commercial and commercial real estate | 1,055,509 | 81.7 | 979,319 | 83.2 | ||||||||||||
Consumer | ||||||||||||||||
Residential mortgage | 180,420 | 14.0 | 139,148 | 11.8 | ||||||||||||
Unsecured | 113 | — | 121 | — | ||||||||||||
Home equity | 51,798 | 4.0 | 56,321 | 4.8 | ||||||||||||
Other secured | 3,450 | 0.3 | 2,839 | 0.2 | ||||||||||||
Total consumer | 235,781 | 18.3 | 198,429 | 16.8 | ||||||||||||
Total loans | $ | 1,291,290 | 100.0 | % | $ | 1,177,748 | 100.0 | % |
(1) | Includes both owner occupied and non-owner occupied commercial real estate. |
Commercial real estate loans accounted for 42.1%43.9% and 40.4%45.7% of the total loan portfolio at September 30, 20172023 and December 31, 20162022, 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.
The non-owner occupied portion of the commercial real estate portfolio totaled $43.8 million at September 30, 2023. Of this total, $29.7 million was secured by office property. Within this office property category, only nine loans totaling $2.0 million come up for maturity or renewal in the next 18 months. All of these loans secured by office property are well-secured, performing and have acceptable occupancy rates under our standards.
Our consumer residential mortgage loan portfolio, which also includes residential construction loans made to individual homeowners, comprised 17.6%14.0% of portfolio loans at September 30, 20172023 and 17.0%11.8% at December 31, 2016.2022. 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. A large portion of
The following table shows our residential mortgage loan production continues to be sold on the secondary market with servicing released.
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
Fixed rate residential mortgage loans | $ | 80,252 | $ | 64,797 | ||||
Variable rate residential mortgage loans | 100,168 | 74,351 | ||||||
Total residential mortgage loans | $ | 180,420 | $ | 139,148 |
Our portfolio of other consumer loans includes loans secured by personal property and home equity fixed term and line of credit loans. Consumer loansThis portfolio decreased by $6.9$3.9 million to $89.0$55.4 million at September 30, 20172023 from $95.9$59.3 million at December 31, 2016, due primarily to a decrease in home equity loans. Consumer2022. These other consumer loans comprised 7.1%4.3% of our portfolio loans at September 30, 20172023 and 7.5%5.0% at December 31, 2016.
Given that current industry credit conditions are tightening, we expect industry pricing will increase in response to cost of funds increases and we will continue to respond accordingly.
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, 2017,2023, nonperforming assets totaled $7.2 million compared to $12.6 millionjust $1,000, down $77,000 from $78,000 at December 31, 2016. Additions2022. There were no additions to other real estate owned in the first nine months of 2017 were $60,000, compared to $102,0002023 or in the first nine months of 2016.2022. At September 30, 2017,2023, there was just one loanwere no loans in redemption,foreclosure, so we expect there to be few, if any, additions to other real estate owned in 2017.the remainder of 2023. Proceeds from sales of foreclosed properties were $6.2$2.7 million in the first nine months of 2017,2023, resulting in net realized gains on sales of $660,000. We sold our largest individual foreclosed property in the second quarter of 2017.$356,000. Proceeds from sales of foreclosed properties were $4.2 million$47,000 in the first nine months of 20162022, resulting in $47,000 in net realized gains on sales of $365,000. Based upon purchase agreements in place at September 30, 2017 andsales. With the sale of our largest individual property in the second quarter of 2017, we expect the level of sales of foreclosed properties to be lower in the final quarter of 2017 than experienced in the first nine months of 2017.
Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. Nonperforming loans at September 30, 2023 consisted of $1,000 of residential mortgage loans. As of September 30, 2017,2023, nonperforming loans were negligible and totaled $521,000,$1,000, or 0.04%0.00008% of total portfolio loans, compared to $300,000,$78,000, or 0.02%0.01% of total portfolio loans, at December 31, 2016.
Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $6.7 million$0 at September 30, 20172023 and $12.3$2.3 million at December 31, 2016. Of this balance at September 30, 2017, there were 21 commercial real estate properties totaling approximately $6.6 million. The remaining balance was comprised of 4 residential properties totaling approximately $109,000.2022. 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.
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
Foreclosed Asset Property Type | Carrying Value | Foreclosed Asset Writedown | Combined Writedown (Loan and Foreclosed Asset) | Carrying Value at Carrying Value | Foreclosed Asset Writedown | Combined Writedown (Loan and Foreclosed Asset) | ||||||||||||||||||
Single Family | $ | --- | --- | % | --- | % | $ | 136 | --- | % | 20.3 | % | ||||||||||||
Residential Lot | 109 | 46.9 | 73.1 | 438 | 30.1 | 48.0 | ||||||||||||||||||
Multi-Family | --- | --- | --- | --- | --- | --- | ||||||||||||||||||
Vacant Land | 2,246 | 46.8 | 53.6 | 3,096 | 47.2 | 58.3 | ||||||||||||||||||
Residential Development | 2,218 | 29.5 | 71.3 | 2,570 | 36.2 | 74.2 | ||||||||||||||||||
Commercial Office | --- | --- | --- | 240 | 49.3 | 51.1 | ||||||||||||||||||
Commercial Industrial | --- | --- | --- | --- | --- | --- | ||||||||||||||||||
Commercial Improved | 2,088 | 9.3 | 28.8 | 5,773 | 48.7 | 51.2 | ||||||||||||||||||
$ | 6,661 | 32.5 | 58.1 | $ | 12,253 | 45.2 | 60.1 |
The following table shows the composition and amount of our nonperforming assets (dollars in thousands):
September 30, 2017 | December 31, 2016 | |||||||
Nonaccrual loans | $ | 521 | $ | 300 | ||||
Loans 90 days or more delinquent and still accruing | --- | --- | ||||||
Total nonperforming loans (NPLs) | 521 | 300 | ||||||
Foreclosed assets | 6,661 | 12,253 | ||||||
Repossessed assets | --- | --- | ||||||
Total nonperforming assets (NPAs) | $ | 7,182 | $ | 12,553 | ||||
NPLs to total loans | 0.04 | % | 0.02 | % | ||||
NPAs to total assets | 0.40 | % | 0.72 | % |
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
Nonaccrual loans | $ | 1 | $ | 78 | ||||
Loans 90 days or more delinquent and still accruing | — | — | ||||||
Total nonperforming loans (NPLs) | 1 | 78 | ||||||
Foreclosed assets | — | 2,343 | ||||||
Repossessed assets | — | — | ||||||
Total nonperforming assets (NPAs) | $ | 1 | $ | 2,421 | ||||
NPLs to total loans | 0.00008 | % | 0.01 | % | ||||
NPAs to total assets | 0.00004 | % | 0.08 | % |
We adopted ASU 2022-02 effective January 1, 2023. This standard eliminated the previous troubled debt restructuring ("TDR") accounting model and replaced it with guidance and disclosure requirements for identifying modifications to loans to borrowers experiencing financial difficulty. The following table shows the composition and amount of our troubled debt restructurings (TDRs) at September 30, 2017 and December 31, 2016 (dollars in thousands):
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
Commercial | Consumer | Total | Commercial | Consumer | Total | |||||||||||||||||||
Performing TDRs | $ | 12,974 | $ | 8,609 | $ | 21,583 | $ | 17,786 | $ | 12,051 | $ | 29,837 | ||||||||||||
Nonperforming TDRs (1) | 322 | 55 | 377 | 141 | 8 | 149 | ||||||||||||||||||
Total TDRs | $ | 13,296 | $ | 8,664 | $ | 21,960 | $ | 17,927 | $ | 12,059 | $ | 29,986 |
September 30, 2023 | ||||||||||||
Outstanding | Percentage to | |||||||||||
Number of | Recorded | Total | ||||||||||
Loans | Balance | Loans | ||||||||||
Commercial and industrial | 3 | $ | 266 | 0.05 | % | |||||||
Commercial real estate | 3 | 493 | 0.09 | % | ||||||||
Consumer | 31 | 2,690 | 1.14 | % | ||||||||
37 | $ | 3,449 | 0.27 | % |
Allowance for loancredit losses:
We adopted the Current Expected Credit Loss ("CECL") standard effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the probable incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance for credit losses of $1.5 million, $62,000 to establish a reserve for unfunded commitments and a $1.2 million decrease to retained earnings to reflect the cumulative effect of adoption of CECL, with the $323,000 tax impact portion being recorded as part of the deferred tax asset on our Consolidated Balance Sheet.
The table below shows the changes in thesecertain credit metrics over the past five quarters:
(Dollars in millions) | Quarter Ended September 30, 2017 | Quarter Ended June 30, 2017 | Quarter Ended March 31, 2017 | Quarter Ended December 31, 2016 | Quarter Ended September 30, 2016 | |||||||||||||||
Commercial loans | $ | 949.2 | $ | 949.8 | $ | 962.1 | $ | 967.3 | $ | 923.2 | ||||||||||
Nonperforming loans | 0.5 | 0.7 | 0.4 | 0.3 | 0.2 | |||||||||||||||
Other real estate owned and repo assets | 6.7 | 7.1 | 12.1 | 12.3 | 13.1 | |||||||||||||||
Total nonperforming assets | 7.2 | 7.8 | 12.5 | 12.6 | 13.3 | |||||||||||||||
Net charge-offs (recoveries) | (0.2 | ) | (0.4 | ) | (0.2 | ) | (1.2 | ) | (0.1 | ) | ||||||||||
Total delinquencies | 0.8 | 0.8 | 0.9 | 1.4 | 0.3 |
Quarter Ended | Quarter Ended | Quarter Ended | Quarter Ended | Quarter Ended | ||||||||||||||||
September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||
2023 | 2023 | 2023 | 2022 | 2022 | ||||||||||||||||
Nonperforming loans | $ | 1 | $ | 72 | $ | 75 | $ | 78 | $ | 85 | ||||||||||
Other real estate owned and repo assets | — | — | — | 2,343 | 2,343 | |||||||||||||||
Total nonperforming assets | 1 | 72 | 75 | 2,421 | 2,428 | |||||||||||||||
Net charge-offs (recoveries) | (42 | ) | (15 | ) | (33 | ) | (89 | ) | (190 | ) | ||||||||||
Total delinquencies | — | 158 | 277 | 172 | 84 |
At September 30, 2023, we have had net loan recoveries in eachthirty-three of the last elevenpast thirty-five quarters. Our total delinquencies have continued to be negligible and were $872,000$0 at September 30, 20172023 and $1.4 million$172,000 at December 31, 2016. Our delinquency percentage at September 30, 2017 was just 0.07%, well below the Bank’s peers.
The allowance for loancredit losses decreased $528,000increased $1.7 million in the first nine months of 2017.2023. As discussed above, the increase in the first nine months of 2023 was primarily due to the effect of adopting CECL on January 1, 2023. We recorded a negative provision for loancredit losses expense of $1.35 million$150,000 for the nine months ended September 30, 20172023 compared to a negative $1.1provision benefit of $1.5 million for the same period of 2016.2022. Net loan recoveries were $822,000$90,000 for the nine months ended September 30, 2017,2023, compared to net loan recoveries of $866,000$432,000 for the same period in 2016.2022. The ratio of net charge-offs (recoveries) to average loans was -0.09%-0.01% on an annualized basis for the first nine months of 2017, compared to -0.10%2023 and -0.05% for the first nine months of 2016.
While we have experienced low levels of gross charge-offs over recent quarters. We do, however,quarters, we recognize that future charge-offs and resulting provisions for loancredit losses are expected to be impacted by the timing and extent of changes in the overall economy and the real estate markets. We believe we have seen some stabilization in economic conditions and real estate markets. However, we expect it to take additional time for sustained improvement in the economy and real estate markets in order to further reduce our impaired loans.
The allowance for credit losses accounting in effect at December 31, 2022 and all prior periods was based on our estimate of probable incurred loan losses is maintained at a level believed appropriate based upon our assessmentas of the probable estimatedreporting date ("incurred loss" methodology). Under the CECL methodology, our allowance is based on the total amount of credit losses inherent inthat are expected over the remaining life of the loan portfolio. Our methodology for measuring the appropriate levelestimate of allowance and related provision for loancredit losses under CECL is determined using a complex model that relies on historical loss information including our own history as well as peer loss history, reasonable and supportable economic forecasts, and various qualitative factors.
The primary risk elements with respect to our commercial loans are the financial condition of the borrower, sufficiency of collateral and timeliness of scheduled payments. We have a policy of reviewing periodic financial statements from commercial loan customers and have a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to residential and consumer loans is the timeliness of scheduled payments. We have a reporting process that monitors past due loans and have adopted policies to pursue creditors' rights in order to preserve our collateral position. Over the past several key elements, which include specific allowances for loans considered impaired, general allowanceyears, consumer delinquency has been nominal.
Under CECL, for commercial loans not considered impairedidentified as collateral dependent, we estimate the CECL reserve based upon applying our loan rating system, and general allocations based on historical trends for homogeneous loan groups with similar risk characteristics.
We believe our commercial portfolio is adequately diversified, with our largest commercial concentrations in Real Estate, Rental and Leasing (30%), followed by Manufacturing (15%) and Retail Trade (12%).
The determinationtable below breaks down our commercial loan portfolio by industry type at September 30, 2023 and identifies the percentage of loans in each type that have a pass rating within our loss factors is based upon our actual loss history by loan gradegrading system (4 or better) and adjusted for significant factors that,criticized rating (5 or worse) (dollars in management's judgment, affect the collectability of the portfolio as of the analysis date. We use a rolling 18 month actual net chargeoff history as the base for our computation. Over the past few years, the 18 month period computations have reflected sizeable decreases in net chargeoff experience. We addressed this volatility in the qualitative factor considerations applied in our allowance for loan losses computation. Adjustments to the qualitative factors also involved consideration of different loss periods for the Bank, including 12, 24, 36, 48 and 60 month periods. We also considered the extended period of improved asset quality in assessing the overall qualitative component. thousands):
Percent of | Percent Grade 4 | Percent Grade 5 | ||||||||||||||
Total | Total Loans | or Better | or Worse | |||||||||||||
Industry: | ||||||||||||||||
Agricultural Products | $ | 39,358 | 3.73 | % | 92.57 | % | 7.43 | % | ||||||||
Mining and Oil Extraction | 651 | 0.06 | % | 95.39 | % | 4.61 | % | |||||||||
Construction | 76,111 | 7.21 | % | 97.71 | % | 2.29 | % | |||||||||
Manufacturing | 159,959 | 15.15 | % | 97.90 | % | 2.10 | % | |||||||||
Wholesale Trade | 64,624 | 6.12 | % | 100.00 | % | 0.00 | % | |||||||||
Retail Trade | 131,064 | 12.42 | % | 99.97 | % | 0.03 | % | |||||||||
Transportation and Warehousing | 65,958 | 6.25 | % | 99.96 | % | 0.04 | % | |||||||||
Information | 448 | 0.04 | % | 0.00 | % | 100.00 | % | |||||||||
Finance and Insurance | 34,696 | 3.29 | % | 100.00 | % | 0.00 | % | |||||||||
Real Estate and Rental and Leasing | 316,957 | 30.03 | % | 99.74 | % | 0.26 | % | |||||||||
Professional, Scientific and Technical Services | 5,896 | 0.56 | % | 96.96 | % | 3.04 | % | |||||||||
Management of Companies and Enterprises | 2,011 | 0.19 | % | 100.00 | % | 0.00 | % | |||||||||
Administrative and Support Services | 25,721 | 2.44 | % | 98.26 | % | 1.74 | % | |||||||||
Education Services | 4,084 | 0.39 | % | 100.00 | % | 0.00 | % | |||||||||
Health Care and Social Assistance | 34,523 | 3.27 | % | 100.00 | % | 0.00 | % | |||||||||
Arts, Entertainment and Recreation | 4,797 | 0.45 | % | 93.83 | % | 6.17 | % | |||||||||
Accommodations and Food Services | 52,575 | 4.98 | % | 86.44 | % | 13.56 | % | |||||||||
Other Services | 35,737 | 3.39 | % | 96.19 | % | 3.81 | % | |||||||||
Total commercial loans | $ | 1,055,509 | 100.00 | % | 98.22 | % | 1.78 | % |
Considering the change in our qualitative factors and our commercial loan portfolio balances, the general allowance allocated to commercial loans was $12.0$13.7 million at September 30, 20172023 (under CECL) and $12.1$12.8 million at December 31, 2016. This resulted in a general reserve percentage allocated at September 30, 2017 of 1.29% of commercial loans, an increase from 1.27% at December 31, 2016.2022 (under incurred loss). The qualitative component of our allowance allocated to commercial loans was $12.0$11.7 million at September 30, 2017 (down from $12.42023 (under CECL) compared to $12.7 million at December 31, 2016)2022 (under incurred loss).
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, theThe determination of the allowance allocation percentage is based principally on ourpeer historical loss experience.experience under CECL. 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 for credit losses for consumer loans was $3.0$3.3 million at September 30, 20172023 (under CECL) and $3.1$2.2 million at December 31, 2016.
Allowance for credit losses allocated to loans identified as collateral dependent were $0 at September 30, 2023 (under CECL). Allowance allocations for loans identified as impaired at December 31, 2022 (under incurred loss) were $295,000.
The allowance allocations are not intended to imply limitations on usage of the allowance for loancredit losses. The entire allowance for loancredit losses is available for any loan lossesloss without regard to loan type.
See Note 1 - Significant Accounting Policies in this Form 10-Q for further descriptions of our allowance for credit loss estimation process. See also Note 3 - Loans in this Form 10-Q for further information regarding our loan portfolio and allowance.
Premises and Equipment: Premises and equipment totaled $46.8$39.4 million at September 30, 2017,2023, down $3.2 million$907,000 from $50.0$40.3 million at December 31, 2016. During2022.
Bank-Owned Life Insurance: Bank-owned life insurance increased $698,000 from December 31, 2022 to September 30, 2023 due to earnings on the second quarter of 2017 we sold a property in northwest Grand Rapids that had been held for future branch expansion for $590,000, recognizing a net loss on sale of $70,000. During the third quarter of 2017, we sold a property in southwest Grand Rapids (Metro Village) that had been held for future branch expansion for $1.2 million, recognizing a net loss on sale of $176,000.
Deposits and Other Borrowings:
Total depositsOur deposit base is primarily made up of many small accounts, and balances at September 30, 2023 were comprised of 42% personal customers and 58% business customers. Within our business customer base, there is no significant specific industry concentration. Our core deposits - which we define as deposits we have sourced within our local markets - represented 100% of our total deposits at September 30, 2023. Our total balances of $2.45 billion at September 30, 2023 remain elevated, reflecting a $740.2 million increase, or 43%, over pre-pandemic totals of $1.71 billion as of March 31, 2020.
Non-interest checking account balances decreased $4.1$181.8 million during the nine months of 2017.ended September 30, 2023. Interest bearing demand account balances increased $11.0decreased $100.2 million and savings and money market account balances decreased $75.0 million in the nine months ended September 30, 2023 as municipal and business customers have begun deploying their excess balances they carried during the pandemic, including stimulus funding. Certificates of deposits increased $32.0by $187.4 million in the first nine months of 2017. Certificates of deposits increased by $18.6 million2023 reflecting our increases in offered interest rates, particularly in the first nine months of 2017.12-18 month term. 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 33%26.7% of total deposits at September 30, 20172023 and 35%31.9% of total deposits at December 31, 2016. These balances typically increase at year end for many of our commercial customers, then decline in the first quarter. Because2022. In recent years, 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 have begun to see some of these balances move to higher earning deposit types. Interest bearing demand, including money market and savings accounts, comprised 61%61.7% of total deposits at September 30, 20172023 and 60%64.4% at December 31, 2016.2022. Time accountsdeposits as a percentage of total deposits were 6%11.6% at September 30, 20172023 and 5%3.7% at December 31, 2016.
Deposit balances in excess of the $250,000 FDIC insured limit totaled $113.4 millionapproximately $1.10 billion, or 45% of total deposits, at September 30, 2017, including $72.12023 and approximately $1.21 billion, or 46% of total deposits, at December 31, 2022. We have sufficient liquid resources to cover all of the uninsured balances at September 30, 2023.
Borrowed funds at September 30, 2023 consisted of $30.0 million of Federal Home Loan Bank (“FHLB”) advances and $41.2advances. Borrowed funds at December 31, 2022 consisted of $30.0 million of FHLB advances. At September 30, 2023, we had total borrowing capacity of $964.5 million, including $263.7 million in long-term debt associatedunused availability with trust preferred securities. Borrowedthe FHLB, $65.0 million in available fed funds totaled $125.4facilities with correspondent banks, $1.3 million in availability at the FRB Discount Window and the $634.4 million in availability in the FRB Bank Term Funding Program.
CAPITAL RESOURCES
Total shareholders' equity of $269.9 million at September 30, 2023 reflected an increase of $22.8 million from $247.0 million at December 31, 2016, including $84.2 million of FHLB advances and $41.2 million in long-term debt associated with trust preferred securities. Borrowed funds decreased by $12.1 million in the first nine months of 2017 primarily due to an early payoff of $10.0 million of an FHLB advance in July 2017.
Capital guidelines for U.S. banks (commonlyare commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank.III guidelines. The rules include a new 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 when fully phased-in, effectively resultsresulting in a minimum CET1 ratio of 7.0%. The Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% tois 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in)), effectively results in aand the minimum total capital to risk-weighted assets ratio ofis 10.5% (with the capital conservation buffer fully phased-in)buffer), and Basel III requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. We expect that theThe capital ratios for the Company and the Bank under Basel III will continuehave 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, 2017 | June 30, 2017 | March 31, 2017 | Dec 31, 2016 | Sept 30, 2016 | |||||||||||||||
Total capital to risk weighted assets | 15.5 | % | 15.5 | % | 15.1 | % | 14.9 | % | 15.2 | % | ||||||||||
Common Equity Tier 1 to risk weighted assets | 11.7 | 11.6 | 11.3 | 11.0 | 11.3 | |||||||||||||||
Tier 1 capital to risk weighted assets | 14.4 | 14.3 | 14.0 | 13.7 | 14.1 | |||||||||||||||
Tier 1 capital to average assets | 12.0 | 12.2 | 12.1 | 12.0 | 12.0 |
September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||
Macatawa Bank Corporation | 2023 | 2023 | 2023 | 2022 | 2022 | |||||||||||||||
Total capital to risk weighted assets | 18.7 | % | 18.2 | % | 18.1 | % | 17.9 | % | 17.6 | % | ||||||||||
Common Equity Tier 1 to risk weighted assets | 17.7 | 17.2 | 17.1 | 16.9 | 16.7 | |||||||||||||||
Tier 1 capital to risk weighted assets | 17.7 | 17.2 | 17.1 | 16.9 | 16.7 | |||||||||||||||
Tier 1 capital to average assets | 10.9 | 11.1 | 10.3 | 9.7 | 9.3 |
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, theLiquidity 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 toof 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, 2017, the Bank2023, we held $131.6$469.8 million of federal funds sold and other short-term investments. In addition, the Bankwe had available borrowing capacity from correspondent banks, including the Bank Term Funding Program, of approximately $304.1$964.5 million as of September 30, 2017.
Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||
Long term debt | $ | --- | $ | --- | $ | --- | $ | 41,238 | ||||||||
Time deposit maturities | 59,436 | 30,505 | 2,262 | 40 | ||||||||||||
Other borrowed funds | 42,118 | 20,000 | 10,000 | --- | ||||||||||||
Operating lease obligations | 243 | 422 | --- | --- | ||||||||||||
Total | $ | 101,797 | $ | 50,927 | $ | 12,262 | $ | 41,278 |
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, 2017,2023, we had a total of $495.2$715.1 million in unused lines of credit, $121.8$83.5 million in unfunded loan commitments and $12.1$10.0 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. InThe Company’s cash balance at September 30, 20172023 was $6.0$8.7 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 loancredit losses, other real estate owned valuation, loss contingencies 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 loancredit losses and the related provision for loancredit losses is described above in the "Allowance for LoanCredit 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 loancredit losses and the related provision for loancredit losses. Although, based upon our internal analysis, and in our judgment, we believe that we have provided an adequate allowance for loancredit 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 loancredit losses that may be significantly different than the levels that we recorded in the first nine months of 2017.2023.
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.
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, 2017,2023, we had gross deferred tax assets of $8.4$12.9 million and gross deferred tax liabilities of $2.4$2.7 million resulting in a net deferred tax asset of $6.0$10.2 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. Each reporting period we consider all reasonably available positive and negative evidence and determine whether it is “more likely than not” that we would be able to realize our deferred tax assets. With the positive results in the first nine months of 2017, weWe concluded at September 30, 20172023 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.
Our primary market risk exposure isexposures are 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, 20172023 (dollars in thousands):
Interest Rate Scenario | Economic Value of Equity | Percent Change | Net Interest Income | Percent Change | ||||||||||||
Interest rates up 200 basis points | $ | 222,340 | (3.71 | )% | $ | 55,481 | 3.59 | % | ||||||||
Interest rates up 100 basis points | 227,555 | (1.46 | ) | 54,498 | 1.75 | |||||||||||
No change | 230,918 | --- | 53,559 | --- | ||||||||||||
Interest rates down 100 basis points | 214,540 | (7.09 | ) | 51,752 | (3.37 | ) | ||||||||||
Interest rates down 200 basis points | 206,841 | (10.43 | ) | 50,249 | (6.18 | ) |
Economic | ||||||||||||||||
Value of | Percent | Net Interest | Percent | |||||||||||||
Interest Rate Scenario | Equity | Change | Income | Change | ||||||||||||
Interest rates up 200 basis points | $ | 396,181 | (6.14 | )% | $ | 100,041 | 2.23 | % | ||||||||
Interest rates up 100 basis points | 408,847 | (3.14 | ) | 98,937 | 1.10 | |||||||||||
No change | 422,095 | — | 97,856 | — | ||||||||||||
Interest rates down 100 basis points | 433,229 | 2.64 | 96,009 | (1.98 | ) | |||||||||||
Interest rates down 200 basis points | 427,293 | 1.23 | 91,021 | (6.98 | ) |
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.
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.
Evaluation of Disclosure Controls and |
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 2023. 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 | Average | |||||||
Shares | Price Paid | |||||||
Purchased | Per Share | |||||||
Period | ||||||||
July 1 - July 31, 2023 | ||||||||
Employee Transactions | — | $ | — | |||||
August 1 - August 31, 2023 | ||||||||
Employee Transactions | — | $ | — | |||||
September 1 - September 30, 2023 | ||||||||
Employee Transactions | — | $ | — | |||||
Total for Third Quarter ended September 30, 2023 | ||||||||
Employee Transactions | — | $ | — |
3.1 | ||
Restated Articles of Incorporation. Exhibit 3.1 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. | |
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 26, |