Washington, D.C. 20549
LEVEL ONE BANCORP, INC.
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:
Level One Bancorp, Inc.
LEVEL ONE BANCORP, INC.
See accompanying notes to the consolidated financial statements.
LEVEL ONE BANCORP, INC.
See accompanying notes to the consolidated financial statements.
LEVEL ONE BANCORP, INC.
See accompanying notes to the consolidated financial statements.
LEVEL ONE BANCORP, INC.
See accompanying notes to the consolidated financial statements.
LEVEL ONE BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
SEPTEMBERSeptember 30, 20192020
NOTE 1—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations:
Level One Bancorp, Inc. (the "Company"“Company,” “Level One,” “we,” “our,” or “us”) is a financial holding company headquartered in Farmington Hills, Michigan. ItsIn addition to the Company headquarters, as of September 30, 2020, its wholly owned bank subsidiary, Level One Bank (the "Bank"), has 13had 17 offices, including 911 banking centers (our full service branches) in Oakland County, oneMetro Detroit, 1 banking center in each of Detroit and Grand Rapids, Michigan’s two largest cities, one1 banking center in Sterling Heights,Jackson, 3 banking centers in Ann Arbor and one1 mortgage loan production office in Ann Arbor.
The Bank is a Michigan banking corporation with depository accounts insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC"). The Bank provides a wide range of business and consumer financial services in southeastern Michigan and west Michigan. Its primary deposit products are checking, interest-bearing demand, money market and savings, and term certificate accounts, and its primary lending products are commercial real estate, commercial and industrial, residential real estate, and consumer loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Other financial instruments, which potentially represent concentrations of credit risk, include federal funds sold.
The Company's subsidiary, Hamilton Court Insurance Company ("Hamilton Court"), is a wholly owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company and the Bank and reinsurance to ten other third party insurance captives for which insurance may not be currently available or economically feasible in the insurance marketplace. Hamilton Court was designed to insure the risks of the Company and the Bank by providing additional insurance coverage for deductibles, excess limits and uninsured exposures. Hamilton Court is incorporated in Nevada. During the third quarter of 2020, it was determined that Hamilton Court Insurance Company will exit the pool resources relationship to which it was previously a member and will dissolve, which is expected to occur in the fourth quarter of 2020 or the first quarter of 2021.
InitialPreferred Stock Public Offering:
On April 24, 2018,August 10, 2020, the Company sold 1,150,7651,000,000 depositary shares, each representing 1/100th interest in a share of common stock in its initial public offering, including 180,000 shares7.50% Non-Cumulative Perpetual Preferred Stock, Series B, with a liquidation preference of common stock pursuant$2,500 per share of Preferred Stock (equivalent to the exercise in full by the underwriters of their option to purchase additional shares.$25 per depositary share). The aggregate offering price for the shares sold by the Company was $32.2$25.0 million, and after deducting $2.1$1.6 million of underwriting discounts and $1.1 million of offering expenses paid to third parties, the Company received total net proceeds of $29.0 million from the initial public offering. In addition, certain selling shareholders participated in the offering and sold an aggregate of 229,235 shares of our common stock at an aggregate offering price of $6.4$23.4 million. The Company did not receive any proceeds from the sales of shares by the selling shareholders.
Proposed Merger with Ann Arbor State Bank:Bancorp, Inc.:
On August 13, 2019,January 2, 2020, the Company andcompleted its previously announced acquisition of Ann Arbor Bancorp, Inc. ("AAB"(“AAB”) jointly announced the signing of an Agreement and Plan of Merger, dated August 12, 2019, pursuant to which the Company has agreed to acquire AAB and its wholly owned subsidiary, Ann Arbor State Bank. The transaction is anticipatedwas completed pursuant to close ina merger of the fourth quarter of 2019 or the first quarter of 2020, subjectCompany’s wholly owned merger subsidiary (“Merger Sub”) with and into AAB, pursuant to the satisfaction or waiverAgreement and Plan of customary closing conditions.Merger, dated as of August 12, 2019, among the Company, Merger Sub and AAB. The Company paid aggregate consideration of approximately $67.9 million in cash. See "Note 2 - Business Combinations" for more information.
Basis of Presentation and Principles of Consolidation:
The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and conform to practices within the banking industry and include all of the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results for the full year or any other period. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2018,2019, included in our Annual Form 10-K, filed with the SEC on March 22, 2019.13, 2020.
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, the Bank and Hamilton Court, after elimination of significant intercompany transactions and accounts.
Use of Estimates:
To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided; therefore, future results could differ.
Change These estimates and assumptions are subject to many risks and uncertainties, including changes in Accounting Policy:
For fiscal years beginning after December 31, 2018,interest rates and other general economic, business and political conditions, the Company has elected to evaluate goodwill for impairment aseffects of October 1st as opposed to September 30th, as was done in the preceding years. The change will have no impactCoronavirus Disease 2019 (“COVID-19”) pandemic, its potential effects on the current year's or prior years'economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic. The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020, which provides a variety of provisions, including, among other things, a small business lending program to originate paycheck protection loans, temporary relief for the community bank leverage ratio, and temporary relief for financial statements.institutions related to troubled debt restructurings. Actual results may differ from those estimates.
Emerging Growth Company Status:
The Company is an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period when complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period, which means these financial statements, as well as financial statements we file in the future for as long as we remain an emerging growth company, will be subject to all new or revised accounting standards generally applicable to private companies.
Impact of Recently IssuedAdopted Accounting Standards:
Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09 "Revenue from Contracts with Customers (Topic 606)," which provides a framework for revenue recognition that replaces the existing industry and transaction specific requirements under the existing standards. ASU 2014-09 requires an entity to apply a five-step model to determine when to recognize revenue and at what amount. The model specifies that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount in which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity's performance, or at a point in time, when control of the goods or services are transferred to the customer.
The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. The Company adopted ASU 2014-09 and related issuances on January 1, 2019, with no cumulative effect adjustment to opening retained earnings required upon implementation of this standard. The adoption of this guidance does not result in changes to how revenue is recognized or the timing of recognition from our method prior to adoption. Revenue is recognized when obligations, under the terms of a contract with our customer, are satisfied, which generally occurs when services are performed. Revenue is measured as the amount of consideration we expect to receive in exchange for providing services.
The Company performed an analysis of the impact of adoption of this ASU, reviewing revenue recorded from service charges on deposit accounts, gains (losses) on other real estate owned and other assets, debit card interchange fees, and merchant processing fees. Certain revenue received, such as service charges
Service fees on deposit accounts - The fees are generated from a depositor’s option to purchase services offered under the contract and are only considered a contract when the depositor exercises their option to purchase these services. Therefore we deem the term of our contracts with depositors to be day-to-day and do not extend beyond the services already provided.
Debit card interchange fees - We collect interchange fee income when debit cards that we have issued to our customers are used in merchant transactions. Our performance obligation is satisfied and revenue is recognized at the point we initiate the payment of funds from a customer’s account to a merchant account.
Merchant processing fees is recorded- We receive referral fees for referring our customers to a merchant servicer. Fees are immaterial and recognized as received.
Gain (loss) on a transaction by transaction basis or as the service is performed. Finally, the methodology used to record revenue from gains (losses) due to the sale of other real estate owned is not anticipated to change, as the- The Company currently records income or expense only upon consummation of the sale. The Company adopted ASU 2014-09 and related issuances on January 1, 2019, with no cumulative effect adjustment to opening retained earnings required upon implementationsale of this standard.the real estate.
Financial Instruments
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," to improve the accounting for financial instruments. This ASU requires equity investments with readily determinable fair values to be measured at fair value with changes recognized in net income regardless of classification. For equity investments without a readily determinable fair value, the value of the investment would be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer instead of fair value, unless a qualitative assessment indicates impairment. Additionally, this ASU requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements, as well as the required use of exit pricing when measuring the fair value of financial instruments for disclosure purposes. The guidance isbecame effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, and iswas to be applied prospectively with a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Management is currently developing processesThe Company adopted ASU 2016-01 and procedures to comply withrelated issues on January 1, 2019 and determined that the disclosures requirementsimplementation of this ASU, which will impact the disclosures the Company makes related to fair value of its financial instruments. This standard isdid not expected to have a material impact on the
Company'sto our consolidated financial statements. The Company is planning to adopt this new guidance within the time frames stated above.
Impact of Recently Issued Accounting Standards:
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," to improve transparency and comparability across entities regarding leasing arrangements. This ASU requires the recognition of a separate lease liability representing the required discounted lease payments over the lease term and a separate lease asset representing the right to use the underlying asset during the same lease term. Additionally, this ASU provides clarification regarding the identification of certain components of contracts that would represent a lease as well as requires additional disclosures to the notes of the financial statements.
The guidance will beis effective for the Company for fiscal years beginning after December 15, 2019,2021, and interim periods within fiscal years beginning after December 15, 2021,2022, and is to be applied under an optional transition method. The Company is planning to adopt this new guidance within the time frame noted above. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.statements but does not expect that the adoption will have a material impact. Additionally, the Company does not expect to significantly change operating lease agreements prior to adoption.
In October 2019, the FASB approved a delayed effective date for the leases standard to January 2021 for certain entities, including certain SEC filers, public business entities, and private companies. As an emerging growth company, the Company is eligible for the delayed effective date. The Company is planning to adopt this new guidance within the time frames stated above but would delay the implementation to the delayed effective date if the proposed delay is effected.
Allowance for Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," to replace the current incurred loss methodology for recognizing credit losses, which delays recognition until it is probable a loss has been incurred, with a methodology that reflects an estimate of all expected credit losses and considers additional reasonable and supportable forecasted information when determining credit loss estimates. This impacts the calculation of the allowance for credit losses for all financial assets measured under the amortized cost basis, including PCI loans at the time of and subsequent to acquisition. Additionally, credit losses related to available-for-sale debt securities would be recorded through the allowance for credit losses and not as a direct adjustment to the amortized cost of the securities. Based on the ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses," the
The guidance will beis effective for the Company for fiscal years beginning after December 15, 2021,2022, including interim periods within those fiscal years, and is to be applied under a modified retrospective approach.
In October 2019, the FASB approved a delayed effective date for the credit losses standard to January 2023 for certain entities, including certain SEC filers, public business entities, and private companies. As a smaller reporting company, the Company is eligible for the delayed effective date.years. The Company is currently evaluating the impact of the delay on its implementation project plan as well as the impact of adopting this new guidance on the consolidated financial statements, current systems and processes. At this time, the Company is reviewing potential methodologies for estimating expected credit losses using reasonable and supportable forecast information and has identified certain data and system requirements. Once adopted, we expect our allowance for loan losses to increase through a one-time adjustment to retained earnings; however, until our evaluation is complete, the estimated increase in allowance will be unknown. The Company is planning to adopt this new guidance within the time frames stated above but would delayframe noted above.
NOTE 2—BUSINESS COMBINATIONS
On January 2, 2020, the implementation toCompany completed its previously announced acquisition of Ann Arbor Bancorp, Inc. and its wholly owned subsidiary, Ann Arbor State Bank. The Company paid an aggregate consideration of approximately $67.9 million in cash.
AAB's results of operations were included in the delayed effective date ifCompany’s results beginning January 2, 2020. Acquisition-related costs of $1.7 million are included in the proposed delay is effected.Company’s income statement for the nine months ended September 30, 2020.
Income Taxes - Tax CutsGoodwill of $26.2 million arising from the acquisition consisted largely of synergies and Jobs Act
In February 2018, the FASB issued ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220)," which allowed an entity to elect a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effectscost savings resulting from the Tax Cutscombining of the operations of the companies. The goodwill arising from the acquisition of AAB is not deductible for tax purposes.
The following table summarizes the amounts of assets acquired and Jobs Act ("TCJA").liabilities assumed recognized at the acquisition date.
| | | | | | | | |
| (Dollars in thousands) | | |
| Consideration paid: | | |
| Cash | | $ | 67,944 | |
| Fair value of assets acquired: | | |
| Cash and cash equivalents | | 38,480 | |
| Investment securities | | 47,416 | |
| Federal Home Loan Bank stock | | 923 | |
| Loans held for sale | | 1,703 | |
| Loans held for investment | | 222,356 | |
| Premises and equipment | | 2,404 | |
| Core deposit intangibles | | 3,663 | |
| Other assets | | 8,358 | |
| Total assets acquired | | 325,303 | |
| Fair value of liabilities assumed: | | |
| Deposits | | 264,820 | |
| Federal Home Loan Bank advances | | 15,279 | |
| Other liabilities | | 3,427 | |
| Total liabilities assumed | | 283,526 | |
| Total identifiable net assets | | 41,777 | |
| Goodwill recognized in the acquisition | | $ | 26,167 | |
Loans acquired in the acquisition were initially recorded at fair value with no separate allowance for loan losses. The amountCompany reviewed the loans at acquisition to determine which should be considered purchased credit impaired loans (i.e. loans accounted for under ASC 310-30) defining impaired loans as those that were either not accruing interest or exhibited credit risk factors consistent with nonaccrual loans at the acquisition date. Fair values for purchased loans are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of the loan and whether or not the loan was amortizing, and a discount rate reflecting the Company's assessment of risk inherent in the cash flow estimates. The Company accounts for purchased credit impaired loans in accordance with the provisions of ASC 310-30. The cash flows expected to be collected on purchased loans are estimated based upon the expected remaining life of the underlying loans, which includes the effects of estimated prepayments. Purchased loans are considered credit impaired if there is evidence of credit deterioration at the date of purchase and if it is probable that reclassification should includenot all contractually required payments will be collected. Interest income, through accretion of the effectdifference between the carrying value of changes of tax ratethe loans and the expected cash flows is recognized on the deferred tax amount,acquired loans accounted for under ASC 310-30.
Purchased loans outside the scope of ASC 310-30 are accounted for under ASC 310-20. Premiums and discounts created when the loans were recorded at their fair values at acquisition are amortized over the remaining terms of the loans as an adjustment to the related loan's yield.
| | | | | | | | |
| (Dollars in thousands) | | |
| Accounted for under ASC 310-30: | | |
| Contractual cash flows | | $ | 1,018 | |
| Contractual cash flows not expected to be collected (nonaccretable difference) | | 82 | |
| Expected cash flows | | 936 | |
| Interest component of expected cash flows (accretable yield) | | 35 | |
| Fair value at acquisition | | 901 | |
| Accounted for under ASC 310-20: | | |
| Unpaid principal and interest balance | | 221,061 | |
| Fair value premium | | 394 | |
| Fair value at acquisition | | 221,455 | |
| Total fair value at acquisition | | $ | 222,356 | |
The pro forma table below presents information as if the acquisition had occurred on January 1, 2019. The pro forma information includes adjustments to give the effects to any related valuation allowancechanges in interest income due to the accretion (amortization) of the discount (premium) associated with the fair value adjustments to acquired loans, any changes in interest expense due to estimated premium amortization/discount accretion associated with the fair value adjustments to acquired time deposits and borrowings and other debt, amortization of core deposit intangibles that would have resulted had the deposits been acquired as of January 1, 2019, and the related income tax effectseffects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the items in AOCI. In addition,assumed date. Due diligence, professional fees, and other expenses related to the ASU required that an entity state if an election to reclassifymerger were incurred by the tax effects to retained earnings is made, along with a description of other income tax effects that are reclassified from AOCI. This guidance became effective for fiscal years beginning after December 15, 2018 Company and interim periods within those fiscal years, with early adoption permitted. The Company early adopted the ASU and reclassified $168 thousand from retained earnings to AOCIAAB during the first quarterthree and nine months ended September 30, 2020, but the pro forma condensed combined statement of 2018.income is not adjusted to exclude these costs.
In May 2018, the FASB issued an update to ASU No. 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118," regarding the accounting implications | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
| (Dollars in thousands, except per share data) | 2020 | | 2019 | 2020 | | 2019 |
| Net interest income | $ | 16,593 | | | $ | 16,036 | | $ | 47,709 | | | $ | 46,217 | |
| Noninterest income | 9,125 | | | 4,486 | | 21,604 | | | 11,228 | |
| Noninterest expense | 15,143 | | | 13,742 | | 44,822 | | | 38,879 | |
| Net income | 5,211 | | | 4,865 | | 12,062 | | | 13,188 | |
| Net income per diluted share | 0.67 | | 0.62 | 1.55 | | 1.68 |
These amounts would not be provisional amounts. The company would also report provisional amounts for those specific income tax effects for which the accounting under GAAP will be incomplete but for which a reasonable estimate can be determined. This accounting update was effective immediately upon announcement. The Company believes its accounting for the income tax effects of the TCJA is complete. Technical corrections or other forthcoming guidance could change how we interpret provisions of the TCJA, which may impact our effective tax rate and could affect our deferred tax assets, tax positions and/or our tax liabilities.
NOTE 2—3—SECURITIES
The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at September 30, 20192020 and December 31, 20182019 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss).
| | | (Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | (Dollars in thousands) | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| September 30, 2019 | | |
| | |
| | |
| | |
| |
| September 30, 2020 | | September 30, 2020 | | | | | | | | |
| U.S. government sponsored entities & agencies | | $ | 1,422 |
| | $ | 75 |
| | $ | — |
| | $ | 1,497 |
| U.S. government sponsored entities & agencies | | $ | 27,092 | | | $ | 126 | | | $ | (19) | | | $ | 27,199 | |
| State and political subdivision | | 85,845 |
| | 4,892 |
| | (4 | ) | | 90,733 |
| State and political subdivision | | 109,498 | | | 8,140 | | | (88) | | | 117,550 | |
| Mortgage-backed securities: residential | | 9,389 |
| | 93 |
| | (92 | ) | | 9,390 |
| Mortgage-backed securities: residential | | 19,237 | | | 255 | | | 0 | | | 19,492 | |
| Mortgage-backed securities: commercial | | 19,985 |
| | 1,067 |
| | (3 | ) | | 21,049 |
| Mortgage-backed securities: commercial | | 8,025 | | | 630 | | | 0 | | | 8,655 | |
| Collateralized mortgage obligations: residential | | 9,128 |
| | 43 |
| | (102 | ) | | 9,069 |
| Collateralized mortgage obligations: residential | | 14,177 | | | 169 | | | (13) | | | 14,333 | |
| Collateralized mortgage obligations: commercial | | 30,747 |
| | 862 |
| | (11 | ) | | 31,598 |
| Collateralized mortgage obligations: commercial | | 31,659 | | | 1,344 | | | 0 | | | 33,003 | |
| U.S. Treasury | | 1,974 |
| | 27 |
| | — |
| | 2,001 |
| U.S. Treasury | | 1,000 | | | 3 | | | 0 | | | 1,003 | |
| SBA | | 23,583 |
| | 104 |
| | (151 | ) | | 23,536 |
| SBA | | 18,869 | | | 63 | | | (124) | | | 18,808 | |
| Asset backed securities | | 10,384 |
| | — |
| | (197 | ) | | 10,187 |
| Asset backed securities | | 10,298 | | | 0 | | | (344) | | | 9,954 | |
| Corporate bonds | | 5,992 |
| | 191 |
| | (1 | ) | | 6,182 |
| Corporate bonds | | 3,491 | | | 39 | | | 0 | | | 3,530 | |
| Total available-for-sale | | $ | 198,449 |
| | $ | 7,354 |
| | $ | (561 | ) | | $ | 205,242 |
| Total available-for-sale | | $ | 243,346 | | | $ | 10,769 | | | $ | (588) | | | $ | 253,527 | |
| December 31, 2018 | | |
| | |
| | |
| | |
| |
| U.S. government sponsored entities & agencies | | $ | 2,404 |
| | $ | 4 |
| | $ | (11 | ) | | $ | 2,397 |
| |
| December 31, 2019 | | December 31, 2019 | | | | | | | | |
| | State and political subdivision | | 75,093 |
| | 657 |
| | (604 | ) | | 75,146 |
| State and political subdivision | | $ | 89,304 | | | $ | 4,463 | | | $ | (20) | | | $ | 93,747 | |
| Mortgage-backed securities: residential | | 10,114 |
| | 4 |
| | (379 | ) | | 9,739 |
| Mortgage-backed securities: residential | | 10,609 | | | 82 | | | (126) | | | 10,565 | |
| Mortgage-backed securities: commercial | | 12,594 |
| | 17 |
| | (229 | ) | | 12,382 |
| Mortgage-backed securities: commercial | | 8,567 | | | 224 | | | (12) | | | 8,779 | |
| Collateralized mortgage obligations: residential | | 18,916 |
| | 51 |
| | (296 | ) | | 18,671 |
| Collateralized mortgage obligations: residential | | 8,541 | | | 39 | | | (51) | | | 8,529 | |
| Collateralized mortgage obligations: commercial | | 32,390 |
| | 98 |
| | (500 | ) | | 31,988 |
| Collateralized mortgage obligations: commercial | | 22,891 | | | 300 | | | (10) | | | 23,181 | |
| U.S. Treasury | | 21,232 |
| | — |
| | (751 | ) | | 20,481 |
| U.S. Treasury | | 1,976 | | | 23 | | | 0 | | | 1,999 | |
| SBA | | 15,856 |
| | — |
| | (168 | ) | | 15,688 |
| SBA | | 22,051 | | | 87 | | | (154) | | | 21,984 | |
| Asset backed securities | | 3,872 |
| | — |
| | (30 | ) | | 3,842 |
| Asset backed securities | | 10,390 | | | 0 | | | (306) | | | 10,084 | |
| Corporate bonds | | 14,006 |
| | 18 |
| | (100 | ) | | 13,924 |
| Corporate bonds | | 2,030 | | | 20 | | | (13) | | | 2,037 | |
| Total available-for-sale | | $ | 206,477 |
| | $ | 849 |
| | $ | (3,068 | ) | | $ | 204,258 |
| Total available-for-sale | | $ | 176,359 | | | $ | 5,238 | | | $ | (692) | | | $ | 180,905 | |
The proceeds from sales of securities and the associated gains and losses for the periods below are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| (Dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| Proceeds | $ | 5,051 | | | $ | 11,080 | | | $ | 42,640 | | | $ | 46,545 | |
| Gross gains | 434 | | | 202 | | | 1,871 | | | 543 | |
| Gross losses | 0 | | | (51) | | | (9) | | | (392) | |
|
| | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| (Dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| Proceeds | $ | 11,080 |
| | $ | 704 |
| | $ | 46,545 |
| | $ | 704 |
|
| Gross gains | 202 |
| | 2 |
| | 543 |
| | 2 |
|
| Gross losses | (51 | ) | | (2 | ) | | (392 | ) | | (2 | ) |
The amortized cost and fair value of securities are shown in the table below by contractual maturity. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | | | | | | | | | |
| | | September 30, 2020 |
| (Dollars in thousands) | | Amortized
Cost | | Fair
Value |
| Within one year | | $ | 11,141 | | | $ | 11,228 | |
| One to five years | | 27,530 | | | 28,494 | |
| Five to ten years | | 70,259 | | | 73,165 | |
| Beyond ten years | | 134,416 | | | 140,640 | |
| Total | | $ | 243,346 | | | $ | 253,527 | |
|
| | | | | | | | |
| | | September 30, 2019 |
| (Dollars in thousands) | | Amortized Cost | | Fair Value |
| Within one year | | $ | 2,683 |
| | $ | 2,684 |
|
| One to five years | | 24,918 |
| | 25,353 |
|
| Five to ten years | | 52,715 |
| | 54,997 |
|
| Beyond ten years | | 118,133 |
| | 122,208 |
|
| Total | | $ | 198,449 |
| | $ | 205,242 |
|
Securities pledged at September 30, 20192020 and December 31, 20182019 had a carrying amount of $36.7$97.2 million and $22.7$27.3 million, respectively, and were pledged to secure Federal Home Loan Bank ("FHLB") advances, a Federal Reserve Bank line of credit, repurchase agreements, deposits and mortgage derivatives.
As of September 30, 2019,2020, the Bank held 5666 tax-exempt state and local municipal securities totaling $41.1$48.9 million backed by the Michigan School Bond Loan Fund. Other than the aforementioned investments, at September 30, 20192020 and December 31, 2018,2019, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders' equity.
The following table summarizes securities with unrealized losses at September 30, 20192020 and December 31, 20182019 aggregated by security type and length of time in a continuous unrealized loss position: | | | | | Less than 12 Months | | 12 Months or Longer | | Total | | | Less than 12 Months | | 12 Months or Longer | | Total |
| (Dollars in thousands) | | Fair value | | Unrealized Losses | | Fair value | | Unrealized Losses | | Fair value | | Unrealized Losses | (Dollars in thousands) | | Fair
value | | Unrealized
Losses | | Fair
value | | Unrealized
Losses | | Fair
value | | Unrealized
Losses |
| September 30, 2019 | | |
| | |
| | |
| | |
| | |
| | |
| |
| September 30, 2020 | | September 30, 2020 | | | | | | | | | | | | |
| Available-for-sale | | |
| | |
| | |
| | |
| | |
| | |
| Available-for-sale | | | | | | | | | | | | |
| U.S. government sponsored entities & agencies | | U.S. government sponsored entities & agencies | | $ | 14,981 | | | $ | (19) | | | $ | 0 | | | $ | 0 | | | $ | 14,981 | | | $ | (19) | |
| State and political subdivision | | State and political subdivision | | 1,858 | | | (88) | | | 0 | | | 0 | | | 1,858 | | | (88) | |
| | Collateralized mortgage obligations: residential | | Collateralized mortgage obligations: residential | | 0 | | | 0 | | | 1,136 | | | (13) | | | 1,136 | | | (13) | |
| | SBA | | SBA | | 0 | | | 0 | | | 13,190 | | | (124) | | | 13,190 | | | (124) | |
| Asset backed securities | | Asset backed securities | | 0 | | | 0 | | | 9,954 | | | (344) | | | 9,954 | | | (344) | |
| | Total available-for-sale | | Total available-for-sale | | $ | 16,839 | | | $ | (107) | | | $ | 24,280 | | | $ | (481) | | | $ | 41,119 | | | $ | (588) | |
| December 31, 2019 | | December 31, 2019 | | | | | | | | | | | | |
| Available-for-sale | | Available-for-sale | | | | | | | | | | | | |
| | State and political subdivision | | $ | 1,051 |
| | $ | (2 | ) | | $ | 304 |
| | $ | (2 | ) | | $ | 1,355 |
| | $ | (4 | ) | State and political subdivision | | $ | 5,109 | | | $ | (20) | | | $ | 305 | | | $ | 0 | | | $ | 5,414 | | | $ | (20) | |
| Mortgage-backed securities: residential | | — |
| | — |
| | 5,570 |
| | (92 | ) | | 5,570 |
| | (92 | ) | Mortgage-backed securities: residential | | 4,022 | | | (39) | | | 3,982 | | | (87) | | | 8,004 | | | (126) | |
| Mortgage-backed securities: commercial | | 898 |
| | (2 | ) | | 434 |
| | (1 | ) | | 1,332 |
| | (3 | ) | Mortgage-backed securities: commercial | | 1,769 | | | (11) | | | 430 | | | (1) | | | 2,199 | | | (12) | |
| Collateralized mortgage obligations: residential | | — |
| | — |
| | 5,799 |
| | (102 | ) | | 5,799 |
| | (102 | ) | Collateralized mortgage obligations: residential | | 770 | | | (1) | | | 4,631 | | | (50) | | | 5,401 | | | (51) | |
| Collateralized mortgage obligations: commercial | | — |
| | — |
| | 1,730 |
| | (11 | ) | | 1,730 |
| | (11 | ) | Collateralized mortgage obligations: commercial | | 0 | | | 0 | | | 1,716 | | | (10) | | | 1,716 | | | (10) | |
| U.S. Treasury | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| | SBA | | 4,058 |
| | (12 | ) | | 13,286 |
| | (139 | ) | | 17,344 |
| | (151 | ) | SBA | | 3,961 | | | (13) | | | 12,405 | | | (141) | | | 16,366 | | | (154) | |
| Asset backed securities | | 10,187 |
| | (197 | ) | | — |
| | — |
| | 10,187 |
| | (197 | ) | Asset backed securities | | 8,220 | | | (232) | | | 1,864 | | | (74) | | | 10,084 | | | (306) | |
| Corporate bonds | | — |
| | — |
| | 1,004 |
| | (1 | ) | | 1,004 |
| | (1 | ) | Corporate bonds | | 489 | | | (13) | | | 0 | | | 0 | | | 489 | | | (13) | |
| Total available-for-sale | | $ | 16,194 |
| | $ | (213 | ) | | $ | 28,127 |
| | $ | (348 | ) | | $ | 44,321 |
| | $ | (561 | ) | Total available-for-sale | | $ | 24,340 | | | $ | (329) | | | $ | 25,333 | | | $ | (363) | | | $ | 49,673 | | | $ | (692) | |
| December 31, 2018 | | |
| | |
| | |
| | |
| | |
| | |
| |
| Available-for-sale | | |
| | |
| | |
| | |
| | |
| | |
| |
| U.S. government sponsored entities & agencies | | $ | 978 |
| | $ | (11 | ) | | $ | — |
| | $ | — |
| | $ | 978 |
| | $ | (11 | ) | |
| State and political subdivision | | 5,121 |
| | (25 | ) | | 27,667 |
| | (579 | ) | | 32,788 |
| | (604 | ) | |
| Mortgage-backed securities: residential | | 2,595 |
| | (4 | ) | | 6,393 |
| | (375 | ) | | 8,988 |
| | (379 | ) | |
| Mortgage-backed securities: commercial | | 1,967 |
| | (8 | ) | | 8,944 |
| | (221 | ) | | 10,911 |
| | (229 | ) | |
| Collateralized mortgage obligations: residential | | 3,814 |
| | (27 | ) | | 8,958 |
| | (269 | ) | | 12,772 |
| | (296 | ) | |
| Collateralized mortgage obligations: commercial | | — |
| | — |
| | 17,939 |
| | (500 | ) | | 17,939 |
| | (500 | ) | |
| U.S. Treasury | | — |
| | — |
| | 20,481 |
| | (751 | ) | | 20,481 |
| | (751 | ) | |
| SBA | | 12,420 |
| | (91 | ) | | 3,268 |
| | (77 | ) | | 15,688 |
| | (168 | ) | |
| Asset backed securities | | 3,842 |
| | (30 | ) | | — |
| | — |
| | 3,842 |
| | (30 | ) | |
| Corporate bonds | | 7,526 |
| | (28 | ) | | 2,950 |
| | (72 | ) | | 10,476 |
| | (100 | ) | |
| Total available-for-sale | | $ | 38,263 |
| | $ | (224 | ) | | $ | 96,600 |
| | $ | (2,844 | ) | | $ | 134,863 |
| | $ | (3,068 | ) | |
As of September 30, 2019,2020, the Company's investment portfolio consisted of 240306 securities, 4629 of which were in an unrealized loss position. The unrealized losses for these securities resulted primarily from changes in interest rates since purchased. The Company expects full recovery of the carrying amount of these securities and does not intend to sell the securities in an unrealized loss position nor does it believe it will be required to sell securities in an unrealized loss position before the value is recovered. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2019.2020.
NOTE 3—4—LOANS
The following table presents the recorded investment in loans at September 30, 20192020 and December 31, 2018.2019. The recorded investment in loans excludes accrued interest receivable.
| | | (Dollars in thousands) | | Originated | | Acquired | | Total | (Dollars in thousands) | | Originated | | Acquired | | Total |
| September 30, 2019 | | |
| | |
| | |
| |
| September 30, 2020 | | September 30, 2020 | | | | | | |
| Commercial real estate | | $ | 509,704 |
| | $ | 56,077 |
| | $ | 565,781 |
| Commercial real estate | | $ | 593,156 | | | $ | 137,033 | | | $ | 730,189 | |
| Commercial and industrial | | 395,804 |
| | 8,326 |
| | 404,130 |
| Commercial and industrial | | 748,913 | | | 59,010 | | | 807,923 | |
| Residential real estate | | 187,485 |
| | 10,792 |
| | 198,277 |
| Residential real estate | | 261,153 | | | 42,935 | | | 304,088 | |
| Consumer | | 701 |
| | 34 |
| | 735 |
| Consumer | | 671 | | | 1,017 | | | 1,688 | |
| Total | | $ | 1,093,694 |
| | $ | 75,229 |
| | $ | 1,168,923 |
| Total | | $ | 1,603,893 | | | $ | 239,995 | | | $ | 1,843,888 | |
| December 31, 2018 | | |
| | |
| | |
| |
| December 31, 2019 | | December 31, 2019 | | | | | | |
| Commercial real estate | | $ | 500,809 |
| | $ | 61,284 |
| | $ | 562,093 |
| Commercial real estate | | $ | 551,565 | | | $ | 53,081 | | | $ | 604,646 | |
| Commercial and industrial | | 375,130 |
| | 8,325 |
| | 383,455 |
| Commercial and industrial | | 403,922 | | | 6,306 | | | 410,228 | |
| Residential real estate | | 165,015 |
| | 15,003 |
| | 180,018 |
| Residential real estate | | 201,787 | | | 10,052 | | | 211,839 | |
| Consumer | | 944 |
| | 55 |
| | 999 |
| Consumer | | 864 | | | 32 | | | 896 | |
| Total | | $ | 1,041,898 |
| | $ | 84,667 |
| | $ | 1,126,565 |
| Total | | $ | 1,158,138 | | | $ | 69,471 | | | $ | 1,227,609 | |
At September 30, 20192020 and December 31, 2018,2019, the Company had residential loans held for sale, which were originated with the intent to sell, totaling $26.9$60.6 million and $5.6$13.9 million, respectively. During the three months ended September 30, 20192020 and 2018,2019, the Company sold residential real estate loans with proceeds totaling $86.4$157.2 million and $25.1$86.4 million, respectively, and $179.4$377.2 million and $50.2$179.4 million, during the nine months ended September 30, 20192020 and 2018,2019, respectively.
Nonperforming Assets
Nonperforming assets consist of loans for which the accrual of interest has been discontinued and other real estate owned obtained through foreclosure and other repossessed assets. Loans outside of those accounted for under ASC 310-30 are classified as nonaccrual when, in the opinion of management, it is probable that the Company will be unable to collect all the contractual interest and principal payments as scheduled in the loan agreement. The accrual of interest is discontinued when a loan is placed in nonaccrual status and any payments received reduce the carrying value of the loan. A loan may be placed back on accrual status if all contractual payments have been received and collection of future principal and interest payments is no longer doubtful. Acquired loans that are not performing in accordance with contractual terms are not reported as nonperforming because these loans are recorded at their net realizable value based on the principal and interest the Company expects to collect on these loans. There were $6 thousand and $1.2 million in commitments to lend additional funds to borrowers whose loans were classified as nonaccrual as of September 30, 2020 and December 31, 2019, respectively.
Information as to nonperforming assets was as follows:
| | | (Dollars in thousands) | | September 30, 2019 | | December 31, 2018 | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
| Nonaccrual loans: | | |
| | |
| Nonaccrual loans: | | | | |
| Commercial real estate | | $ | 5,043 |
| | $ | 5,927 |
| Commercial real estate | | $ | 7,022 | | | $ | 4,832 | |
| Commercial and industrial | | 4,071 |
| | 9,605 |
| Commercial and industrial | | 8,078 | | | 11,112 | |
| Residential real estate | | 2,339 |
| | 2,915 |
| Residential real estate | | 4,151 | | | 2,569 | |
| Consumer | | Consumer | | 15 | | | 16 | |
| Total nonaccrual loans | | 11,453 |
| | 18,447 |
| Total nonaccrual loans | | 19,266 | | | 18,529 | |
| Other real estate owned | | 373 |
| | — |
| Other real estate owned | | 0 | | | 921 | |
| Total nonperforming assets | | $ | 11,826 |
| | $ | 18,447 |
| Total nonperforming assets | | $ | 19,266 | | | $ | 19,450 | |
| Loans 90 days or more past due and still accruing | | $ | 157 |
| | $ | 243 |
| Loans 90 days or more past due and still accruing | | $ | 552 | | | $ | 157 | |
At September 30, 20192020 and December 31, 2018, all of2019, the loans that were 90 days or more past due and still accruing comprised of either PCI loans or loans that were PCI loans.well-secured and in the process of collection.
Loan delinquency as of the dates presented below was as follows:
| | | (Dollars in thousands) | | Current | | 30 - 59 Days
Past Due | | 60 - 89 Days
Past Due | | 90+ Days
Past Due | | Total | (Dollars in thousands) | | Current | | 30 - 59 Days
Past Due | | 60 - 89 Days
Past Due | | 90+ Days
Past Due | | Total |
| September 30, 2019 | | |
| | |
| | |
| | |
| | |
| |
| September 30, 2020 | | September 30, 2020 | | | | | | | | | | |
| Commercial real estate | | $ | 561,062 |
| | $ | 4,288 |
| | $ | — |
| | $ | 431 |
| | $ | 565,781 |
| Commercial real estate | | $ | 726,018 | | | $ | 3,934 | | | $ | 237 | | | $ | 0 | | | $ | 730,189 | |
| Commercial and industrial | | 403,065 |
| | 918 |
| | 26 |
| | 121 |
| | 404,130 |
| Commercial and industrial | | 802,363 | | | 3,598 | | | 1,962 | | | 0 | | | 807,923 | |
| Residential real estate | | 195,740 |
| | 802 |
| | 743 |
| | 992 |
| | 198,277 |
| Residential real estate | | 294,478 | | | 4,067 | | | 2,133 | | | 3,410 | | | 304,088 | |
| Consumer | | 717 |
| | — |
| | 18 |
| | — |
| | 735 |
| Consumer | | 1,684 | | | 2 | | | 2 | | | 0 | | | 1,688 | |
| Total | | $ | 1,160,584 |
| | $ | 6,008 |
| | $ | 787 |
| | $ | 1,544 |
| | $ | 1,168,923 |
| Total | | $ | 1,824,543 | | | $ | 11,601 | | | $ | 4,334 | | | $ | 3,410 | | | $ | 1,843,888 | |
| December 31, 2018 | | |
| | |
| | |
| | |
| | |
| |
| December 31, 2019 | | December 31, 2019 | | | | | | | | | | |
| Commercial real estate | | $ | 559,523 |
| | $ | 497 |
| | $ | — |
| | $ | 2,073 |
| | $ | 562,093 |
| Commercial real estate | | $ | 597,892 | | | $ | 3,630 | | | $ | 1,286 | | | $ | 1,838 | | | $ | 604,646 | |
| Commercial and industrial | | 381,424 |
| | 664 |
| | 82 |
| | 1,285 |
| | 383,455 |
| Commercial and industrial | | 407,692 | | | 377 | | | 1,275 | | | 884 | | | 410,228 | |
| Residential real estate | | 174,831 |
| | 2,499 |
| | 1,314 |
| | 1,374 |
| | 180,018 |
| Residential real estate | | 206,002 | | | 3,286 | | | 1,429 | | | 1,122 | | | 211,839 | |
| Consumer | | 998 |
| | — |
| | 1 |
| | — |
| | 999 |
| Consumer | | 892 | | | 4 | | | 0 | | | 0 | | | 896 | |
| Total | | $ | 1,116,776 |
| | $ | 3,660 |
| | $ | 1,397 |
| | $ | 4,732 |
| | $ | 1,126,565 |
| Total | | $ | 1,212,478 | | | $ | 7,297 | | | $ | 3,990 | | | $ | 3,844 | | | $ | 1,227,609 | |
Impaired Loans:
Information as to impaired loans, excluding purchased credit impaired loans, was as follows:
| | | (Dollars in thousands) | | September 30, 2019 | | December 31, 2018 | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
| Nonaccrual loans | | $ | 11,453 |
| | $ | 18,447 |
| Nonaccrual loans | | $ | 19,266 | | | $ | 18,529 | |
| Performing troubled debt restructurings: | | |
| | | Performing troubled debt restructurings: | | | |
| | Commercial and industrial | | 553 |
| | 568 |
| Commercial and industrial | | 550 | | | 547 | |
| Residential real estate | | 361 |
| | 363 |
| Residential real estate | | 599 | | | 359 | |
| Total performing troubled debt restructurings | | 914 |
| | 931 |
| Total performing troubled debt restructurings | | 1,149 | | | 906 | |
| Total impaired loans, excluding purchase credit impaired loans | | $ | 12,367 |
| | $ | 19,378 |
| Total impaired loans, excluding purchase credit impaired loans | | $ | 20,415 | | | $ | 19,435 | |
Troubled Debt Restructurings:
The Company assesses loan modifications to determine whether a modification constitutes a troubled debt restructuring ("TDR"). This applies to all loan modifications except for modifications to loans accounted for in pools under ASC 310-30, which are not subject to TDR accounting/classification. For loans excluded from ASC 310-30 accounting, a modification is considered a TDR when a borrower is experiencing financial difficulties and the Company grants a concession to the borrower. For loans accounted for individually under ASC 310-30, a modification is considered a TDR when a borrower is experiencing financial difficulties and the effective yield after the modification is less than the effective yield at the time the loan was acquired or less than the effective yield of any re-estimation of cash flows subsequent to acquisition in association with consideration of qualitative factors included within ASC 310-40. All TDRs are considered impaired loans. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, are considered in the determination of an appropriate level of allowance for loan losses.
The CARES Act was signed into law on March 27, 2020, which provides a variety of provisions, including, among other things, a small business lending program to originate paycheck protection loans, temporary relief for the community bank leverage ratio, and temporary relief for financial institutions related to troubled debt restructurings. As a result of the COVID-19 pandemic, the Company is currently working with borrowers to provide short-term payment modifications. Any short-term modifications made on a good-faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief are not considered TDRs based on interagency guidance. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program was implemented. The Company’s modification programs are designed to provide temporary relief for current borrowers affected by the COVID-19 pandemic. The Company has presumed that borrowers that are current on payments are not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and thus no further TDR analysis is required for each loan modification in the program.
As of September 30, 20192020 and December 31, 2018,2019, the Company had a recorded investment in troubled debt restructurings of $4.1$3.6 million and $5.9$3.9 million, respectively. The Company allocated a specific reserve of $498$235 thousand for
those loans at September 30, 20192020 and a specific reserve of $258$384 thousand for those loans at December 31, 2018.2019. The Company has not committed to lend additional amounts to borrowers whose loans have been modified. As of September 30, 2019,2020, there were $3.2$2.4 million of nonperforming TDRs and $914 thousand$1.2 million of performing TDRs included in impaired loans. As of December 31, 2018,2019, there were $5.0$3.0 million of nonperforming TDRs and $931$906 thousand of performing TDRs included in impaired loans.
All TDRs are considered impaired loans in the calendar year of their restructuring. A loan that has been modified can return to performing status if it satisfies a six-month performance requirement; however, it will continue to be reported as a TDR and considered impaired.
The following table presents the recorded investment of loans modified as TDRs during the three and nine months ended September 30, 2020 and nine months ended September 30, 2019, and 2018, by type of concession granted. There were no0 loans modified as TDRs during the three months ended September 30, 2019 and 2018.2019. In cases where more than one type of concession was granted, the loans were categorized based on the most significant concession.
| | | | | | Concession type | | Financial effects of
modification |
| (Dollars in thousands) | | (Dollars in thousands) | | Principal
deferral | | Interest
rate | | Forbearance
agreement | | Total
number of
loans | | Total
recorded
investment | | Net
charge-offs | | Provision
for loan
losses |
| Three months ended September 30, 2020 | | Three months ended September 30, 2020 | | | | | | | | | | | | | | |
| | Commercial and industrial | | Commercial and industrial | | $ | 0 | | | $ | 0 | | | $ | 148 | | | 1 | | | $ | 148 | | | $ | 0 | | | $ | 0 | |
| | Total | | Total | | $ | 0 | | | $ | 0 | | | $ | 148 | | | 1 | | | $ | 148 | | | $ | 0 | | | $ | 0 | |
| Nine months ended September 30, 2020 | | Nine months ended September 30, 2020 | | | | | | | | | | | | | | |
| | Commercial and industrial | | Commercial and industrial | | $ | 0 | | | $ | 0 | | | $ | 148 | | | 1 | | | $ | 148 | | | $ | 0 | | | $ | 0 | |
| Residential real estate | | Residential real estate | | 0 | | | 75 | | | 0 | | | 1 | | | 75 | | | 0 | | | 0 | |
| | Total | | Total | | $ | 0 | | | $ | 75 | | | $ | 148 | | | 2 | | | $ | 223 | | | $ | 0 | | | $ | 0 | |
| | | | | Concession type | | | | | | Financial effects of
modification | |
| (Dollars in thousands) | | Principal
deferral | | Interest
rate | | Forbearance
agreement | | Total
number of
loans | | Total
recorded
investment | | Net
charge-offs | | Provision
for loan
losses | |
| | Nine months ended September 30, 2019 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| Nine months ended September 30, 2019 | | | | | | | | | | | | | | |
| | Commercial and industrial | | $ | — |
| | $ | — |
| | $ | 351 |
| | 2 |
| | $ | 351 |
| | $ | — |
| | $ | 174 |
| Commercial and industrial | | $ | 0 | | | $ | 0 | | | $ | 351 | | | 2 | | | $ | 351 | | | $ | 0 | | | $ | 174 | |
| | Total | | $ | — |
| | $ | — |
| | $ | 351 |
| | 2 |
| | $ | 351 |
| | $ | — |
| | $ | 174 |
| Total | | $ | 0 | | | $ | 0 | | | $ | 351 | | | 2 | | | $ | 351 | | | $ | 0 | | | $ | 174 | |
| Nine months ended September 30, 2018 | | | | | | | | | | | | | | | |
| Commercial real estate | | $ | — |
| | $ | — |
| | $ | 2,087 |
| | 4 |
| | $ | 2,087 |
| | $ | 101 |
| | $ | — |
| |
| Commercial and industrial | | 133 |
| | — |
| | 990 |
| | 3 |
| | 1,123 |
| | — |
| | — |
| |
| Residential real estate | | — |
| | — |
| | 112 |
| | 2 |
| | 112 |
| | — |
| | 5 |
| |
| Total | | $ | 133 |
| | $ | — |
| | $ | 3,189 |
| | 9 |
| | $ | 3,322 |
| | $ | 101 |
| | $ | 5 |
| |
On an ongoing basis, the Company monitors the performance of TDRs to their modified terms. The following table presents the number of loans modified as TDRs during the twelve months ended September 30, 2018 for which there was a subsequent payment default, including the recorded investment as of the period end. There were no0 loans modified as TDRs during the twelve months ending September 30, 2020 and 2019, for which there was a subsequent default. A payment on a TDR is considered to be in default once it is greater than 30 days past due.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, 2018 | | Nine months ended September 30, 2018 |
| (Dollars in thousands) | | Total number of
loans | | Total recorded
investment | | Provision for loan losses following a
subsequent default | | Total number of
loans | | Total recorded
investment | | Provision for loan losses following a
subsequent default |
| Commercial real estate | | 3 |
| | $ | 2,087 |
| | $ | — |
| | 3 |
| | $ | 2,087 |
| | $ | — |
|
| Commercial and industrial | | 2 |
| | 1,182 |
| | — |
| | 3 |
| | 1,316 |
| | — |
|
| Residential real estate | | — |
| | — |
| | — |
| | 1 |
| | 111 |
| | — |
|
| Total | | 5 |
| | $ | 3,269 |
| | $ | — |
| | 7 |
| | $ | 3,514 |
| | $ | — |
|
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of 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 loans individually by classifying the loans as to credit risk. This analysis includes commercial and industrial and commercial real estate loans and is performed on an annual basis. The Company uses the following definitions for risk ratings:
Pass. Loans classified as pass are higher quality loans that do not fit any of the other categories described below. This category includes loans risk rated with the following ratings: cash/stock secured, excellent credit risk, superior credit risk, good credit risk, satisfactory credit risk, and marginal credit risk.
Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company's credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Based on the most recent analysis performed, the risk category of loans by class of loans was as follows:
| | | (Dollars in thousands) | | Pass | | Special Mention | | Substandard | | Doubtful | | Total | (Dollars in thousands) | | Pass | | Special
Mention | | Substandard | | Doubtful | | Total |
| September 30, 2019 | | |
| | |
| | |
| | |
| | |
| |
| September 30, 2020 | | September 30, 2020 | | | | | | | | | | |
| Commercial real estate | | $ | 552,320 |
| | $ | 8,342 |
| | $ | 4,653 |
| | $ | 466 |
| | $ | 565,781 |
| Commercial real estate | | $ | 703,241 | | | $ | 19,686 | | | $ | 6,723 | | | $ | 539 | | | $ | 730,189 | |
| Commercial and industrial | | 383,380 |
| | 14,270 |
| | 6,440 |
| | 40 |
| | 404,130 |
| Commercial and industrial | | 773,242 | | | 17,874 | | | 12,260 | | | 4,547 | | | 807,923 | |
| Total | | $ | 935,700 |
| | $ | 22,612 |
| | $ | 11,093 |
| | $ | 506 |
| | $ | 969,911 |
| Total | | $ | 1,476,483 | | | $ | 37,560 | | | $ | 18,983 | | | $ | 5,086 | | | $ | 1,538,112 | |
| December 31, 2018 | | |
| | |
| | |
| | |
| | |
| |
| December 31, 2019 | | December 31, 2019 | | | | | | | | | | |
| Commercial real estate | | $ | 545,843 |
| | $ | 10,240 |
| | $ | 5,966 |
| | $ | 44 |
| | $ | 562,093 |
| Commercial real estate | | $ | 591,419 | | | $ | 8,325 | | | $ | 4,042 | | | $ | 860 | | | $ | 604,646 | |
| Commercial and industrial | | 368,189 |
| | 2,841 |
| | 12,425 |
| | — |
| | 383,455 |
| Commercial and industrial | | 383,756 | | | 8,967 | | | 16,527 | | | 978 | | | 410,228 | |
| Total | | $ | 914,032 |
| | $ | 13,081 |
| | $ | 18,391 |
| | $ | 44 |
| | $ | 945,548 |
| Total | | $ | 975,175 | | | $ | 17,292 | | | $ | 20,569 | | | $ | 1,838 | | | $ | 1,014,874 | |
For residential real estate loans and consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. Residential real estate loans and consumer loans are considered nonperforming if they are 90 days or more past due. Consumer loan types are continuously monitored for changes in delinquency trends and other asset quality indicators.
The following presents residential real estate and consumer loans by credit quality:
| | | (Dollars in thousands) | | Performing | | Nonperforming | | Total | (Dollars in thousands) | | Performing | | Nonperforming | | Total |
| September 30, 2019 | | |
| | |
| | |
| |
| September 30, 2020 | | September 30, 2020 | | | | | | |
| Residential real estate | | $ | 195,938 |
| | $ | 2,339 |
| | $ | 198,277 |
| Residential real estate | | $ | 299,937 | | | $ | 4,151 | | | $ | 304,088 | |
| Consumer | | 735 |
| | — |
| | 735 |
| Consumer | | 1,673 | | | 15 | | | 1,688 | |
| Total | | $ | 196,673 |
| | $ | 2,339 |
| | $ | 199,012 |
| Total | | $ | 301,610 | | | $ | 4,166 | | | $ | 305,776 | |
| December 31, 2018 | | |
| | |
| | |
| |
| December 31, 2019 | | December 31, 2019 | | | | | | |
| Residential real estate | | $ | 177,103 |
| | $ | 2,915 |
| | $ | 180,018 |
| Residential real estate | | $ | 209,270 | | | $ | 2,569 | | | $ | 211,839 | |
| Consumer | | 999 |
| | — |
| | 999 |
| Consumer | | 880 | | | 16 | | | 896 | |
| Total | | $ | 178,102 |
| | $ | 2,915 |
| | $ | 181,017 |
| Total | | $ | 210,150 | | | $ | 2,585 | | | $ | 212,735 | |
Purchased Credit Impaired Loans:
As part of the Company's previous four5 acquisitions, the Company acquired purchase credit impaired ("PCI") loans for which there was evidence of credit quality deterioration since origination, and we determined that it was probable that the Company would be unable to collect all contractually required principal and interest payments. The total balance of all PCI loans from these acquisitions was as follows:
| | | | | | | | | | | | | | |
| (Dollars in thousand) | | Unpaid Principal Balance | | Recorded Investment |
| September 30, 2020 | | | | |
| Commercial real estate | | $ | 6,304 | | | $ | 2,841 | |
| Commercial and industrial | | 683 | | | 281 | |
| Residential real estate | | 4,048 | | | 2,945 | |
| | | | |
| Total PCI loans | | $ | 11,035 | | | $ | 6,067 | |
| December 31, 2019 | | | | |
| Commercial real estate | | $ | 6,597 | | | $ | 2,884 | |
| Commercial and industrial | | 556 | | | 135 | |
| Residential real estate | | 4,215 | | | 2,954 | |
| Total PCI loans | | $ | 11,368 | | | $ | 5,973 | |
|
| | | | | | | | |
| (Dollars in thousand) | | Unpaid Principal Balance | | Recorded Investment |
| September 30, 2019 | | |
| | |
|
| Commercial real estate | | $ | 6,190 |
| | $ | 3,640 |
|
| Commercial and industrial | | 280 |
| | 162 |
|
| Residential real estate | | 4,317 |
| | 3,081 |
|
| Total PCI loans | | $ | 10,787 |
| | $ | 6,883 |
|
| December 31, 2018 | | | | |
| Commercial real estate | | $ | 7,406 |
| | $ | 4,344 |
|
| Commercial and industrial | | 177 |
| | 122 |
|
| Residential real estate | | 4,974 |
| | 3,409 |
|
| Total PCI loans | | $ | 12,557 |
| | $ | 7,875 |
|
The following table reflects the activity in the accretable yield of PCI loans from past acquisitions, which includes total expected cash flows, including interest, in excess of the recorded investment.
| | | | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, | |
| (Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 | |
| Accretable yield at beginning of period | | $ | 10,194 |
| | $ | 12,390 |
| | $ | 10,947 |
| | $ | 14,452 |
| Accretable yield at beginning of period | $ | 8,374 | | | $ | 10,194 | | | $ | 9,141 | | | $ | 10,947 | | |
| Additions due to acquisitions | | Additions due to acquisitions | 0 | | | 0 | | | 35 | | | 0 | | |
| Accretion of income | | (597 | ) | | (1,167 | ) | | (1,772 | ) | | (3,076 | ) | Accretion of income | (482) | | | (597) | | | (1,350) | | | (1,772) | | |
| Adjustments to accretable yield | | — |
| | — |
| | 422 |
| | (159 | ) | Adjustments to accretable yield | 0 | | | 0 | | | 66 | | | 422 | | |
| Other activity, net | | — |
| | — |
| | — |
| | 6 |
| |
| | Accretable yield at end of period | | $ | 9,597 |
| | $ | 11,223 |
| | $ | 9,597 |
| | $ | 11,223 |
| Accretable yield at end of period | $ | 7,892 | | | $ | 9,597 | | | $ | 7,892 | | | $ | 9,597 | | |
"AccretionAdditions due to acquisitions" represents the accretable yield added as a result of the AAB acquisition. "Accretion of income" represents the income earned on these loans for the year. "Adjustments to accretable yield" represents the net amount of accretable yield added or removed as a result of the semi-annual re-estimation of expected cash flows.
NOTE 4—5—ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained to absorb probable incurred losses from the loan portfolio. The allowance for loan losses is based on management's continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of nonaccrual loans.
The Company established an allowance for loan losses associated with PCI loans (accounted for under ASC 310-30) based on credit deterioration subsequent to the acquisition date. As of September 30, 2019,2020, the Company had six6 PCI loan pools and 1113 non-pooled PCI loans. The Company re-estimates cash flows expected to be collected for PCI loans on a semi-annual basis, with any decline in expected cash flows recorded as provision for loan losses on a discounted basis during the period. For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield to be recognized on a prospective basis over the loan's remaining life.
For loans not accounted for under ASC 310-30, the Company individually evaluates certain impaired loans on a quarterly basis and establishes specific allowances for such loans, if required. A loan is considered impaired when it is probable that interest or principal payments will not be made in accordance with the contractual terms of the loan agreement. Consistent with this definition, all loans for which the accrual of interest has been discontinued (nonaccrual loans) and all TDRs are considered impaired. The Company individually evaluates nonaccrual loans with book balances of $250 thousand or more, all loans whose terms have been modified in a TDR, and certain other loans. The threshold for individual evaluation is revised on an infrequent basis, generally when economic circumstances significantly change. Specific allowances for impaired loans are estimated using one of several methods, including the estimated fair value of underlying collateral, observable market value of similar debt or discounted expected future cash flows. All other impaired loans are individually evaluated by identifying its risk characteristics and applying the standard reserve factor for the corresponding loan pool.
Loans which do not meet the criteria to be individually evaluated are evaluated in pools of loans with similar risk characteristics. Business loans are assigned to pools based on the Company's internal risk rating system. Internal risk ratings are assigned to each business loan at the time of approval and are subjected to subsequent periodic reviews by the Company's senior management, generally at least annually or more frequently upon the occurrence of a circumstance that affects the credit risk of the loan. For business loans not individually evaluated, losses inherent to the pool are estimated by applying standard reserve factors to outstanding principal balances.
The allowance for loans not individually evaluated is determined by applying estimated loss rates to various pools of loans within the portfolios with similar risk characteristics. Estimated loss rates for all pools are updated quarterly, incorporating quantitative and qualitative factors such as recent charge-off experience, current economic conditions and trends, changes in collateral values of properties securing loans (using index-based estimates), and trends with respect to past due and nonaccrual amounts.
Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance less any remaining purchase discount.
Loans individually evaluated for impairment are presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Recorded investment with
no related
allowance | | Recorded investment
with related
allowance | | Total
recorded
investment | | Contractual
principal
balance | | Related
allowance |
| September 30, 2020 | | | | | | | | | | |
| Individually evaluated impaired loans: | | | | | | | | | | |
| Commercial real estate | | $ | 7,022 | | | $ | 0 | | | $ | 7,022 | | | $ | 7,355 | | | $ | 0 | |
| Commercial and industrial | | 4,465 | | | 4,717 | | | 9,182 | | | 10,031 | | | 798 | |
| Residential real estate | | 2,942 | | | 266 | | | 3,208 | | | 3,459 | | | 26 | |
| Total | | $ | 14,429 | | | $ | 4,983 | | | $ | 19,412 | | | $ | 20,845 | | | $ | 824 | |
| December 31, 2019 | | | | | | | | | | |
| Individually evaluated impaired loans: | | | | | | | | | | |
| Commercial real estate | | $ | 4,832 | | | $ | 0 | | | $ | 4,832 | | | $ | 5,156 | | | $ | 0 | |
| Commercial and industrial | | 10,739 | | | 913 | | | 11,652 | | | 12,521 | | | 363 | |
| Residential real estate | | 1,197 | | | 189 | | | 1,386 | | | 1,570 | | | 22 | |
| Total | | $ | 16,768 | | | $ | 1,102 | | | $ | 17,870 | | | $ | 19,247 | | | $ | 385 | |
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Average
Recorded
Investment | | Interest
Income
Recognized | | Cash Basis
Interest
Recognized |
| For the three months ended September 30, 2020 | | | | | | |
| Individually evaluated impaired loans: | | | | | | |
| Commercial real estate | | $ | 7,139 | | | $ | 0 | | | $ | 0 | |
| Commercial and industrial | | 8,960 | | | 12 | | | 0 | |
| Residential real estate | | 3,265 | | | 7 | | | 0 | |
| | | | | | |
| Total | | $ | 19,364 | | | $ | 19 | | | $ | 0 | |
| For the nine months ended September 30, 2020 | | | | | | |
| Individually evaluated impaired loans: | | | | | | |
| Commercial real estate | | $ | 7,433 | | | $ | 0 | | | $ | 0 | |
| Commercial and industrial | | 13,086 | | | 34 | | | 84 | |
| Residential real estate | | 3,266 | | | 26 | | | 0 | |
| | | | | | |
| Total | | $ | 23,785 | | | $ | 60 | | | $ | 84 | |
| For the three months ended September 30, 2019 | | | | | | |
| Individually evaluated impaired loans: | | | | | | |
| Commercial real estate | | $ | 3,111 | | | $ | 2 | | | $ | 35 | |
| Commercial and industrial | | 6,752 | | | 14 | | | 349 | |
| Residential real estate | | 1,428 | | | 7 | | | 0 | |
| | | | | | |
| Total | | $ | 11,291 | | | $ | 23 | | | $ | 384 | |
| For the nine months ended September 30, 2019 | | | | | | |
| Individually evaluated impaired loans: | | | | | | |
| Commercial real estate | | $ | 4,034 | | | $ | 2 | | | $ | 209 | |
| Commercial and industrial | | 9,080 | | | 33 | | | 573 | |
| Residential real estate | | 2,059 | | | 21 | | | 10 | |
| | | | | | |
| Total | | $ | 15,173 | | | $ | 56 | | | $ | 792 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Recorded investment with no related allowance | | Recorded investment with related allowance (1) | | Total recorded investment | | Contractual principal balance | | Related allowance (1) |
| September 30, 2019 | | |
| | |
| | |
| | |
| | |
|
| Individually evaluated impaired loans: | | |
| | |
| | |
| | |
| | |
|
| Commercial real estate | | $ | 4,479 |
| | $ | 564 |
| | $ | 5,043 |
| | $ | 5,244 |
| | $ | 37 |
|
| Commercial and industrial | | 2,292 |
| | 2,051 |
| | 4,343 |
| | 4,608 |
| | 443 |
|
| Residential real estate | | 1,207 |
| | 189 |
| | 1,396 |
| | 1,541 |
| | 18 |
|
| Total | | $ | 7,978 |
| | $ | 2,804 |
| | $ | 10,782 |
| | $ | 11,393 |
| | $ | 498 |
|
| December 31, 2018 | | |
| | |
| | |
| | |
| | |
|
| Individually evaluated impaired loans: | | |
| | |
| | |
| | |
| | |
|
| Commercial real estate | | $ | 5,898 |
| | $ | 3,991 |
| | $ | 9,889 |
| | $ | 13,076 |
| | $ | 815 |
|
| Commercial and industrial | | 5,892 |
| | 4,059 |
| | 9,951 |
| | 10,411 |
| | 526 |
|
| Residential real estate | | 1,666 |
| | 3,255 |
| | 4,921 |
| | 6,604 |
| | 101 |
|
| Total | | $ | 13,456 |
| | $ | 11,305 |
| | $ | 24,761 |
| | $ | 30,091 |
| | $ | 1,442 |
|
(1) December 31, 2018 individually evaluated impaired loans included $7.2 millionTable of PCI loans with a related allowance of $920 thousand. September 30, 2019 individually evaluated impaired loans do not include PCI loans with a related allowance. |
| | | | | | | | | | | | |
| (Dollars in thousands) | | Average Recorded Investment | | Interest Income Recognized | | Cash Basis Interest Recognized |
| For the three months ended September 30, 2019 | | |
| | |
| | |
|
Individually evaluated impaired loans (1): | | |
| | |
| | |
|
| Commercial real estate | | $ | 3,111 |
| | $ | 2 |
| | $ | 35 |
|
| Commercial and industrial | | 6,752 |
| | 14 |
| | 349 |
|
| Residential real estate | | 1,428 |
| | 7 |
| | — |
|
| Total | | $ | 11,291 |
| | $ | 23 |
| | $ | 384 |
|
| For the nine months ended September 30, 2019 | | | | | | |
Individually evaluated impaired loans (1): | | | | |
| | |
|
| Commercial real estate | | $ | 4,034 |
| | $ | 2 |
| | $ | 209 |
|
| Commercial and industrial | | 9,080 |
| | 33 |
| | 573 |
|
| Residential real estate | | 2,059 |
| | 21 |
| | 10 |
|
| Total | | $ | 15,173 |
| | $ | 56 |
| | $ | 792 |
|
| For the three months ended September 30, 2018 | | |
| | |
| | |
|
Individually evaluated impaired loans (1): | | |
| | |
| | |
|
| Commercial real estate | | $ | 9,524 |
| | $ | 430 |
| | $ | 142 |
|
| Commercial and industrial | | 6,559 |
| | 22 |
| | — |
|
| Residential real estate | | 5,217 |
| | 90 |
| | — |
|
| Total | | $ | 21,300 |
| | $ | 542 |
| | $ | 142 |
|
| For the nine months ended September 30, 2018 | | | | | | |
Individually evaluated impaired loans (1): | | | | | | |
| Commercial real estate | | $ | 9,258 |
| | $ | 1,275 |
| | $ | 142 |
|
| Commercial and industrial | | 7,736 |
| | 71 |
| | 112 |
|
| Residential real estate | | 5,256 |
| | 277 |
| | — |
|
| Total | | $ | 22,250 |
| | $ | 1,623 |
| | $ | 254 |
|
(1) September 30, 2018 individually evaluated impaired loans included PCI loans, whereas September 30, 2019 individually evaluated impaired loans excluded PCI loans.
Activity in the allowance for loan losses and the allocationis presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Commercial
Real Estate | | Commercial
and Industrial | | Residential
Real Estate | | Consumer | | Total |
| For the three months ended September 30, 2020 | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | |
| Beginning balance | | $ | 7,987 | | | $ | 6,496 | | | $ | 2,565 | | | $ | 15 | | | $ | 17,063 | |
| Provision (benefit) for loan losses | | 1,820 | | | 1,679 | | | 781 | | | (10) | | | 4,270 | |
| Gross chargeoffs | | 0 | | | (10) | | | (110) | | | (4) | | | (124) | |
| Recoveries | | 12 | | | 15 | | | 10 | | | 8 | | | 45 | |
| Net (chargeoffs) recoveries | | 12 | | | 5 | | | (100) | | | 4 | | | (79) | |
| Ending allowance for loan losses | | $ | 9,819 | | | $ | 8,180 | | | $ | 3,246 | | | $ | 9 | | | $ | 21,254 | |
| For the nine months ended September 30, 2020 | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | |
| Beginning balance | | $ | 5,773 | | | $ | 5,515 | | | $ | 1,384 | | | $ | 2 | | | $ | 12,674 | |
| Provision for loan losses | | 4,034 | | | 4,347 | | | 1,921 | | | 32 | | | 10,334 | |
| Gross chargeoffs | | 0 | | | (1,729) | | | (110) | | | (47) | | | (1,886) | |
| Recoveries | | 12 | | | 47 | | | 51 | | | 22 | | | 132 | |
| Net (chargeoffs) recoveries | | 12 | | | (1,682) | | | (59) | | | (25) | | | (1,754) | |
| Ending allowance for loan losses | | $ | 9,819 | | | $ | 8,180 | | | $ | 3,246 | | | $ | 9 | | | $ | 21,254 | |
| For the three months ended September 30, 2019 | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | |
| Beginning balance | | $ | 5,219 | | | $ | 5,990 | | | $ | 1,142 | | | $ | 2 | | | $ | 12,353 | |
| Provision (benefit) for loan losses | | 184 | | | (280) | | | 72 | | | 8 | | | (16) | |
| Gross chargeoffs | | 0 | | | (49) | | | 0 | | | (34) | | | (83) | |
| Recoveries | | 5 | | | 10 | | | 12 | | | 26 | | | 53 | |
| Net (chargeoffs) recoveries | | 5 | | | (39) | | | 12 | | | (8) | | | (30) | |
| Ending allowance for loan losses | | $ | 5,408 | | | $ | 5,671 | | | $ | 1,226 | | | $ | 2 | | | $ | 12,307 | |
| For the nine months ended September 30, 2019 | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | |
| Beginning balance | | $ | 5,227 | | | $ | 5,174 | | | $ | 1,164 | | | $ | 1 | | | $ | 11,566 | |
| Provision for loan losses | | 249 | | | 560 | | | 7 | | | 19 | | | 835 | |
| Gross chargeoffs | | (74) | | | (164) | | | 0 | | | (48) | | | (286) | |
| Recoveries | | 6 | | | 101 | | | 55 | | | 30 | | | 192 | |
| Net (chargeoffs) recoveries | | (68) | | | (63) | | | 55 | | | (18) | | | (94) | |
| Ending allowance for loan losses | | $ | 5,408 | | | $ | 5,671 | | | $ | 1,226 | | | $ | 2 | | | $ | 12,307 | |
Allocation of the allowance for loans was as follows:loan losses is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Commercial
Real Estate | | Commercial
and Industrial | | Residential
Real Estate | | Consumer | | Total |
| September 30, 2020 | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 0 | | | $ | 798 | | | $ | 26 | | | $ | 0 | | | $ | 824 | |
| Collectively evaluated for impairment | | 9,109 | | | 7,352 | | | 3,023 | | | 9 | | | 19,493 | |
| Acquired with deteriorated credit quality | | 710 | | | 30 | | | 197 | | | 0 | | | 937 | |
| Ending allowance for loan losses | | $ | 9,819 | | | $ | 8,180 | | | $ | 3,246 | | | $ | 9 | | | $ | 21,254 | |
| Balance of loans: | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 7,022 | | | $ | 9,182 | | | $ | 3,208 | | | $ | 0 | | | $ | 19,412 | |
| Collectively evaluated for impairment | | 720,326 | | | 798,460 | | | 297,935 | | | 1,688 | | | 1,818,409 | |
| Acquired with deteriorated credit quality | | 2,841 | | | 281 | | | 2,945 | | | 0 | | | 6,067 | |
| Total loans | | $ | 730,189 | | | $ | 807,923 | | | $ | 304,088 | | | $ | 1,688 | | | $ | 1,843,888 | |
| December 31, 2019 | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 0 | | | $ | 363 | | | $ | 22 | | | $ | 0 | | | $ | 385 | |
| Collectively evaluated for impairment | | 5,062 | | | 5,124 | | | 1,339 | | | 2 | | | 11,527 | |
| Acquired with deteriorated credit quality | | 711 | | | 28 | | | 23 | | | 0 | | | 762 | |
| Ending allowance for loan losses | | $ | 5,773 | | | $ | 5,515 | | | $ | 1,384 | | | $ | 2 | | | $ | 12,674 | |
| Balance of loans: | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 4,832 | | | $ | 11,652 | | | $ | 1,386 | | | $ | 0 | | | $ | 17,870 | |
| Collectively evaluated for impairment | | 596,930 | | | 398,441 | | | 207,499 | | | 896 | | | 1,203,766 | |
| Acquired with deteriorated credit quality | | 2,884 | | | 135 | | | 2,954 | | | 0 | | | 5,973 | |
| Total loans | | $ | 604,646 | | | $ | 410,228 | | | $ | 211,839 | | | $ | 896 | | | $ | 1,227,609 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Commercial Real Estate | | Commercial and Industrial | | Residential Real Estate | | Consumer | | Total |
| For the three months ended September 30, 2019 | | |
| | |
| | |
| | |
| | |
|
| Allowance for loan losses: | | |
| | |
| | |
| | |
| | |
|
| Beginning balance | | $ | 5,219 |
| | $ | 5,990 |
| | $ | 1,142 |
| | $ | 2 |
| | $ | 12,353 |
|
| Provision (benefit) for loan losses | | 184 |
| | (280 | ) | | 72 |
| | 8 |
| | (16 | ) |
| Gross chargeoffs | | — |
| | (49 | ) | | — |
| | (34 | ) | | (83 | ) |
| Recoveries | | 5 |
| | 10 |
| | 12 |
| | 26 |
| | 53 |
|
| Net (chargeoffs) recoveries | | 5 |
| | (39 | ) | | 12 |
| | (8 | ) | | (30 | ) |
| Ending allowance for loan losses | | $ | 5,408 |
| | $ | 5,671 |
| | $ | 1,226 |
| | $ | 2 |
| | $ | 12,307 |
|
| For the nine months ended September 30, 2019 | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | |
| Beginning balance | | $ | 5,227 |
| | $ | 5,174 |
| | $ | 1,164 |
| | $ | 1 |
| | $ | 11,566 |
|
| Provision for loan losses | | 249 |
| | 560 |
| | 7 |
| | 19 |
| | 835 |
|
| Gross chargeoffs | | (74 | ) | | (164 | ) | | — |
| | (48 | ) | | (286 | ) |
| Recoveries | | 6 |
| | 101 |
| | 55 |
| | 30 |
| | 192 |
|
| Net (chargeoffs) recoveries | | (68 | ) | | (63 | ) | | 55 |
| | (18 | ) | | (94 | ) |
| Ending allowance for loan losses | | $ | 5,408 |
| | $ | 5,671 |
| | $ | 1,226 |
| | $ | 2 |
| | $ | 12,307 |
|
| For the three months ended September 30, 2018 | | | | | | | | | | |
| Allowance for loan losses: | | |
| | |
| | |
| | |
| | |
|
| Beginning balance | | $ | 5,060 |
| | $ | 5,423 |
| | $ | 977 |
| | $ | 5 |
| | $ | 11,465 |
|
| Provision for loan losses | | 34 |
| | 475 |
| | 101 |
| | 9 |
| | 619 |
|
| Gross chargeoffs | | — |
| | (237 | ) | | — |
| | (8 | ) | | (245 | ) |
| Recoveries | | 23 |
| | 8 |
| | 19 |
| | 1 |
| | 51 |
|
| Net (chargeoffs) recoveries | | 23 |
| | (229 | ) | | 19 |
| | (7 | ) | | (194 | ) |
| Ending allowance for loan losses | | $ | 5,117 |
| | $ | 5,669 |
| | $ | 1,097 |
| | $ | 7 |
| | $ | 11,890 |
|
| For the nine months ended September 30, 2018 | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | |
| Beginning balance | | $ | 4,852 |
| | $ | 5,903 |
| | $ | 950 |
| | $ | 8 |
| | $ | 11,713 |
|
| Provision (benefit) for loan losses | | 352 |
| | (53 | ) | | 143 |
| | 21 |
| | 463 |
|
| Gross chargeoffs | | (112 | ) | | (995 | ) | | (47 | ) | | (23 | ) | | (1,177 | ) |
| Recoveries | | 25 |
| | 814 |
| | 51 |
| | 1 |
| | 891 |
|
| Net (chargeoffs) recoveries | | (87 | ) | | (181 | ) | | 4 |
| | (22 | ) | | (286 | ) |
| Ending allowance for loan losses | | $ | 5,117 |
| | $ | 5,669 |
| | $ | 1,097 |
| | $ | 7 |
| | $ | 11,890 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Commercial Real Estate | | Commercial and Industrial | | Residential Real Estate | | Consumer | | Total |
| September 30, 2019 | | |
| | |
| | |
| | |
| | |
|
| Allowance for loan losses: | | |
| | |
| | |
| | |
| | |
|
| Individually evaluated for impairment | | $ | 37 |
| | $ | 443 |
| | $ | 18 |
| | $ | — |
| | $ | 498 |
|
| Collectively evaluated for impairment | | 4,619 |
| | 5,189 |
| | 1,195 |
| | 2 |
| | 11,005 |
|
| Acquired with deteriorated credit quality | | 752 |
| | 39 |
| | 13 |
| | — |
| | 804 |
|
| Ending allowance for loan losses | | $ | 5,408 |
| | $ | 5,671 |
| | $ | 1,226 |
| | $ | 2 |
| | $ | 12,307 |
|
| Balance of loans: | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 5,043 |
| | $ | 4,343 |
| | $ | 1,396 |
| | $ | — |
| | $ | 10,782 |
|
| Collectively evaluated for impairment | | 557,098 |
| | 399,625 |
| | 193,800 |
| | 735 |
| | 1,151,258 |
|
| Acquired with deteriorated credit quality | | 3,640 |
| | 162 |
| | 3,081 |
| | — |
| | 6,883 |
|
| Total loans | | $ | 565,781 |
| | $ | 404,130 |
| | $ | 198,277 |
| | $ | 735 |
| | $ | 1,168,923 |
|
| December 31, 2018 | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | |
| Individually evaluated for impairment | | $ | — |
| | $ | 504 |
| | $ | 18 |
| | $ | — |
| | $ | 522 |
|
| Collectively evaluated for impairment | | 4,412 |
| | 4,648 |
| | 1,063 |
| | 1 |
| | 10,124 |
|
| Acquired with deteriorated credit quality | | 815 |
| | 22 |
| | 83 |
| | — |
| | 920 |
|
| Ending allowance for loan losses | | $ | 5,227 |
| | $ | 5,174 |
| | $ | 1,164 |
| | $ | 1 |
| | $ | 11,566 |
|
| Balance of loans: | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 5,898 |
| | $ | 9,829 |
| | $ | 1,854 |
| | $ | — |
| | $ | 17,581 |
|
| Collectively evaluated for impairment | | 551,851 |
| | 373,504 |
| | 174,755 |
| | 999 |
| | 1,101,109 |
|
| Acquired with deteriorated credit quality | | 4,344 |
| | 122 |
| | 3,409 |
| | — |
| | 7,875 |
|
| Total loans | | $ | 562,093 |
| | $ | 383,455 |
| | $ | 180,018 |
| | $ | 999 |
| | $ | 1,126,565 |
|
NOTE 5—6—PREMISES AND EQUIPMENT
Premises and equipment were as follows at September 30, 20192020 and December 31, 2018:2019:
| | | (Dollars in thousands) | | September 30, 2019 | | December 31, 2018 | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
| Land | | $ | 2,253 |
| | $ | 2,197 |
| Land | | $ | 3,514 | | | $ | 2,254 | |
| Buildings | | 9,825 |
| | 9,746 |
| Buildings | | 10,656 | | | 9,825 | |
| Leasehold improvements | | 2,192 |
| | 1,708 |
| Leasehold improvements | | 2,993 | | | 2,714 | |
| Furniture, fixtures and equipment | | 6,322 |
| | 6,024 |
| Furniture, fixtures and equipment | | 7,231 | | | 6,539 | |
| Total premises and equipment | | $ | 20,592 |
| | $ | 19,675 |
| Total premises and equipment | | $ | 24,394 | | | $ | 21,332 | |
| Less: Accumulated depreciation | | 7,165 |
| | 6,433 |
| Less: Accumulated depreciation | | 8,748 | | | 7,494 | |
| Net premises and equipment | | $ | 13,427 |
| | $ | 13,242 |
| Net premises and equipment | | $ | 15,646 | | | $ | 13,838 | |
Depreciation expense was $326$426 thousand and $345$326 thousand for the three months ended September 30, 2020 and 2019, and 2018,$1.3 million and $986 thousand and $1.0 million for the nine months ended September 30, 20192020 and 2018,2019, respectively.
Most of the Company's branch facilities are rented under non-cancelable operating lease agreements. Total rent expense was $307$450 thousand and $285$307 thousand for the three months ended September 30, 2020 and 2019, and 2018,$1.4 million and $840 thousand and $790 thousand for the nine months ended September 30, 20192020 and 2018,2019, respectively.
NOTE 6—7—GOODWILL AND INTANGIBLE ASSETS
Goodwill:Goodwill: The Company has acquired two3 banks, Lotus Bank in March 2015, and Bank of Michigan in March 2016, and Ann Arbor State Bank in January 2020, which resulted in the recognition of goodwill of $4.6 million, and $4.8 million, ofand $26.2 million, respectively. Total goodwill respectively. Goodwill was $35.6 million at September 30, 2020 and $9.4 million at both September 30, 2019 and December 31, 2018.2019.
Goodwill is not amortized but is evaluated at least annually for impairment.impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value. The Company's most recent annual goodwill impairment review performed as of September 30, 2018October 1, 2019 did not indicate that an impairment existed.
As a result of the unprecedented decline in economic conditions triggered by the COVID-19 pandemic, the market valuations, including our stock price, saw a significant decline in March 2020, which then continued into second quarter of 2020. These events indicated that goodwill may be impaired and resulted in management performing a qualitative goodwill impairment assessment in the second quarter of 2020. As a result of the analysis, we concluded that it was more-likely-than-not that the fair value of the reporting unit could be greater than its carrying amount.
Since the price of our stock did not fully recover during the third quarter of 2020, the Company concluded to engage a reputable, third-party valuation firm to perform a quantitative analysis of goodwill existed. The Company alsoas of August 31, 2020 ("the valuation date"). In deriving at the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of our common stock and other relevant events. In addition, the valuation relied on financial projections through 2023 and growth rates prepared by management. Based on the valuation prepared, it was determined that no triggering events have occurred that indicated impairment from the most recent valuation date through September 30, 2019 and that the Company's estimated fair value of the reporting unit at August 31, 2020 was greater than its book value and impairment of goodwill was not impaired atrequired.
Furthermore, management noted that despite the market capitalization declining from December 2019 to September 2020 as a result of the COVID-19 pandemic, the Bank’s financial performance has remained positive. This is evidenced by the strong financial indicators for the Bank, solid credit quality ratios, as well as the strong capital position of the Bank. In addition, third quarter 2020 revenue reflected significant and continuing growth in our residential mortgage banking business, as well as net SBA fees related to Paycheck Protection Program ("PPP") loans funded during second and third quarters of 2020. Management concurred with the conclusion derived from the quantitative goodwill analysis as of August 31, 2020 and determined that there were no material changes between the valuation date and September 30, 2019.
Beginning with fiscal year 2019, the Company has elected to evaluate2020. As such, management concluded that it is more likely than not that there was 0 goodwill for impairment as of October 1st rather than September 30th as was done in the preceding years. The change will have no impact on the current year's or prior year's financial statements.30, 2020.
Acquired
Intangible Assets: The Company has recorded core deposit intangibles ("CDIs") associated with each of its acquisitions. CDIs are amortized on an accelerated basis over their estimated useful lives.
The table below presents the Company's net carrying amount of CDIs:
| | | (Dollars in thousands) | | September 30, 2019 | | December 31, 2018 | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
| Gross carrying amount | | $ | 2,045 |
| | $ | 2,045 |
| Gross carrying amount | | $ | 5,708 | | | $ | 2,045 | |
| Accumulated amortization | | (1,715 | ) | | (1,598 | ) | Accumulated amortization | | (2,320) | | | (1,744) | |
| Net Intangible | | $ | 330 |
| | $ | 447 |
| Net Intangible | | $ | 3,388 | | | $ | 301 | |
Amortization expense for the CDIs was $29$191 thousand and $55$29 thousand for the three months ended September 30, 2020 and 2019, and 2018$576 thousand and $117 thousand and $165 thousand for the nine months ended September 30, 20192020 and 2018,2019, respectively.
Mortgage Servicing Rights ("MSRs"): The Company has recorded MSRs for loans that are sold with servicing retained. MSRs are carried at the lower of the initial capitalized amount, net of accumulated amortization or estimated fair value. MSRs are amortized in proportion to and over the period of estimated net servicing income. The Company serviced residential mortgage loans for others with unpaid principal balances of approximately $211.0 million and $9.0 million as of September 30, 2020 and December 31, 2019, respectively.
Changes in our mortgage servicing rights were as follows for the three and nine months ended September 30, 2020 . The Company had $1 thousand in mortgage servicing rights as of September 30, 2019:
| | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | | | For the nine months ended September 30, | | |
| (Dollars in thousands) | | 2020 | | | | 2020 | | |
| Mortgage servicing rights: | | | | | | | | |
| Balance, beginning of period | | $ | 1,213 | | | | | $ | 76 | | | |
| Originated servicing | | 1,073 | | | | | 2,250 | | | |
| Amortization | | (93) | | | | | (133) | | | |
| Balance, end of period | | 2,193 | | | | | 2,193 | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Fair value: | | | | | | | | |
| At beginning of period | | $ | 1,256 | | | | | $ | 87 | | | |
| At end of period | | 2,567 | | | | | 2,567 | | | |
NOTE 78 —BORROWINGS AND SUBORDINATED DEBT
The following table presents the components of our short-term borrowings and long-term debt.
| | | | | September 30, 2019 | | December 31, 2018 | | | September 30, 2020 | | December 31, 2019 |
| (Dollars in thousands) | | Amount | | Weighted
Average
Rate(1) | | Amount | | Weighted
Average
Rate(1) | (Dollars in thousands) | | Amount | | Weighted
Average
Rate(1) | | Amount | | Weighted
Average
Rate(1) |
| Short-term borrowings: | | |
| | |
| | |
| | |
| Short-term borrowings: | | | | | | | | |
| FHLB Advances | | $ | — |
| | — | % | | $ | 90,000 |
| | 2.54 | % | FHLB Advances | | $ | 0 | | | 0 | % | | $ | 60,000 | | | 1.61 | % |
| Securities sold under agreements to repurchase | | 545 |
| | 0.30 |
| | 609 |
| | 0.30 |
| Securities sold under agreements to repurchase | | 187 | | | 0.30 | | | 851 | | | 0.30 | |
| FHLB line of credit | | — |
| | — |
| | 2,520 |
| | 2.87 |
| |
| | Federal funds purchased | | 10,000 |
| | 1.90 |
| | 5,000 |
| | 2.50 |
| Federal funds purchased | | 0 | | | 0 | | | 5,000 | | | 1.90 | |
| Total short-term borrowings | | 10,545 |
| | 1.82 |
| | 98,129 |
| | 2.53 |
| Total short-term borrowings | | 187 | | | 0.30 | | | 65,851 | | | 1.62 | |
| Long-term debt: | | | | | | | | | Long-term debt: | |
| Secured borrowing due in 2022 | | 1,392 |
| | 1.00 |
| | 1,445 |
| | 1.00 |
| Secured borrowing due in 2022 | | 1,322 | | | 1.00 | | | 1,374 | | | 1.00 | |
FHLB advances due in 2022 to 2029(2) | | 100,000 |
| | 1.11 |
| | — |
| | — |
| FHLB advances due in 2022 to 2029(2) | | 181,202 | | | 1.09 | | | 145,000 | | | 1.06 | |
Subordinated notes due in 2025(3) | | 14,934 |
| | 6.38 |
| | 14,891 |
| | 6.38 |
| |
FRB borrowings (3) | | FRB borrowings (3) | | 34,098 | | | 0.35 | | | 0 | | | 0 | |
Subordinated notes due in 2025 and 2029(4) | | Subordinated notes due in 2025 and 2029(4) | | 44,555 | | | 5.29 | | | 44,440 | | | 5.29 | |
| Total long-term debt | | 116,326 |
| | 1.79 |
| | 16,336 |
| | 5.90 |
| Total long-term debt | | 261,177 | | | 1.71 | | | 190,814 | | | 2.04 | |
| Total short-term and long-term borrowings | | $ | 126,871 |
| | 1.79 | % | | $ | 114,465 |
| | 3.01 | % | Total short-term and long-term borrowings | | $ | 261,364 | | | 1.71 | % | | $ | 256,665 | | | 1.93 | % |
(1) Weighted average rate presented is the contractual rate which excludes premiums and discounts related to purchase accounting.
(2) At September 30, 2019,2020, the long-term FHLB advances consisted of 0.66%0.42% - 2.35%2.93% fixed rate notes.
(3)notes and can be called through 2024 without penalty by the issuer. The September 30, 2020 balance includes FHLB advances of $181.0 million and purchase accounting premiums of $202 thousand.
(3) The September 30, 2020 balance of FRB borrowings consisted of 0.35% fixed rate notes utilized to fund the PPP loans. The FRB borrowings have a maturity date equal to the maturity date of the respective PPP loans pledged to secure the borrowings, which is two years after the origination date of the PPP loans.
(4) The September 30, 2020 balance includes subordinated notes of $45.0 million and debt issuance costs of $445 thousand. The December 31, 2019 balance includes subordinated notes of $15.0$45.0 million and debt issuance costs of $66$560 thousand.
At September 30, 2020, the Company had $34.1 million of debt outstanding with the Federal Reserve Bank. These borrowings reflected the Company's efforts to help facilitate the funding of the PPP loans that were approved by the SBA during the quarter ended September 30, 2020. The December 31, 2018 balance includes subordinated notesFRB borrowings bear a 0.35% fixed interest rate and mature two years after the origination date of $15.0 million and debt issuance costs of $109 thousand.the respective PPP loans that have been pledged to secure them.
The Bank is a member of the FHLB of Indianapolis, which provides short- and long-term funding collateralized by mortgage-related assets to its members. FHLB short-term borrowings bear interest at variable rates based on LIBOR. The
$181.0 million of long-term FHLB advances as of September 30, 2020 were secured by a blanket lien on $419.6$510.6 million of real estate-related loans as of September 30, 2019.loans. Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to an additional $144.9$211.1 million from the FHLB at September 30, 2019.2020. In addition, the Bank can borrow up to $130.0$122.5 million through the unsecured lines of credit it has established with other correspondent banks, as well as $4.9$5.3 million through a secured line with the Federal Reserve Bank. The Bank had $10.0 million0 outstanding federal funds purchased as of September 30, 20192020 and $5.0 million outstanding federal funds purchased as of December 31, 2018.2019.
At September 30, 2019,2020, the Company had $545$187 thousand of securities sold under agreements to repurchase with customers, which mature overnight. These borrowings were secured by residential collateralized mortgage obligation securities with a fair value of $1.2$1.9 million at September 30, 2019.2020.
The Company had a secured borrowing of $1.4$1.3 million as of September 30, 20192020 relating to certain loan participations sold by the Company that did not qualify for sales treatment. The secured borrowing bears a fixed rate of 1.00% and matures on September 15, 2022.
As ofAt September 30, 2019,2020, the Company had $45.0 million outstanding subordinated notes and $445 thousand of debt issuance costs. The debt issuance costs are netted against the balance of the subordinated notes and recognized as expense over the expected term of the notes.
The $15.0 million of subordinated notes. The notes issued on December 21, 2015 bear a fixed interest rate of 6.375% per annum, payable semiannually through December 15, 2020. The notes will bear a floating interest rate of three-month LIBOR plus 477 basis points payable quarterly after December 15, 2020 through maturity. The notes mature no later than December 15, 2025, and the Company has the option to redeem or prepay any or all of the subordinated notes without premium or penalty any time after December 15, 2020 or upon an occurrence of a Tier 2 capital event or tax event.
The $30.0 million of subordinated notes issued on December 18, 2019 bear a fixed interest rate of 4.75% per annum, payable semiannually through December 18, 2024. The notes are subordinatedwill bear a floating interest rate of three-month secured overnight financing rate (SOFR) plus 311 basis points payable quarterly after December 18, 2024 through maturity. The notes mature no later than December 18, 2029, and the Company has the option to redeem any or all other borrowings. At September 30, 2019, there was $66 thousand of debt issuance costs remaining, which are netted against the balance of the subordinated notes and recognized as expense overwithout premium or penalty any time after December 18, 2024 or upon the expected termoccurrence of the notes.a Tier 2 capital event or tax event.
NOTE 8—9—INCOME TAXES
The Company recordsand its subsidiaries are subject to U.S. federal income tax expense using its estimatetax. In the ordinary course of business, we are routinely subject to audit by Internal Revenue Service. Currently, the effective income tax rate expectedCompany is subject to examination by taxing authorities for the full2016 tax return year and applies that rate on a year-to-date basis. The fluctuations in the Company's effective federal income tax rate reflect changes related to interest income exempt from federal taxation and other nondeductible expenses relative to income tax credits.forward.
A reconciliation of expected income tax expense using the federal corporate taxstatutory rate of 21% as of September 30, 2020 and the2019 and actual income tax expense recordedis as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the three months ended September 30, | | For the nine months ended September 30, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| Income tax expense based on federal corporate tax rate | | $ | 1,328 | | | $ | 1,118 | | | $ | 2,970 | | | $ | 2,911 | |
| Changes resulting from: | | | | | | | | |
| Tax-exempt income | | (154) | | | (142) | | | (469) | | | (398) | |
| | | | | | | | |
| | | | | | | | |
| Net operating loss carryback due to CARES Act | | 0 | | | 0 | | | (290) | | | 0 | |
| Disqualified dispositions from stock options | | 0 | | | 0 | | | (175) | | | 0 | |
| Other, net | | (57) | | | (62) | | | 73 | | | (85) | |
| Income tax expense | | $ | 1,117 | | | $ | 914 | | | $ | 2,109 | | | $ | 2,428 | |
In March 2020, the United States government approved the CARES Act, allowing companies to carryback net operating losses generated in our consolidated financial statements2018 through 2020 for five years to periods in which the tax rate was as follows:higher. Ann Arbor State Bank had a net operating loss ("NOL") of approximately $2.2 million generated on its 2020 short tax return which resulted in an increase in value of the NOL (which is part of the deferred tax assets) and therefore a $290 thousand tax benefit to be recognized during the first quarter of 2020. Additionally, disqualified dispositions of Ann Arbor State Bank’s stock options generated a $175 thousand tax benefit.
|
| | | | | | | | | | | | | | | | |
| | | For the three months ended September 30, | | For the nine months ended September 30, |
| (Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Income tax expense based on federal corporate tax rate | | $ | 1,118 |
| | $ | 823 |
| | $ | 2,911 |
| | $ | 2,646 |
|
| Changes resulting from: | | |
| | |
| | | | |
| Tax-exempt income | | (142 | ) | | (104 | ) | | (398 | ) | | (289 | ) |
| Other, net | | (62 | ) | | (54 | ) | | (85 | ) | | (190 | ) |
| Income tax expense | | $ | 914 |
| | $ | 665 |
| | $ | 2,428 |
| | $ | 2,167 |
|
NOTE 9—10—STOCK BASED COMPENSATION
On March 15, 2018, the Company’s Board of Directors approved the 2018 Equity Incentive Compensation Plan ("2018 Plan"). The 2018 Plan became effective upon shareholder approval at the annual shareholders meeting held on April 17, 2018. Under the 2018 Plan, the Company can grant incentive and non-qualified stock options, stock awards, stock appreciation rights, and other incentive awards to directors and employees of, and certain service providers to, the Company and its subsidiaries. Once the 2018 Plan became effective, no further awards could be granted from the 2007 Stock Option Plan ("Stock Option Plan") or the 2014 Equity Incentive Plan ("2014 Plan"). However, any outstanding equity awards granted under the Stock Option Plan or the 2014 Plan will remain subject to the terms of such plans until the time it issuch awards are no longer outstanding. For further discussion on the Stock Option Plan and 2014 Plan, refer to the disclosures included within the Annual Form 10-K, filed with the SEC on March 22, 2019.
The Company has reserved 250,000 shares of common stock for issuance under the 2018 Plan. During the nine months ended September 30, 2020 and 2019, the Company granted no stock optionsissued 38,170 and issued 35,633 restricted stock awards, respectively, under the 2018 Plan, resulting in 207,617Plan. There were 165,597 shares available to be grantedfor issuance as of September 30, 2019. During the nine months ended2020.
September 30, 2018, the Company granted 30,000 stock options under the Stock Option Plan and 30,271 restricted stock awards under the 2014 Plan.
Stock Options
As of September 30, 2019,2020, all of the Company's outstanding options were granted under the Stock Option Plan. The term of these options is ten years, and they vest one-third each year, over a three yearyears period. The Company will use authorized, but unissued shares to satisfy share option exercises. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model.
Expected volatilities are based on historical volatilities of the Company's common stock. The Company assumes all awards will vest. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The fair value of theThere were 0 stock options granted induring the nine months ended September 30, 2018 was determined using the following weighted-average assumptions as2020 or September 30, 2019.
|
| | |
| | September 30, 2018 |
Risk Free Interest Rate | | 2.83% |
Expected Term (years) | | 7.0 |
Expected Volatility | | 0.04% |
Weighted average fair value of options granted | | $4.46 |
The summary of our stock option activity for the nine months ended September 30, 20192020 is as follows:
|
| | | | | | | | | |
| | | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term |
| Options outstanding at January 1, 2019 | | 376,768 |
| | $ | 16.26 |
| | 5.8 |
| Exercised | | (21,550 | ) | | 10.16 |
| | |
| Options outstanding at September 30, 2019 | | 355,218 |
| | 16.63 |
| | 5.3 |
| Options exercisable at September 30, 2019 | | 335,214 |
| | $ | 16.14 |
| | 5.1 |
| | | | | | | | | | | | | | | | | | | | |
| | Shares | | Weighted Average
Exercise Price | | Weighted Average Remaining Contractual
Term |
| Options outstanding, beginning of period | | 355,218 | | | $ | 16.63 | | | 5.0 |
| | | | | | |
| Exercised | | (10,000) | | | 9.57 | | | |
| | | | | | |
| Options outstanding, end of period | | 345,218 | | | 16.83 | | | 4.4 |
| Options exercisable | | 335,216 | | | $ | 16.59 | | | 4.3 |
The aggregate intrinsic value was $2.7 million$516 thousand for both options outstanding and exercisable as of September 30, 2019.2020. As of September 30, 2019,2020, there was $61$17 thousand of total unrecognized compensation cost related to stock options granted under the Stock Option Plan. The cost is expected to be recognized over a weighted-average period of 1.10.38 years.
Share-based compensation expense charged against income was $12$11 thousand and $38$12 thousand for the three months ended September 30, 2020 and 2019, respectively, and 2018,$33 thousand and $43 thousand and $128 thousand for the nine months ended September 30, 20192020 and 2018,2019, respectively.
Restricted Stock Awards
A summary of changes in the Company's nonvested shares for the nine months ended September 30, 20192020 is as follows:
| | | Nonvested Shares | | Shares | | Weighted Average Grant-Date Fair Value | Nonvested Shares | | Shares | | Weighted Average
Grant-Date Fair Value |
| Nonvested at January 1, 2019 | | 53,770 |
| | $ | 24.14 |
| |
| Nonvested at January 1, 2020 | | Nonvested at January 1, 2020 | | 80,370 | | | $ | 24.28 | |
| Granted | | 35,633 |
| | 23.76 |
| Granted | | 38,170 | | | 24.90 | |
| Vested | | (6,700 | ) | | 20.75 |
| Vested | | (19,850) | | | 23.10 | |
| Forfeited | | (3,150 | ) | | 23.99 |
| Forfeited | | (1,400) | | | 24.46 | |
| Nonvested at September 30, 2019 | | 79,553 |
| | $ | 24.26 |
| |
| Nonvested at September 30, 2020 | | Nonvested at September 30, 2020 | | 97,290 | | | $ | 24.76 | |
As of September 30, 2019,2020, there was $990 thousand$1.2 million of total unrecognized compensation cost related to nonvested shares granted under the 2014 Plan and 2018 Plan. The cost is expected to be recognized over a weighted average period of 1.91.88 years. The total fair value of shares vested during the nine months ended September 30, 20192020 was $139$459 thousand.
Total expense for restricted stock awards totaled $177$223 thousand and $175$177 thousand for the three months ended September 30, 2020 and 2019, respectively, and 2018,$620 thousand and $474 thousand and $487 thousand for the nine months ended September 30, 20192020 and 2018,2019, respectively. For the nine months ended September 30, 2020 and 2019, there was $64 thousand and $43 thousand, respectively, of restricted stock redeemed to cover the payroll taxes due at the time of vesting.
NOTE 10—OFF-BALANCE11 —OFF-BALANCE SHEET ACTIVITIES
In the normal course of business, the Company offers a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include outstanding commitments to extend credit, credit lines, commercial letters of credit and standby letters of credit. TheseCommitments to extend credit are agreements to provide credit to a customer, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. used and the total commitment amounts do not necessarily represent future cash flow requirements.
Standby letters of credit and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party. These financial standby letters of credit irrevocably obligate the Company to pay a third-party beneficiary when a customer fails to repay an outstanding loan or debt instrument.
Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies used for loans are used to make such commitments, including obtaining collateral at exercise of the commitment. We maintain an allowance to cover probable losses inherent in our financial instruments with off-balance sheet risk. At September 30, 2020, the allowance for off-balance sheet risk was $498 thousand, compared to $318 thousand at December 31, 2019, and was included in "Other liabilities" on our consolidated balance sheets.
A summary of the contractual amounts of the Company's exposure to off-balance sheet risk is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2020 | | December 31, 2019 |
| (Dollars in thousands) | | Fixed | | Variable | | Fixed | | Variable |
| Commitments to make loans | | $ | 5,302 | | | $ | 5,295 | | | $ | 16,276 | | | $ | 20,128 | |
| Unused lines of credit | | 30,496 | | | 361,749 | | | 28,723 | | | 288,086 | |
| Unused standby letters of credit and commercial letters of credit | | 3,705 | | | 2,028 | | | 4,895 | | | 0 | |
|
| | | | | | | | | | | | | | | | |
| | | September 30, 2019 | | December 31, 2018 |
| (Dollars in thousands) | | Fixed | | Variable | | Fixed | | Variable |
| Commitments to make loans | | $ | 16,252 |
| | $ | 22,769 |
| | $ | 8,608 |
| | $ | 10,900 |
|
| Unused lines of credit | | 19,544 |
| | 289,779 |
| | 18,672 |
| | 229,490 |
|
| Unused standby letters of credit and commercial letters of credit | | 4,195 |
| | — |
| | 3,861 |
| | 232 |
|
Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments of $16.3$5.3 million as of September 30, 2019, have2020, had interest rates ranging from 3.6%3.0% to 7.8%5.5% and maturities ranging from 23 months to 15 years to 30 years..
NOTE 11—12—REGULATORY CAPITAL MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, 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. Failure to meet capital requirements can initiate regulatory action. Management believed that as of September 30, 2019,2020, the Company and Bank met all capital adequacy requirements to which they were subject.
The Basel III rules require the Company to maintain a capital conservation buffer of common equity capital of greater than 2.5% above the minimum risk-weighted assets ratios, which is the fully phased-in amount of the capital conservation buffer. The capital conservation buffer was 2.5% at September 30, 2019 and 1.875% at December 31, 2018.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.
At September 30, 20192020 and December 31, 2018,2019, the Bank was classified asBank's capital ratios were in excess of the requirement to be "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events that management believes have changed the Bank's category.
Actual and required capital amounts and ratios are presented below:
| | | | | Actual | | For Capital Adequacy Purposes | | For Capital Adequacy Purposes + Capital Conservation Buffer(1) | | Well Capitalized Under Prompt Corrective Action Provisions | | | Actual | | For Capital
Adequacy
Purposes | | For Capital Adequacy
Purposes + Capital
Conservation Buffer(1) | | Well Capitalized Under Prompt Corrective
Action Provisions |
| (Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | (Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| September 30, 2019 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| September 30, 2020 | | September 30, 2020 | | | | | | | | | | | | | | | | |
| Common equity tier 1 to risk-weighted assets: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Common equity tier 1 to risk-weighted assets: | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 153,143 |
| | 11.73 | % | | $ | 58,754 |
| | 4.50 | % | | $ | 91,396 |
| | 7.00 | % | |
|
| |
|
| Consolidated | | $ | 139,067 | | | 8.83 | % | | $ | 70,875 | | | 4.50 | % | | $ | 110,250 | | | 7.00 | % | |
| Bank | | 160,141 |
| | 12.25 | % | | 58,804 |
| | 4.50 | % | | 91,472 |
| | 7.00 | % | | $ | 84,939 |
| | 6.50 | % | Bank | | 176,593 | | | 11.23 | % | | 70,760 | | | 4.50 | % | | 110,070 | | | 7.00 | % | | $ | 102,208 | | | 6.50 | % |
| Tier 1 capital to risk-weighted assets: | | | | | | | | | | | | | | | | | Tier 1 capital to risk-weighted assets: | |
| Consolidated | | $ | 153,143 |
| | 11.73 | % | | $ | 78,339 |
| | 6.00 | % | | $ | 110,980 |
| | 8.50 | % | |
|
| |
|
| Consolidated | | $ | 162,437 | | | 10.31 | % | | $ | 94,500 | | | 6.00 | % | | $ | 133,875 | | | 8.50 | % | |
| Bank | | 160,141 |
| | 12.25 | % | | 78,405 |
| | 6.00 | % | | 111,074 |
| | 8.50 | % | | $ | 104,540 |
| | 8.00 | % | Bank | | 176,593 | | | 11.23 | % | | 94,346 | | | 6.00 | % | | 133,657 | | | 8.50 | % | | $ | 125,795 | | | 8.00 | % |
| Total capital to risk-weighted assets: | | | | | | | | | | | | | | | | | Total capital to risk-weighted assets: | |
| Consolidated | | $ | 180,711 |
| | 13.84 | % | | $ | 104,452 |
| | 8.00 | % | | $ | 137,093 |
| | 10.50 | % | |
|
| |
|
| Consolidated | | $ | 226,679 | | | 14.39 | % | | $ | 126,000 | | | 8.00 | % | | $ | 165,375 | | | 10.50 | % | |
| Bank | | 172,774 |
| | 13.22 | % | | 104,540 |
| | 8.00 | % | | 137,209 |
| | 10.50 | % | | $ | 130,675 |
| | 10.00 | % | Bank | | 196,274 | | | 12.48 | % | | 125,795 | | | 8.00 | % | | 165,106 | | | 10.50 | % | | $ | 157,244 | | | 10.00 | % |
| Tier 1 capital to average assets (leverage ratio): | | | | | | | | | | | | | | | | | Tier 1 capital to average assets (leverage ratio): | |
| Consolidated | | $ | 153,143 |
| | 10.12 | % | | $ | 60,503 |
| | 4.00 | % | | $ | 60,503 |
| | 4.00 | % | |
|
| |
|
| Consolidated | | $ | 162,437 | | | 7.17 | % | | $ | 90,664 | | | 4.00 | % | | $ | 90,664 | | | 4.00 | % | |
| Bank | | 160,141 |
| | 10.64 | % | | 60,191 |
| | 4.00 | % | | 60,191 |
| | 4.00 | % | | $ | 75,238 |
| | 5.00 | % | Bank | | 176,593 | | | 7.83 | % | | 90,220 | | | 4.00 | % | | 90,220 | | | 4.00 | % | | $ | 112,776 | | | 5.00 | % |
| December 31, 2018 | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | December 31, 2019 | |
| Common equity tier 1 to risk-weighted assets: | | | | | | | | | | | | | | | | | Common equity tier 1 to risk-weighted assets: | |
| Consolidated | | $ | 144,008 |
| | 11.82 | % | | $ | 54,803 |
| | 4.50 | % | | $ | 77,699 |
| | 6.38 | % | |
|
| |
|
| Consolidated | | $ | 157,659 | | | 11.72 | % | | $ | 60,533 | | | 4.50 | % | | $ | 94,163 | | | 7.00 | % | |
| Bank | | 147,495 |
| | 12.12 | % | | 54,780 |
| | 4.50 | % | | 77,666 |
| | 6.38 | % | | $ | 79,126 |
| | 6.50 | % | Bank | | 165,199 | | | 12.27 | % | | 60,568 | | | 4.50 | % | | 94,217 | | | 7.00 | % | | $ | 87,487 | | | 6.50 | % |
| Tier 1 capital to risk-weighted assets: | | | | | | | | | | | | | | | | | Tier 1 capital to risk-weighted assets: | |
| Consolidated | | $ | 144,008 |
| | 11.82 | % | | $ | 73,071 |
| | 6.00 | % | | $ | 95,967 |
| | 7.88 | % | |
|
| |
|
| Consolidated | | $ | 157,659 | | | 11.72 | % | | $ | 80,711 | | | 6.00 | % | | $ | 114,341 | | | 8.50 | % | |
| Bank | | 147,495 |
| | 12.12 | % | | 73,040 |
| | 6.00 | % | | 95,926 |
| | 7.88 | % | | $ | 97,386 |
| | 8.00 | % | Bank | | 165,199 | | | 12.27 | % | | 80,757 | | | 6.00 | % | | 114,406 | | | 8.50 | % | | $ | 107,676 | | | 8.00 | % |
| Total capital to risk-weighted assets: | | | | | | | | | | | | | | | | | Total capital to risk-weighted assets: | |
| Consolidated | | $ | 170,503 |
| | 14.00 | % | | $ | 97,428 |
| | 8.00 | % | | $ | 120,324 |
| | 9.88 | % | |
|
| |
|
| Consolidated | | $ | 215,091 | | | 15.99 | % | | $ | 107,615 | | | 8.00 | % | | $ | 141,244 | | | 10.50 | % | |
| Bank | | 159,100 |
| | 13.07 | % | | 97,386 |
| | 8.00 | % | | 120,272 |
| | 9.88 | % | | $ | 121,733 |
| | 10.00 | % | Bank | | 178,191 | | | 13.24 | % | | 107,676 | | | 8.00 | % | | 141,325 | | | 10.50 | % | | $ | 134,595 | | | 10.00 | % |
| Tier 1 capital to average assets (leverage ratio): | | | | | | | | | | | | | | | | | Tier 1 capital to average assets (leverage ratio): | |
| Consolidated | | $ | 144,008 |
| | 10.21 | % | | $ | 56,411 |
| | 4.00 | % | | $ | 56,411 |
| | 4.00 | % | |
|
| |
|
| Consolidated | | $ | 157,659 | | | 10.41 | % | | $ | 60,580 | | | 4.00 | % | | $ | 60,580 | | | 4.00 | % | |
| Bank | | 147,495 |
| | 10.48 | % | | 56,309 |
| | 4.00 | % | | 56,309 |
| | 4.00 | % | | $ | 70,386 |
| | 5.00 | % | Bank | | 165,199 | | | 10.96 | % | | 60,276 | | | 4.00 | % | | 60,276 | | | 4.00 | % | | $ | 75,345 | | | 5.00 | % |
(1) Reflects the capital conservation buffer of 2.5% and 1.875% applicable during 2019 and 2018, respectively..
Dividend Restrictions - The Company’s primary source of cash is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. As of September 30, 2019,2020, the Bank had the capacity to pay the Company a dividend of up to $35.6$42.9 million without the need to obtain prior regulatory approval.
NOTE 12—13—FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
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 company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Investment Securities: Securities available for sale are recorded at fair value on a recurring basis as follows: the fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). NoFor securities are valuedwhere pricing on similar securities is not available, a third party is engaged to calculate the fair value using a Level 3 approach.the Municipal Market Data curve (Level 3).
Loans Held for Sale, at Fair Value: The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).
Loans Measured at Fair Value: During the normal course of business, loans originated with the initial intention to sell but not ultimately sold, are transferred from held for sale to our portfolio of loans held for investment at fair value as the Company adopted the fair value option at origination. The fair value of these loans is determined by obtaining fair value pricing from a third-party software, and then layering an additional adjustment, ranging from 5 to 75 basis points, as determined by management, depending on the reason for the transfer.transfer from loans held for sale. Due to the adjustments made, the Company classifies the loans transferred from loans held for sale as recurring Level 3.
Mortgage Servicing Rights ("MSRs"): In accordance with GAAP, the Company must record impairment charges on mortgage servicing rights on a non-recurring basis when the carrying value exceeds the estimated fair value. The fair value of our MSRs is obtained from a third-party valuation company that uses a discounted cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, costs to service, contractual servicing fee income, ancillary income, late fees, replacement reserves and other economic factors that are determined based on current market conditions. The reliance on Level 3 inputs to derive at the fair value of MSRs results in a Level 3 classification.
Impaired Loans: Impaired loans are measured and recorded at fair value on a non-recurring basis. All of our nonaccrual loans and trouble debt restructured loans are considered impaired and are reviewed individually for the amount of impairment, if any. The fair value of impaired loans is estimated using one of several methods, including the fair value of the collateral or the present value of the expected future cash flows discounted at the loan's effective interest rate. For loans that are collateral dependent, the fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business. Such adjustments are considered unobservable and the fair value measurement is categorized as a Level 3 measurement.
Other Real Estate Owned: Other real estate owned assets are recorded at the lower of cost or fair value upon the transfer of a loan to other real estate owned and, subsequently, continue to be measured and carried at the lower of cost or fair value. The fair value of other real estate owned is based on recent real estate appraisals which are generally updated annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales, cost, and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Other real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by either the Company or the Company's appraisal services vendor. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Management monitors the
actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.
Derivatives: Customer-initiated derivatives are traded in over-the counter markets where quoted market prices are not readily available. Fair value of customer-initiated derivatives is measured on a recurring basis using valuation models that use market observable inputs (Level 2).
Mortgage banking related derivatives including 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 recorded at fair value on a recurring basis. The fair value of these commitments is based on the fair value of related mortgage loans determined using observable market data (Level 2). Interest rate lock commitments are adjusted for expectations of exercise and funding. This adjustment is not considered to be material input.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Total | | Quoted Prices
in Active Markets
for Identical Assets
(Level 1) | | Significant Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| September 30, 2020 | | | | | | | | |
| Securities available for sale: | | | | | | | | |
| U.S. government sponsored entities and agencies | | $ | 27,199 | | | $ | 0 | | | $ | 27,199 | | | $ | 0 | |
| State and political subdivision | | 117,550 | | | 0 | | | 115,838 | | | 1,712 | |
| Mortgage-backed securities: residential | | 19,492 | | | 0 | | | 19,492 | | | 0 | |
| Mortgage-backed securities: commercial | | 8,655 | | | 0 | | | 8,655 | | | 0 | |
| Collateralized mortgage obligations: residential | | 14,333 | | | 0 | | | 14,333 | | | 0 | |
| Collateralized mortgage obligations: commercial | | 33,003 | | | 0 | | | 33,003 | | | 0 | |
| U.S. Treasury | | 1,003 | | | 0 | | | 1,003 | | | 0 | |
| SBA | | 18,808 | | | 0 | | | 18,808 | | | 0 | |
| Asset backed securities | | 9,954 | | | 0 | | | 9,954 | | | 0 | |
| Corporate bonds | | 3,530 | | | 0 | | | 3,530 | | | 0 | |
| Total securities available for sale | | 253,527 | | | 0 | | | 251,815 | | | 1,712 | |
| Loans held for sale | | 60,635 | | | 0 | | | 60,635 | | | 0 | |
| Loans measured at fair value: | | | | | | | | |
| Residential real estate | | 5,080 | | | 0 | | | 0 | | | 5,080 | |
| Derivative assets: | | | | | | | | |
| Customer-initiated derivatives | | 14,422 | | | 0 | | | 14,422 | | | 0 | |
| Forward contracts related to mortgage loans to be delivered for sale | | 117 | | | 0 | | | 117 | | | 0 | |
| Interest rate lock commitments | | 2,068 | | | 0 | | | 2,068 | | | 0 | |
| Total assets at fair value | | $ | 335,849 | | | $ | 0 | | | $ | 329,057 | | | $ | 6,792 | |
| Derivative liabilities: | | | | | | | | |
| Customer-initiated derivatives | | 14,422 | | | 0 | | | 14,422 | | | 0 | |
| Forward contracts related to mortgage loans to be delivered for sale | | 441 | | | 0 | | | 441 | | | 0 | |
| Interest rate lock commitments | | 4 | | | 0 | | | 4 | | | 0 | |
| Total liabilities at fair value | | $ | 14,867 | | | $ | 0 | | | $ | 14,867 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Total | | Quoted Prices
in Active Markets
for Identical Assets
(Level 1) | | Significant Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| September 30, 2019 | | |
| | |
| | |
| | |
|
| Securities available for sale: | | |
| | |
| | |
| | |
|
| U.S. government sponsored entities and agencies | | $ | 1,497 |
| | $ | — |
| | $ | 1,497 |
| | $ | — |
|
| State and political subdivision | | 90,733 |
| | — |
| | 90,733 |
| | — |
|
| Mortgage-backed securities: residential | | 9,390 |
| | — |
| | 9,390 |
| | — |
|
| Mortgage-backed securities: commercial | | 21,049 |
| | — |
| | 21,049 |
| | — |
|
| Collateralized mortgage obligations: residential | | 9,069 |
| | — |
| | 9,069 |
| | — |
|
| Collateralized mortgage obligations: commercial | | 31,598 |
| | — |
| | 31,598 |
| | — |
|
| U.S. Treasury | | 2,001 |
| | — |
| | 2,001 |
| | — |
|
| SBA | | 23,536 |
| | — |
| | 23,536 |
| | — |
|
| Asset backed securities | | 10,187 |
| | — |
| | 10,187 |
| | — |
|
| Corporate bonds | | 6,182 |
| | — |
| | 6,182 |
| | — |
|
| Total securities available for sale | | 205,242 |
| | — |
| | 205,242 |
| | — |
|
| Loans held for sale | | 26,864 |
| | — |
| | 26,864 |
| | — |
|
| Loans measured at fair value: | | | | | | | | |
| Residential real estate | | 4,890 |
| | — |
| | — |
| | 4,890 |
|
| Derivative assets: | | | | | | | | |
| Customer-initiated derivatives | | 5,628 |
| | — |
| | 5,628 |
| | — |
|
| Forward contracts related to mortgage loans to be delivered for sale | | 185 |
| | — |
| | 185 |
| | — |
|
| Interest rate lock commitments | | 359 |
| | — |
| | 359 |
| | — |
|
| Total assets at fair value | | $ | 243,168 |
| | $ | — |
| | $ | 238,278 |
| | $ | 4,890 |
|
| Derivative liabilities: | | | | | | | | |
| Customer-initiated derivatives | | 5,628 |
| | — |
| | 5,628 |
| | — |
|
| Forward contracts related to mortgage loans to be delivered for sale | | 56 |
| | — |
| | 56 |
| | — |
|
| Interest rate lock commitments | | 5 |
| | — |
| | 5 |
| | — |
|
| Total liabilities at fair value | | $ | 5,689 |
| | $ | — |
| | $ | 5,689 |
| | $ | — |
|
| | | (Dollars in thousands) | | Total | | Quoted Prices
in Active Markets
for Identical Assets
(Level 1) | | Significant Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | (Dollars in thousands) | | Total | | Quoted Prices
in Active Markets
for Identical Assets
(Level 1) | | Significant Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| December 31, 2018 | | | | | | | | | |
| December 31, 2019 | | December 31, 2019 | | | | | | | | |
| Securities available for sale: | | | | | | | | | Securities available for sale: | |
| U.S. government sponsored entities and agencies | | $ | 2,397 |
| | $ | — |
| | $ | 2,397 |
| | $ | — |
| |
| | State and political subdivision | | 75,146 |
| | — |
| | 75,146 |
| | — |
| State and political subdivision | | $ | 93,747 | | | $ | 0 | | | $ | 93,747 | | | $ | 0 | |
| Mortgage-backed securities: residential | | 9,739 |
| | — |
| | 9,739 |
| | — |
| Mortgage-backed securities: residential | | 10,565 | | | 0 | | | 10,565 | | | 0 | |
| Mortgage-backed securities: commercial | | 12,382 |
| | — |
| | 12,382 |
| | — |
| Mortgage-backed securities: commercial | | 8,779 | | | 0 | | | 8,779 | | | 0 | |
| Collateralized mortgage obligations: residential | | 18,671 |
| | — |
| | 18,671 |
| | — |
| Collateralized mortgage obligations: residential | | 8,529 | | | 0 | | | 8,529 | | | 0 | |
| Collateralized mortgage obligations: commercial | | 31,988 |
| | — |
| | 31,988 |
| | — |
| Collateralized mortgage obligations: commercial | | 23,181 | | | 0 | | | 23,181 | | | 0 | |
| U.S. Treasury | | 20,481 |
| | — |
| | 20,481 |
| | — |
| U.S. Treasury | | 1,999 | | | 0 | | | 1,999 | | | 0 | |
| SBA | | 15,688 |
| | — |
| | 15,688 |
| | — |
| SBA | | 21,984 | | | 0 | | | 21,984 | | | 0 | |
| Asset backed securities | | 3,842 |
| | — |
| | 3,842 |
| | — |
| Asset backed securities | | 10,084 | | | 0 | | | 10,084 | | | 0 | |
| Corporate bonds | | 13,924 |
| | — |
| | 13,924 |
| | — |
| Corporate bonds | | 2,037 | | | 0 | | | 2,037 | | | 0 | |
| Total securities available for sale | | $ | 204,258 |
| | $ | — |
| | $ | 204,258 |
| | $ | — |
| Total securities available for sale | | $ | 180,905 | | | $ | 0 | | | $ | 180,905 | | | $ | 0 | |
| Loans held for sale | | 5,595 |
| | — |
| | 5,595 |
| | — |
| Loans held for sale | | 13,889 | | | 0 | | | 13,889 | | | 0 | |
| Loans measured at fair value: | | | | | | | | | Loans measured at fair value: | |
| Residential real estate | | 4,571 |
| | — |
| | — |
| | 4,571 |
| Residential real estate | | 4,063 | | | 0 | | | 0 | | | 4,063 | |
| Derivative assets: | | | | | | | | | Derivative assets: | |
| Customer-initiated derivatives | | 1,126 |
| | — |
| | 1,126 |
| | — |
| Customer-initiated derivatives | | 4,684 | | | 0 | | | 4,684 | | | 0 | |
| Forward contracts related to mortgage loans to be delivered for sale | | 22 |
| | — |
| | 22 |
| | — |
| Forward contracts related to mortgage loans to be delivered for sale | | 34 | | | 0 | | | 34 | | | 0 | |
| Interest rate lock commitments | | 198 |
| | — |
| | 198 |
| | — |
| Interest rate lock commitments | | 256 | | | 0 | | | 256 | | | 0 | |
| Total assets at fair value | | $ | 215,770 |
| | $ | — |
| | $ | 211,199 |
| | $ | 4,571 |
| Total assets at fair value | | $ | 203,831 | | | $ | 0 | | | $ | 199,768 | | | $ | 4,063 | |
| Derivative liabilities: | | | | | | | | | Derivative liabilities: | | | | | | | | |
| Customer-initiated derivatives | | 1,126 |
| | — |
| | 1,126 |
| | — |
| Customer-initiated derivatives | | 4,684 | | | 0 | | | 4,684 | | | 0 | |
| Forward contracts related to mortgage loans to be delivered for sale | | 43 |
| | — |
| | 43 |
| | — |
| Forward contracts related to mortgage loans to be delivered for sale | | 33 | | | 0 | | | 33 | | | 0 | |
| Total liabilities at fair value | | $ | 1,169 |
| | $ | — |
| | $ | 1,169 |
| | $ | — |
| Total liabilities at fair value | | $ | 4,717 | | | $ | 0 | | | $ | 4,717 | | | $ | 0 | |
There were no transfers between levels within the fair value hierarchy, within a specific category, during the nine months ended September 30, 20192020 or during the year ended December 31, 2018.2019. The level 3 investment securities disclosed as of September 30, 2020 were acquired from Ann Arbor State Bank during the first quarter of 2020.
The following table summarizes the changes in Level 3 assets measured at fair value on a recurring basis.
| | | | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, |
| (Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| Loans held for investment | | | | | | | | | Loans held for investment | | | | | | | | |
| Beginning balance | | $ | 5,624 |
| | $ | 4,414 |
| | $ | 4,571 |
| | $ | 4,291 |
| Beginning balance | | $ | 4,056 | | | $ | 5,624 | | | $ | 4,063 | | | $ | 4,571 | |
| Transfers from loans held for sale | | 466 |
| | 149 |
| | 1,895 |
| | 453 |
| Transfers from loans held for sale | | 1,468 | | | 466 | | | 2,284 | | | 1,895 | |
| Gains (losses): | | | | | | | | | Gains (losses): | |
| Recorded in "Mortgage banking activities" | | (9 | ) | | (32 | ) | | 151 |
| | (144 | ) | Recorded in "Mortgage banking activities" | | 65 | | | (9) | | | 62 | | | 151 | |
| Repayments | | (1,191 | ) | | (44 | ) | | (1,727 | ) | | (113 | ) | Repayments | | (509) | | | (1,191) | | | (1,329) | | | (1,727) | |
| Ending balance | | $ | 4,890 |
| | $ | 4,487 |
| | $ | 4,890 |
| | $ | 4,487 |
| Ending balance | | $ | 5,080 | | | $ | 4,890 | | | $ | 5,080 | | | $ | 4,890 | |
|
The Company has elected the fair value option for loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company's policy on loans held for investment. There were no loans held for sale that were on nonaccrual status or 90 days past due as of September 30, 20192020 or December 31, 2018.
2019.
As of September 30, 20192020 and December 31, 2018,2019, the aggregate fair value, contractual balance (including accrued interest), and gain or loss for loans held for sale carried at fair value was as follows:
| | | (Dollars in thousands) | | September 30, 2019 | | December 31, 2018 | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
| Aggregate fair value | | $ | 26,864 |
| | $ | 5,595 |
| Aggregate fair value | | $ | 60,635 | | | $ | 13,889 | |
| Contractual balance | | 26,429 |
| | 5,512 |
| Contractual balance | | 59,055 | | | 13,510 | |
| Unrealized gain | | 435 |
| | 83 |
| Unrealized gain | | 1,580 | | | 379 | |
The total amount of gains as a result of changes in fair value of loans held for sale included in "Mortgage banking activities" for the three and nine months ended September 30, 20192020 and 20182019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the three months ended September 30, | | For the nine months ended September 30, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| Change in fair value | | $ | 556 | | | $ | (98) | | | $ | 1,201 | | | $ | 352 | |
|
| | | | | | | | | | | | | | | | |
| | | For the three months ended September 30, | | For the nine months ended September 30, |
| (Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Change in fair value | | $ | (98 | ) | | $ | 69 |
| | $ | 352 |
| | $ | 100 |
|
Assets measured at fair value on a non-recurring basis are summarized below:
| | (Dollars in thousands) | | (Dollars in thousands) | | Total | | Significant Unobservable Inputs
(Level 3) |
| September 30, 2020 | | September 30, 2020 | | | | |
| Impaired loans: | | Impaired loans: | |
| Residential real estate | | Residential real estate | | $ | 1,305 | | | $ | 1,305 | |
| | Commercial and industrial | | Commercial and industrial | | 761 | | | 761 | |
| Mortgage servicing rights | | Mortgage servicing rights | | 2,567 | | | 2,567 | |
| | | (Dollars in thousands) | | Total | | Significant Unobservable Inputs
(Level 3) | |
| September 30, 2019 | | | | | |
| | Total | | Total | | $ | 4,633 | | | $ | 4,633 | |
| December 31, 2019 | | December 31, 2019 | | | | |
| Impaired loans: | | | | | Impaired loans: | |
| Commercial real estate | | $ | 897 |
| | $ | 897 |
| Commercial real estate | | $ | 265 | | | $ | 265 | |
| Commercial and industrial | | 1,291 |
| | 1,291 |
| Commercial and industrial | | 261 | | | 261 | |
| Mortgage servicing rights | | Mortgage servicing rights | | 87 | | | 87 | |
| Other real estate owned | | 373 |
| | 373 |
| Other real estate owned | | 921 | | | 921 | |
| Total | | $ | 2,561 |
| | $ | 2,561 |
| Total | | $ | 1,534 | | | $ | 1,534 | |
| December 31, 2018 | | | | | |
| Impaired loans: | | | | | |
| Commercial and industrial | | $ | 3,337 |
| | $ | 3,337 |
| |
| Total | | $ | 3,337 |
| | $ | 3,337 |
| |
|
The Company recorded specific reserves of $246$91 thousand and $278$161 thousand to reduce the value of these loans at September 30, 20192020 and December 31, 2018,2019, respectively, based on the estimated fair value of the underlying collateral. The Company also recorded chargeoffs of $74$364 thousand during the nine months ended September 30, 20192020 related to the impaired loans at fair value. There were no charge-offschargeoffs of $298 thousand related to impaired loans at fair value during the year ended December 31, 2018.2019.
The Company recorded a valuation allowance of $17 thousand related to mortgage servicing rights during the first quarter of 2020, which was then reversed during the second quarter of 2020 as a result of the fair value at June 30, 2020 being higher than book value, and the fair value remained higher as of September 30, 2020. There was 0 valuation allowance related to mortgage servicing rights during the year ended December 31, 2019. There were no0 write downs recorded in other real estate owned during the three and nine months ended September 30, 2019. There were no other real estate owned assets at fair value at2020 or the year ended December 31, 2018.2019.
The table below presents quantitative information about the significant unobservable inputs for assets measured at fair value on a nonrecurring basis at September 30, 20192020 and December 31, 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Fair value at
September 30, 2020 | | Valuation
Technique(s) | | Significant
Unobservable Input(s) | | Discount % Range/Amount |
| Impaired loans | | $ | 2,066 | | | Discounted appraisals; estimated net realizable value of collateral | | Collateral discounts | | 10.00-80.00% |
| Mortgage servicing rights | | 2,567 | | | Discounted cash flow | | Prepayment speed | | 9.40 | % |
| | | | | | Discount rate | | 7.75 | % |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Fair value at
December 31, 2019 | | Valuation
Technique(s) | | Significant
Unobservable Input(s) | | Discount % Range/Amount |
| Impaired loans | | $ | 526 | | | Discounted appraisals; estimated net realizable value of collateral | | Collateral discounts | | 10.00-50.00% |
| Mortgage servicing rights | | 87 | | | Discounted cash flow | | Prepayment speed | | 13.42 | % |
| | | | | | Discount rate | | 8.50 | % |
| Other real estate owned | | 921 | | | Appraisal of property | | Discounted appraisal value | | 18.00-36.00% |
|
| | | | | | | | | | | |
| (Dollars in thousands) | | Fair value at September 30, 2019 | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Discount % Range |
| Impaired loans | | $ | 2,188 |
| | Discounted appraisals; estimated net realizable value of collateral | | Collateral discounts | | 10-50% |
|
| Other real estate owned | | 373 |
| | Appraisal of property | | Discounted appraisal value | | 36 | % |
|
| | | | | | | | | | |
| (Dollars in thousands) | | Fair value at
December 31, 2018 | | Valuation
Technique(s) | | Significant
Unobservable Input(s) | | Discount % Range |
| Impaired loans | | $ | 3,337 |
| | Discounted appraisals | | Collateral discounts | | 17-50% |
The carrying amounts and estimated fair values of financial instruments, excluding those previously presented unless otherwise noted, at September 30, 20192020 and December 31, 2018 were as follows:2019 are noted in the table below.
| | | | | | | Estimated Fair Value | | Estimated Fair Value |
| (Dollars in thousands) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Total | (Dollars in thousands) | | Carrying Value | | Quoted Prices in
Active Markets for
Identical Assets (Level 1) | | Significant
Other Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs (Level 3) | | Total |
| September 30, 2019 | | |
| | |
| | |
| | |
| | |
| September 30, 2020 | | September 30, 2020 | | | | | | | | | |
| Financial assets: | | |
| | |
| | |
| | |
| | Financial assets: | | | | | | | | | |
| Cash and cash equivalents | | $ | 49,361 |
| | $ | 32,400 |
| | $ | 16,961 |
| | $ | — |
| $ | 49,361 |
| Cash and cash equivalents | | $ | 176,486 | | | $ | 31,080 | | | $ | 145,406 | | | $ | 0 | | | $ | 176,486 | |
| Federal Home Loan Bank stock | | 8,325 |
| | NA |
| | NA |
| | NA |
| NA |
| |
| Other investments | | Other investments | | 14,398 | | | N/A | | N/A | | N/A | | N/A |
| Net loans | | 1,156,616 |
| | — |
| | — |
| | 1,164,984 |
| 1,164,984 |
| Net loans | | 1,822,634 | | | 0 | | | 0 | | | 1,863,805 | | | 1,863,805 | |
| Accrued interest receivable | | 5,280 |
| | — |
| | 1,916 |
| | 3,364 |
| 5,280 |
| Accrued interest receivable | | 8,541 | | | 0 | | | 1,966 | | | 6,575 | | | 8,541 | |
| Financial liabilities: | | | | | | | | |
|
| Financial liabilities: | |
| Deposits | | 1,194,542 |
| | — |
| | 1,197,718 |
| | — |
| 1,197,718 |
| Deposits | | 1,943,435 | | | 0 | | | 2,008,494 | | | 0 | | | 2,008,494 | |
| Borrowings | | 111,937 |
| | — |
| | 111,729 |
| | — |
| 111,729 |
| Borrowings | | 216,809 | | | 0 | | | 224,511 | | | 0 | | | 224,511 | |
| Subordinated notes | | 14,934 |
| | — |
| | 15,405 |
| | — |
| 15,405 |
| Subordinated notes | | 44,555 | | | 0 | | | 44,795 | | | 0 | | | 44,795 | |
| Accrued interest payable | | 2,500 |
| | — |
| | 2,500 |
| | — |
| 2,500 |
| Accrued interest payable | | 2,265 | | | 0 | | | 2,265 | | | 0 | | | 2,265 | |
| December 31, 2018 | | | | | | | | | |
| December 31, 2019 | | December 31, 2019 | |
| Financial assets: | | | | | | | | | Financial assets: | |
| Cash and cash equivalents | | $ | 33,296 |
| | $ | 27,072 |
| | $ | 6,224 |
| | $ | — |
| $ | 33,296 |
| Cash and cash equivalents | | $ | 103,930 | | | $ | 19,990 | | | $ | 83,940 | | | $ | 0 | | | $ | 103,930 | |
| Federal Home Loan Bank stock | | 8,325 |
| | NA |
| | NA |
| | NA |
| NA |
| |
| Other investments | | Other investments | | 11,475 | | | N/A | | N/A | | N/A | | N/A |
| Net loans | | 1,114,999 |
| | — |
| | — |
| | 1,113,648 |
| 1,113,648 |
| Net loans | | 1,214,935 | | | 0 | | | 0 | | | 1,203,639 | | | 1,203,639 | |
| Accrued interest receivable | | 4,207 |
| | — |
| | 1,210 |
| | 2,997 |
| 4,207 |
| Accrued interest receivable | | 4,403 | | | 0 | | | 1,236 | | | 3,167 | | | 4,403 | |
| Financial liabilities: | | | | | | | | |
|
| Financial liabilities: | |
| Deposits | | 1,134,635 |
| | — |
| | 1,137,575 |
| | — |
| 1,137,575 |
| Deposits | | 1,135,428 | | | 0 | | | 1,138,202 | | | 0 | | | 1,138,202 | |
| Borrowings | | 99,574 |
| | — |
| | 100,602 |
| | — |
| 100,602 |
| Borrowings | | 212,225 | | | 0 | | | 212,125 | | | 0 | | | 212,125 | |
| Subordinated notes | | 14,891 |
| | — |
| | 15,450 |
| | — |
| 15,450 |
| Subordinated notes | | 44,440 | | | 0 | | | 47,100 | | | 0 | | | 47,100 | |
| Accrued interest payable | | 1,674 |
| | — |
| | 1,674 |
| | — |
| 1,674 |
| Accrued interest payable | | 1,574 | | | 0 | | | 1,574 | | | 0 | | | 1,574 | |
The methods and assumptions, not previously presented, used to estimate fair value are described as follows:
(a)Cash and Cash Equivalents
The carrying amounts of cash on hand and non-interest due from bank accounts approximate fair values and are classified as Level 1. The carrying amounts of fed funds sold and interest bearing due from bank accounts approximate fair values and are classified as Level 2.
(b)FHLB StockOther Investments
It is not practical to determine the fair value of FHLB stock and Arctaris investment bond due to restrictions placed on its transferability.
(c)Loans
Fair value of loans, excluding loans held for sale, are estimated as follows: Fair values for all loans are estimated using present value of future estimated cash flows, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality, resulting in a Level 3 classification. Impaired loans are valuesvalued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
(d)Deposits
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 2 classification. Fair values for fixed and variable rate certificates of deposit are estimated using a present
value of future estimated cash flows calculation that applies interest rates currently being offered on certificates of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
(e) Borrowings
The fair values of the Company's short-term and long-term borrowings are estimated using present value of future estimated cash flows using current interest rates offered to the Company for similar types of borrowing arrangements, resulting in a Level 2 classification.
(f)Subordinated notesNotes
The fair value of the Company's subordinated notes is calculated based on present value of future estimated cash flows using current interest rates offered to the Company for similar types of borrowing arrangements, resulting in a Level 2 classification.
(g) Accrued Interest Receivable/Payable
The carrying amounts of accrued interest approximate fair value resulting in a Level 3 classification for receivable and a Level 2 classification for payable, consistent with their associated assets/liabilities.
NOTE 13—14—DERIVATIVES
The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions with approved, reputable, independent counterparties with substantially matching terms. The agreements are considered standalone derivatives, and changes in the fair value of derivatives are reported in earnings as non-interest income.
Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Company's exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in the agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, the Company minimizes credit risk through credit approvals, limits, and monitoring procedures.
Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair values of these mortgage-banking derivatives are included in mortgage banking activities.
The following table presents the notional amount and fair value of the Company's derivative instruments held or issued in connection with customer initiated and mortgage banking activities:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (Dollars in thousands) | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| Included in other assets: | | | | | | | |
| Customer-initiated and mortgage banking derivatives: | | | | | | | |
| Customer-initiated derivatives | $ | 135,462 | | | $ | 14,422 | | | $ | 103,941 | | | $ | 4,684 | |
| Forward contracts related to mortgage loans to be delivered for sale | 38,840 | | | 117 | | | 6,018 | | | 34 | |
| Interest rate lock commitments | 110,179 | | | 2,068 | | | 25,519 | | | 256 | |
| Total derivatives included in other assets | $ | 284,481 | | | $ | 16,607 | | | $ | 135,478 | | | $ | 4,974 | |
| Included in other liabilities: | | | | | | | |
| Customer-initiated and mortgage banking derivatives: | | | | | | | |
| Customer-initiated derivatives | $ | 135,462 | | | $ | 14,422 | | | $ | 103,941 | | | $ | 4,684 | |
| Forward contracts related to mortgage loans to be delivered for sale | 99,697 | | | 441 | | | 20,633 | | | 33 | |
| Interest rate lock commitments | 4,053 | | | 4 | | | 928 | | | 0 | |
| Total derivatives included in other liabilities | $ | 239,212 | | | $ | 14,867 | | | $ | 125,502 | | | $ | 4,717 | |
|
| | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| (Dollars in thousands) | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| Included in other assets: | | | | | | | |
| Customer-initiated and mortgage banking derivatives: | | | | | | | |
| Customer-initiated derivatives | $ | 73,512 |
| | $ | 5,628 |
| | $ | 35,733 |
| | $ | 1,126 |
|
| Forward contracts related to mortgage loans to be delivered for sale | 34,459 |
| | 185 |
| | 5,241 |
| | 22 |
|
| Interest rate lock commitments | 42,091 |
| | 359 |
| | 18,375 |
| | 198 |
|
| Total derivatives included in other assets | $ | 150,062 |
| | $ | 6,172 |
| | $ | 59,349 |
| | $ | 1,346 |
|
| Included in other liabilities: | | | | | | | |
| Customer-initiated and mortgage banking derivatives: | | | | | | | |
| Customer-initiated derivatives | $ | 73,512 |
| | $ | 5,628 |
| | $ | 35,733 |
| | $ | 1,126 |
|
| Forward contracts related to mortgage loans to be delivered for sale | 19,148 |
| | 56 |
| | 11,195 |
| | 43 |
|
| Interest rate lock commitments | 2,296 |
| | 5 |
| | — |
| | — |
|
| Total derivatives included in other liabilities | $ | 94,956 |
| | $ | 5,689 |
| | $ | 46,928 |
| | $ | 1,169 |
|
In the normal course of business, the Company may decide to settle a forward contract rather than fulfill the contract. Cash received or paid in this settlement manner is included in "Mortgage banking activities" in the consolidated statements of income and is considered a cost of executing a forward contract. The following table presents the gains (losses) related to derivative instruments reflecting the changes in fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the three months ended September 30, | | For the nine months ended September 30, |
| (Dollars in thousands) | Location of Gain (Loss) | | 2020 | | 2019 | | 2020 | | 2019 |
| Forward contracts related to mortgage loans to be delivered for sale | Mortgage banking activities | | $ | (1,207) | | | $ | (26) | | | $ | (3,996) | | | $ | (417) | |
| Interest rate lock commitments | Mortgage banking activities | | 391 | | | (48) | | | 1,808 | | | 156 | |
| Total loss recognized in income | | | $ | (816) | | | $ | (74) | | | $ | (2,188) | | | $ | (261) | |
|
| | | | | | | | | | | | | | | | | |
| | | | For the three months ended September 30, | | For the nine months ended September 30, |
| (Dollars in thousands) | Location of Gain (Loss) | | 2019 | | 2018 | | 2019 | | 2018 |
| Forward contracts related to mortgage loans to be delivered for sale | Mortgage Banking Activities | | $ | (26 | ) | | $ | 20 |
| | $ | (417 | ) | | $ | 14 |
|
| Interest rate lock commitments | Mortgage Banking Activities | | (48 | ) | | 65 |
| | 156 |
| | 149 |
|
| Total gain (loss) recognized in income | | | $ | (74 | ) | | $ | 85 |
| | $ | (261 | ) | | $ | 163 |
|
Balance Sheet Offsetting:
Certain financial instruments, including customer-initiated derivatives and interest rate swaps, may be eligible for offset in the consolidated balance sheets and/or subject to master netting arrangements or similar agreements. The Company is a party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes based on an accounting policy election. The table below presents information about the Company's financial instruments that are eligible for offset.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Gross amounts not offset in the statements of financial position | | |
| (Dollars in thousands) | Gross amounts recognized | | Gross amounts offset in the statements of financial condition | | Net amounts presented in the statements of financial condition | | Financial instruments | | Collateral (received)/posted | | Net amount |
| September 30, 2020 | | | | | | | | | | | |
| Offsetting derivative assets: | | | | | | | | | | | |
| Customer initiated derivatives | $ | 14,422 | | | $ | 0 | | | $ | 14,422 | | | $ | 0 | | | $ | 0 | | | $ | 14,422 | |
| Offsetting derivative liabilities: | | | | | | | | | | | |
| Customer initiated derivatives | 14,422 | | | 0 | | | 14,422 | | | 0 | | | 15,383 | | | (961) | |
| December 31, 2019 | | | | | | | | | | | |
| Offsetting derivative assets: | | | | | | | | | | | |
| Customer initiated derivatives | $ | 4,684 | | | $ | 0 | | | $ | 4,684 | | | $ | 0 | | | $ | 0 | | | $ | 4,684 | |
| Offsetting derivative liabilities: | | | | | | | | | | | |
| Customer initiated derivatives | 4,684 | | | 0 | | | 4,684 | | | 0 | | | 4,375 | | | 309 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the statements of financial position | | |
| (Dollars in thousands) | Gross amounts recognized | | Gross amounts offset in the statements of financial condition | | Net amounts presented in the statements of financial condition | | Financial instruments | | Collateral (received)/posted | | Net amount |
| September 30, 2019 | | | | | | | | | | | |
| Offsetting derivative assets: | | | | | | | | | | | |
| Customer initiated derivatives | $ | 5,628 |
| | $ | — |
| | $ | 5,628 |
| | $ | — |
| | $ | — |
| | $ | 5,628 |
|
| Offsetting derivative liabilities: | | | | | | | | | | | |
| Customer initiated derivatives | 5,628 |
| | — |
| | 5,628 |
| | — |
| | 6,527 |
| | (899 | ) |
| December 31, 2018 | | | | | | | | | | | |
| Offsetting derivative assets: | | | | | | | | | | | |
| Customer initiated derivatives | $ | 1,126 |
| | $ | — |
| | $ | 1,126 |
| | $ | — |
| | $ | — |
| | $ | 1,126 |
|
| Offsetting derivative liabilities: | | | | | | | | | | | |
| Customer initiated derivatives | 1,126 |
| | — |
| | 1,126 |
| | — |
| | 1,020 |
| | 106 |
|
NOTE 14—15—PARENT COMPANY FINANCIAL STATEMENTS
Balance Sheets—Parent Company
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 29,105 | | | $ | 35,210 | |
| Investment in banking subsidiary | | 223,624 | | | 178,240 | |
| Investment in captive insurance subsidiary | | 2,306 | | | 1,668 | |
| Income tax benefit | | 158 | | | 520 | |
| Other assets | | 41 | | | 99 | |
| Total assets | | $ | 255,234 | | | $ | 215,737 | |
| Liabilities | | | | |
| Subordinated notes | | $ | 44,555 | | | $ | 44,440 | |
| Accrued expenses and other liabilities | | 1,211 | | | 594 | |
| Total liabilities | | 45,766 | | | 45,034 | |
| Shareholders' equity | | 209,468 | | | 170,703 | |
| Total liabilities and shareholders' equity | | $ | 255,234 | | | $ | 215,737 | |
|
| | | | | | | | |
| (Dollars in thousands) | | September 30, 2019 | | December 31, 2018 |
| Assets | | |
| | |
|
| Cash and cash equivalents | | $ | 5,910 |
| | $ | 9,690 |
|
| Investment in banking subsidiary | | 174,966 |
| | 155,248 |
|
| Investment in captive insurance subsidiary | | 2,264 |
| | 1,622 |
|
| Income tax benefit | | 456 |
| | 393 |
|
| Other assets | | 73 |
| | 21 |
|
| Total assets | | $ | 183,669 |
| | $ | 166,974 |
|
| Liabilities | | | | |
| Subordinated notes | | $ | 14,934 |
| | $ | 14,891 |
|
| Accrued expenses and other liabilities | | 767 |
| | 323 |
|
| Total liabilities | | 15,701 |
| | 15,214 |
|
| Shareholders' equity | | 167,968 |
| | 151,760 |
|
| Total liabilities and shareholders' equity | | $ | 183,669 |
| | $ | 166,974 |
|
Statements of Income and Comprehensive Income—Parent Company
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| Income | | | | | | | | |
| Dividend income from bank subsidiary | | $ | 5,000 | | | $ | 0 | | | $ | 41,500 | | | $ | 0 | |
| Total income | | $ | 5,000 | | | $ | 0 | | | $ | 41,500 | | | $ | 0 | |
| Expenses | | | | | | | | |
| Interest on borrowed funds | | 11 | | | 0 | | | 33 | | | 0 | |
| Interest on subordinated notes | | 632 | | | 256 | | | 1,903 | | | 759 | |
| Other expenses | | 302 | | | 516 | | | 1,017 | | | 902 | |
| Total expenses | | $ | 945 | | | $ | 772 | | | $ | 2,953 | | | $ | 1,661 | |
| Income (loss) before income taxes and equity in (overdistributed) undistributed net earnings of subsidiaries | | 4,055 | | | (772) | | | 38,547 | | | (1,661) | |
| Income tax benefit | | 228 | | | 181 | | | 383 | | | 272 | |
| Equity in (overdistributed) undistributed earnings of subsidiaries | | 926 | | | 5,000 | | | (26,890) | | | 12,820 | |
| Net income | | $ | 5,209 | | | $ | 4,409 | | | $ | 12,040 | | | $ | 11,431 | |
| Other comprehensive income | | 783 | | | 1,238 | | | 4,451 | | | 7,120 | |
| Total comprehensive income, net of tax | | $ | 5,992 | | | $ | 5,647 | | | $ | 16,491 | | | $ | 18,551 | |
|
| | | | | | | | | | | | | | | | |
| | | For the three months ended September 30, | | For the nine months ended September 30, |
| (Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Expenses | | | | | | | | |
| Interest on subordinated notes | | $ | 256 |
| | $ | 256 |
| | $ | 759 |
| | $ | 759 |
|
| Other expenses | | 516 |
| | 151 |
| | 902 |
| | 480 |
|
| Total expenses | | 772 |
| | 407 |
| | 1,661 |
| | 1,239 |
|
| Loss before income taxes and equity in undistributed net earnings of subsidiaries | | (772 | ) | | (407 | ) | | (1,661 | ) | | (1,239 | ) |
| Income tax (benefit) expense | | 181 |
| | (2 | ) | | 272 |
| | 201 |
|
| Equity in undistributed earnings of subsidiaries | | 5,000 |
| | 3,664 |
| | 12,820 |
| | 11,473 |
|
| Net income | | $ | 4,409 |
| | $ | 3,255 |
| | $ | 11,431 |
| | $ | 10,435 |
|
| Other comprehensive income (loss) | | 1,238 |
| | (986 | ) | | 7,120 |
| | (3,174 | ) |
| Total comprehensive income, net of tax | | $ | 5,647 |
| | $ | 2,269 |
| | $ | 18,551 |
| | $ | 7,261 |
|
Statements of Cash Flows—Parent Company
| | | | | | | | | | | | | | | | |
| | | For the nine months ended September 30, | | |
| (Dollars in thousands) | | 2020 | | 2019 | | |
| Cash flows from operating activities | | | | | | |
| Net income | | $ | 12,040 | | | $ | 11,431 | | | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Equity in over (under) distributed earnings of subsidiaries | | 26,890 | | | (12,820) | | | |
| Stock based compensation expense | | 72 | | | 54 | | | |
| (Increase) Decrease in other assets, net | | 420 | | | (115) | | | |
| Increase in other liabilities, net | | 654 | | | 411 | | | |
| Net cash provided by (used in) operating activities | | 40,076 | | | (1,039) | | | |
| Cash flows from investing activities | | | | | | |
| Cash used in acquisitions | | (67,944) | | | 0 | | | |
| | | | | | |
| | | | | | |
| Net cash used in investing activities | | (67,944) | | | 0 | | | |
| Cash flows from financing activities | | | | | | |
| Preferred stock offering, net of issuance costs | | 23,370 | | | 0 | | | |
| | | | | | |
| Share buyback - redeemed stock | | (620) | | | (2,108) | | | |
| Common stock dividends paid | | (1,082) | | | (852) | | | |
| Proceeds from exercised stock options | | 95 | | | 219 | | | |
| Net cash provided by (used in) financing activities | | 21,763 | | | (2,741) | | | |
| Net decrease in cash and cash equivalents | | (6,105) | | | (3,780) | | | |
| Beginning cash and cash equivalents | | 35,210 | | | 9,690 | | | |
| Ending cash and cash equivalents | | $ | 29,105 | | | $ | 5,910 | | | |
|
| | | | | | | | |
| | | For the nine months ended September 30, |
| (Dollars in thousands) | | 2019 | | 2018 |
| Cash flows from operating activities | | |
| | |
|
| Net income | | $ | 11,431 |
| | $ | 10,435 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Equity in undistributed earnings of subsidiaries | | (12,820 | ) | | (11,473 | ) |
| Stock based compensation expense | | 54 |
| | 242 |
|
| (Increase) decrease in other assets, net | | (115 | ) | | 33 |
|
| Increase in other liabilities, net | | 411 |
| | 135 |
|
| Net cash used in operating activities | | (1,039 | ) | | (628 | ) |
| Cash flows from investing activities | | | | |
| Capital infusion to subsidiaries | | — |
| | (20,000 | ) |
| Net cash used in investing activities | | — |
| | (20,000 | ) |
| Cash flows from financing activities | | | | |
| Net proceeds from issuance of common stock related to initial public offering | | — |
| | 29,030 |
|
| Share buyback - redeemed stock | | (2,108 | ) | | — |
|
| Common stock dividends paid | | (852 | ) | | (430 | ) |
| Proceeds from exercised stock options | | 219 |
| | 1,269 |
|
| Net cash provided by (used in) financing activities | | (2,741 | ) | | 29,869 |
|
| Net increase (decrease) in cash and cash equivalents | | (3,780 | ) | | 9,241 |
|
| Beginning cash and cash equivalents | | 9,690 |
| | 1,158 |
|
| Ending cash and cash equivalents | | $ | 5,910 |
| | $ | 10,399 |
|
NOTE 15—16—EARNINGS PER COMMON SHARE
Beginning in the second quarter of 2019, the Company has elected to prospectively use the two-class method in calculating earnings per share due to the restricted stock awards qualifying as participating securities. The two-class method is used in the calculation of basic and diluted earnings per common share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participating rights in undistributed earnings.
Average shares of common stock for diluted net income per common share include shares to be issued upon the exercise of stock options granted under the Company's share-based compensation plans and restricted stock awards.
The calculation of basic and diluted earnings per share using the two-class method for each periodthe periods noted below was as follows: | | | | | | | | For the three months ended September 30, | | For the nine months ended September 30, |
| (Dollars in thousands, except per share data) | | For the three months ended September 30, 2019 | | For the nine months ended September 30, 2019 | |
| (In thousands, except per share data) | | (In thousands, except per share data) | | 2020 | | 2019 | | 2020 | | 2019 |
| Net income | | $ | 4,409 |
| | $ | 11,431 |
| Net income | | $ | 5,209 | | | $ | 4,409 | | | $ | 12,040 | | | $ | 11,431 | |
| Net income allocated to participating securities | | 45 |
| | 110 |
| Net income allocated to participating securities | | 40 | | | 45 | | | 140 | | | 110 | |
| Net income allocated to common shareholders (1) | | $ | 4,364 |
| | $ | 11,321 |
| Net income allocated to common shareholders (1) | | $ | 5,169 | | | $ | 4,364 | | | $ | 11,900 | | | $ | 11,321 | |
| Weighted average common shares - issued | | 7,721 |
| | 7,738 |
| Weighted average common shares - issued | | 7,734 | | | 7,721 | | | 7,730 | | | 7,738 | |
| Average unvested restricted share awards | | (80 | ) | | (76 | ) | Average unvested restricted share awards | | (59) | | | (80) | | | (90) | | | (76) | |
| Weighted average common shares outstanding - basic | | 7,641 |
| | 7,662 |
| Weighted average common shares outstanding - basic | | 7,675 | | | 7,641 | | | 7,640 | | | 7,662 | |
| Effect of dilutive securities | | | | | |
| Effect of dilutive securities: | | Effect of dilutive securities: | |
| Weighted average common stock equivalents | | 111 |
| | 114 |
| Weighted average common stock equivalents | | 37 | | | 111 | | | 61 | | | 114 | |
| Weighted average common shares outstanding - diluted | | 7,752 |
| | 7,776 |
| Weighted average common shares outstanding - diluted | | 7,712 | | | 7,752 | | | 7,701 | | | $ | 7,776 | |
| EPS available to common shareholders | | | | | EPS available to common shareholders | | | | | | | | |
| Basic earnings per common share | | $ | 0.57 |
| | $ | 1.48 |
| Basic earnings per common share | | $ | 0.68 | | | $ | 0.57 | | | $ | 1.56 | | | $ | 1.48 | |
| Diluted earnings per common share | | $ | 0.56 |
| | $ | 1.46 |
| Diluted earnings per common share | | $ | 0.67 | | | $ | 0.56 | | | $ | 1.55 | | | $ | 1.46 | |
(1) Net income allocated to common shareholders for basic and diluted earnings per share may differ under the two-class method as a result of adding common share equivalents for options to dilutive shares outstanding, which alters the ratio used to allocate net income to common shareholders and participating securities for the purposes of calculating diluted earnings per share.
For the three and nine months ended September 30, 2018, the basic and diluted earnings per share were calculated using the treasury stock method, as disclosed in the table below.
|
| | | | | | | | |
| (Dollars in thousands, except per share data) | | For the three months ended September 30, 2018 | | For the nine months ended September 30, 2018 |
| Basic: | | | | |
| Net Income attributable to common shareholders | | $ | 3,255 |
| | $ | 10,435 |
|
| Weighted average common shares outstanding | | 7,749,047 |
| | 7,264,494 |
|
| Basic earnings per share | | $ | 0.42 |
| | $ | 1.44 |
|
| Diluted: | | | | |
| Net Income attributable to common shareholders | | $ | 3,255 |
| | $ | 10,435 |
|
| Weighted average common shares outstanding | | 7,749,047 |
| | 7,264,494 |
|
| Add: Dilutive effects of assumed exercises of stock options | | 152,062 |
| | 149,182 |
|
| Weighted average common and dilutive potential common shares outstanding | | 7,901,109 |
| | 7,413,676 |
|
| Diluted earnings per common share | | $ | 0.41 |
| | $ | 1.41 |
|
Stock options for 214,668 and 30,000 shares of common stock were not considered in computing diluted earnings per common share for the three months ended September 30, 2020 and 2019, respectively, and 2018,117,334 and stock options for 30,000 shares and 25,055 shares of common stock were not considered in computing diluted earnings per common share for the nine months ended September 30, 2020 and2019, and 2018, respectively, because they were antidilutive.
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion explains our financial condition and results of operations as of and for the three and nine months ended September 30, 2019.2020. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2018,2019, filed with the SEC on March 22, 2019.13, 2020. Annualized results for these interim periods may not be indicative of results for the full year or future periods.
In addition to the historical information contained herein, this Form 10-Q includes "forward-looking statements" within the meaning of such term in the Private Securities Litigation Reform Act of 1995. These statements are subject to many risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including its effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; the ability of the Company to implement its strategy and expand its lending operations; changes in interest rates and other general economic, business and political conditions, including changes in the financial markets; changes in business plans as circumstances warrant; risks related to mergers and acquisitions; changes in benchmark interest rates used to price loans and deposits, including the expected elimination of LIBOR; and other risks detailed from time to time in filings made by the Company with the SEC. Readers should note that the forward-looking statements included herein are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "will," "propose," "may," "plan," "seek," "expect," "intend," "estimate," "anticipate," "believe," "continue," or similar terminology. Any forward-looking statements presented herein are made only as of the date of this document, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.
Critical Accounting Policies
Our consolidated financial statements are prepared based on the application of accounting policies generally accepted in the United States. Our critical accounting policies require reliance on estimates and assumptions, which are based upon historical experience and on various other assumptions that management believes are reasonable under current circumstances, but may prove to be inaccurate or can be subject to variations. Changes in underlying factors, assumptions, or estimates could have a material impact on our future financial condition and results of operations.
The most critical of these significant accounting policies are set forth in "Note"Note 1 – Basis of Presentation and Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, which was filed with the SEC on March 22, 2019.13, 2020. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2018.2019.
Overview
Level One Bancorp, Inc. is a bankfinancial holding company headquartered in Farmington Hills, Michigan, with its primary branch operations in southeastern Michigan and Grand Rapids, Michigan.west Michigan. Through our wholly owned subsidiary, Level One Bank, we offer a broad range of loan products to the residential and commercialcommercial markets, as well as retail and business banking services. Hamilton Court Insurance Company, a wholly owned subsidiary of the Company, provides property and casualty insurance to the Company and the Bank and reinsurance to ten other third-party insurance captives for which insurance may not be currently available or economically feasible in the insurance marketplace.
Since 2007, we have grown substantially through organic growth and a series of four acquisitions, all of which have been fully integrated into our operations. We have made significant investments over the last several years in hiring additional staff and upgrading technology and system security. In 2016, we opened our first branch in the Grand Rapids, Michigan market. In During the third quarter of 2017, we opened our second location2020, it was determined that Hamilton Court Insurance Company will exit the pool resources relationship to which it was previously a member and will dissolve, which is expected to occur in Bloomfield Township located in Oakland County. In the thirdfourth quarter of 2018, we doubled2020 or the sizefirst quarter of our mortgage division with the addition of new mortgage officers and support staff. As of September 30, 2019, the Company had total consolidated assets of $1.51 billion, total consolidated deposits of $1.19 billion and total consolidated shareholders' equity of $168.0 million.2021.
Our principal business activity hasactivities have been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We derive income principally from interest charged on loans and leases and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest sources, such as fees received in connection with various lending and deposit services and originations and sales of residential mortgage loans. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for loan losses and income tax expense.
Since 2007, we have grown substantially through organic growth and a series of five acquisitions, all of which have been fully integrated into our operations. We have made significant investments over the last several years in hiring additional staff and upgrading technology and system security. In 2016, we opened our first branch in the Grand Rapids, Michigan market. In the third quarter of 2017, we opened our second location in Bloomfield Township located in Oakland County. In the third quarter of 2018, we doubled the size of our mortgage division with the addition of new mortgage officers and support staff.
Recent Developments
Proposed Merger with Ann Arbor State Bank: On August 13, 2019,January 2, 2020, the Company andcompleted its previously announced acquisition of Ann Arbor Bancorp, Inc. ("AAB"(“AAB”) jointly announced the signing of an Agreement and Plan of Merger, dated August 12, 2019, pursuant to which the Company has agreed to acquire AAB and its wholly owned subsidiary, Ann Arbor State Bank. The transaction is anticipatedwas completed pursuant to close ina merger of the fourth quarter of 2019 or the first quarter of 2020, subjectCompany’s wholly owned merger subsidiary (“Merger Sub”) with and into AAB, pursuant to the satisfaction or waiverAgreement and Plan of customary closing conditions.Merger, dated as of August 12, 2019, among the Company, Merger Sub and AAB. The Company paid aggregate consideration of approximately $67.9 million in cash.
Our results of operations for the three and nine months ended September 30, 2020 include the results of operations of AAB on and after January 2, 2020, including $17 thousand and $1.7 million of acquisition fees, respectively. Results for periods before January 2, 2020 reflect only those of Level One and do not include the results of operations of AAB. See "Note 2 - Business Combinations" for more information. In addition, all identifiable assets, including the intangible assets that consisted of $26.2 million in goodwill and $3.7 million in core deposit intangibles, and liabilities of AAB as of the merger date have been recorded at their estimated fair value and added to those of Level One. As of September 30, 2020, the Company had total consolidated assets of $2.45 billion, total consolidated deposits of $1.94 billion and total consolidated shareholders' equity of $209.5 million.
Recent Developments
Third Quarter Dividend. On September 19, 2019,16, 2020, the Company declared a third quarter 20192020 cash dividend of $0.04$0.05 per common share, payable on October 15, 20192020.
Preferred Stock Public Offering and First Cash Dividend. On August 10, 2020, the Company sold 1,000,000 depositary shares, each representing a 1/100th interest in a share of 7.50% Non-Cumulative Perpetual Preferred Stock, Series B, with a liquidation preference of $2,500 per share of Preferred Stock (equivalent to $25 per depositary share). The aggregate offering price for the shares sold by the Company was $25.0 million, and after deducting $1.6 million of underwriting discounts and offering expenses paid to third parties, the Company received total net proceeds of $23.4 million.
On October 21, 2020, Level One’s Board of Directors declared a quarterly cash dividend of $47.92 per share on its 7.50% Non-Cumulative Preferred Stock, Series B. Holders of depositary shares will receive $0.4792 per depositary share. The dividend is payable on November 15, 2020, to shareholders of record at the close of business on October 31, 2020.
Impact of COVID-19 Pandemic. The COVID-19 pandemic in the United States has had, and is expected to continue to have, a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.
Effects on Our Market Areas. Our commercial and consumer banking products and services are offered primarily in Michigan, where individuals, companies and other organizations have limited their economic activity in response to the pandemic. It is uncertain whether and to what extent additional restrictions on economic activities and social gatherings will be imposed in future periods. These limitations on economic activity have had an adverse impact on the Michigan economy and our clients. The Bank and its branches have remained open during these orders because banks have been deemed essential businesses. Up until June 22, 2020, the Bank had been serving its customers through its drive-thrus, by appointment only for in-person services, and online and mobile banking tools. While our branches became fully available for in-person services to serve our clients on June 22, 2020, we will continue to be diligent in our efforts to follow all CDC guidelines to ensure the health and safety of our clients and team members.
As a result of the COVID-19 pandemic, the state’s unemployment rate remained slightly elevated at 8.5% in September 2020 compared to 4.1% in March 2020 before the full impact of COVID-19, according to the Michigan Department of Technology, Management & Budget.
Policy and Regulatory Developments. Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
•The Federal Reserve decreased the range for the federal funds target rate by 0.5% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a range of 0.0 - 0.25%.
•On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration (“SBA”), referred to as the paycheck protection program (“PPP”). The Bank participated as a lender in the PPP. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited
period of time to account for the effects of COVID-19. Refer to Note 4 - Loans for further discussion of the CARES Act and its impact on TDRs.
•On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs.
•On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes three new loan facilities intended to facilitate lending to small and midsized businesses: (1) the Main Street New Loan Facility (“MSNLF”), (2) the Main Street Priority Loan Facility (“MSPLF”), and (3) the Main Street Expanded Loan Facility (“MSELF”). MSNLF and MSPLF loans are unsecured term loans originated on or after April 24, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 24, 2020. The combined size of the program is authorized up to $600 billion. The Company is currently participating in all three loan facilities established by the Main Street Business Lending Program.
•In addition to the policy responses described above, the federal bank regulatory agencies, along with their state counterparts, have issued a stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act (“CRA”) for certain pandemic-related loans, investments and public service. Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regulated institutions, including making greater use of off-site reviews. The Federal Reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.
•On August 3, 2020, the FFIEC issued a joint statement on Additional Loan Accommodations Related to COVID-19, which, among other things, encouraged financial institutions to consider prudent additional loan accommodation options when borrowers are unable to meet their obligations due to continuing financial challenges. Accommodation options should be based on prudent risk management and consumer protection principles.
Effects on Our Business. We currently expect that the COVID-19 pandemic and the specific developments referred to above will have a significant impact on our business. In particular, we anticipate that a significant portion of the Bank’s borrowers in the restaurant and hospitality industries will continue to endure significant economic distress, which has caused, and will continue to cause, them to draw on their existing lines of credit and adversely affect their ability and willingness to repay existing indebtedness, and is expected to adversely impact the value of collateral. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries and the value of certain collateral securing our loans. See “Part II-Item 1A. Risk Factors” for additional information regarding the effects and risks of the COVID-19 pandemic to our business, financial condition and results of operations.
Level One's Response to the COVID-19 Pandemic. Level One has taken comprehensive steps to help our customers, team members and communities during the current COVID-19 pandemic health crisis. For our customers, we have provided loan payment deferrals and offered fee waivers, among other actions. Through September 30, 2019.2020, we have helped our consumer and small business customers by deferring loan payments and waiving fees on $416.3 million of non-PPP loans ($388.9 million of commercial balances and $27.4 million of consumer balances). As of September 30, 2020, we had $16.3 million of loans that had an outstanding payment deferral.
We are continuing to enable the vast majority of our main office team members to work remotely each day. We have also taken significant actions to help ensure the safety of our team members whose roles require them to come into the office, which include the development, implementation and communication of a comprehensive return to office plan. In addition, while our
branches have fully opened to serve our clients, we continue to be diligent in our efforts to follow all CDC guidelines to ensure the health and safety of our clients and team members. We will continue to evaluate this fluid situation and take additional actions as necessary.
To support our communities, we have made charitable donations, including one to a local health system, in order to help support the frontline workers impacted by the COVID-19 pandemic.
Level One also recognizes that some of the most impacted industries are the food service and hospitality industries. As of September 30, 2020, Level One had less than 4.4% and 0.5% of loan concentrations in the food service and hospitality industries, respectively.
Selected Financial Data - Unaudited
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the three months ended | | As of and for the nine months ended |
| (Dollars in thousands, except per share data) | September 30, 2020 | | June 30,
2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| Earnings Summary | | | | | | | | | |
| Interest income | $ | 20,245 | | | $ | 20,396 | | | $ | 17,983 | | | $ | 60,458 | | | $ | 53,082 | |
| Interest expense | 3,648 | | | 4,163 | | | 4,995 | | | 12,808 | | | 14,935 | |
| Net interest income | 16,597 | | | 16,233 | | | 12,988 | | | 47,650 | | | 38,147 | |
| Provision expense (benefit) for loan losses | 4,270 | | | 5,575 | | | (16) | | | 10,334 | | | 835 | |
| Noninterest income | 9,125 | | | 7,789 | | | 3,858 | | | 21,604 | | | 9,621 | |
| Noninterest expense | 15,126 | | | 15,083 | | | 11,539 | | | 44,771 | | | 33,074 | |
| Income before income taxes | 6,326 | | | 3,364 | | | 5,323 | | | 14,149 | | | 13,859 | |
| Income tax provision | 1,117 | | | 643 | | | 914 | | | 2,109 | | | 2,428 | |
| Net income | 5,209 | | | 2,721 | | | 4,409 | | | 12,040 | | | 11,431 | |
| | | | | | | | | |
| Net income allocated to participating securities | 40 | | | 19 | | | 45 | | | 140 | | | 110 | |
| Net income attributable to common shareholders | $ | 5,169 | | | $ | 2,702 | | | $ | 4,364 | | | $ | 11,900 | | | $ | 11,321 | |
| Per Share Data | | | | | | | | | |
| Basic earnings per common share | $ | 0.68 | | | $ | 0.35 | | | $ | 0.57 | | | $ | 1.56 | | | $ | 1.48 | |
| Diluted earnings per common share | 0.67 | | | 0.35 | | | 0.56 | | | 1.55 | | | 1.46 | |
Diluted earnings per common share, excluding acquisition and due diligence fees (1) | 0.67 | | | 0.37 | | | 0.60 | | | 1.72 | | | 1.50 | |
| Book value per common share | 24.06 | | | 23.31 | | | 21.77 | | | 27.08 | | | 21.77 | |
Tangible book value per common share (1) | 18.74 | | | 18.09 | | | 20.51 | | | 18.74 | | | 20.51 | |
| Preferred shares outstanding (in thousands) | 10 | | | — | | | — | | | 10 | | | — | |
| Common shares outstanding (in thousands) | 7,734 | | | 7,734 | | | 7,714 | | | 7,734 | | | 7,714 | |
| Average basic common shares (in thousands) | 7,675 | | | 7,676 | | | 7,721 | | | 7,640 | | | 7,738 | |
| Average diluted common shares (in thousands) | 7,712 | | | 7,721 | | | 7,752 | | | 7,701 | | | 7,776 | |
| Selected Period End Balances | | | | | | | | | |
| Total assets | $ | 2,446,447 | | | $ | 2,541,696 | | | $ | 1,509,463 | | | $ | 2,446,447 | | | $ | 1,509,463 | |
| Securities available-for-sale | 253,527 | | | 217,172 | | | 205,242 | | | 253,527 | | | 205,242 | |
| Total loans | 1,843,888 | | | 1,815,353 | | | 1,168,923 | | | 1,843,888 | | | 1,168,923 | |
| Total deposits | 1,943,435 | | | 1,821,351 | | | 1,194,542 | | | 1,943,435 | | | 1,194,542 | |
| Total liabilities | 2,236,979 | | | 2,361,437 | | | 1,341,495 | | | 2,236,979 | | | 1,341,495 | |
| Total shareholders' equity | 209,468 | | | 180,259 | | | 167,968 | | | 209,468 | | | 167,968 | |
| Total common shareholders' equity | 186,098 | | | 180,259 | | | 167,968 | | | 186,098 | | | 167,968 | |
Tangible common shareholders' equity (1) | 144,963 | | | 139,913 | | | 158,250 | | | 144,963 | | | 158,250 | |
| Performance and Capital Ratios | | | | | | | | | |
| Return on average assets | 0.83 | % | | 0.46 | % | | 1.16 | % | | 0.71 | % | | 1.02 | % |
| Return on average equity | 10.48 | | | 6.02 | | | 10.58 | | | 8.68 | | | 9.51 | |
Net interest margin (fully taxable equivalent) (2) | 2.80 | | | 2.98 | | | 3.59 | | | 3.04 | | | 3.61 | |
| Efficiency ratio (noninterest expense/net interest income plus noninterest income) | 58.81 | | | 62.79 | | | 68.50 | | | 64.65 | | | 69.24 | |
| Dividend payout ratio | 7.41 | | | 14.22 | | | 7.03 | | | 8.99 | | | 7.45 | |
| Total shareholders' equity to total assets | 8.56 | | | 7.09 | | | 11.13 | | | 8.56 | | | 11.13 | |
Tangible common equity to tangible assets (1) | 6.03 | | | 5.59 | | | 10.55 | | | 6.03 | | | 10.55 | |
| Common equity tier 1 to risk-weighted assets | 8.83 | | | 8.76 | | | 11.73 | | | 8.83 | | | 11.73 | |
| Tier 1 capital to risk-weighted assets | 10.31 | | | 8.76 | | | 11.73 | | | 10.31 | | | 11.73 | |
| Total capital to risk-weighted assets | 14.39 | | | 12.81 | | | 13.84 | | | 14.39 | | | 13.84 | |
| Tier 1 capital to average assets (leverage ratio) | 7.17 | | | 6.21 | | | 10.12 | | | 7.17 | | | 10.12 | |
| Asset Quality Ratios: | | | | | | | | | |
| Net charge-offs to average loans | 0.02 | % | | 0.34 | % | | 0.01 | % | | 0.14 | % | | 0.03 | % |
| Nonperforming assets as a percentage of total assets | 0.79 | | | 0.33 | | | 0.78 | | | 0.79 | | | 0.78 | |
| Nonaccrual loans as a percent of total loans | 1.04 | | | 0.46 | | | 0.98 | | | 1.04 | | | 0.98 | |
| Allowance for loan losses as a percentage of total loans | 1.15 | | | 0.94 | | | 1.05 | | | 1.15 | | | 1.05 | |
| Allowance for loan losses as a percentage of nonaccrual loans | 110.32 | | | 206.37 | | | 107.46 | | | 110.32 | | | 107.46 | |
| Allowance for loan losses as a percentage of nonaccrual loans, excluding allowance allocated to loans accounted for under ASC 310-30 | 105.46 | | | 195.04 | | | 100.52 | | | 105.46 | | | 100.52 | |
|
| | | | | | | | | | | | | | | | | | | |
| | As of and for the three months ended | | As of and for the nine months ended |
| | September 30, | | June 30, | | September 30, | | September 30, | | September 30, |
| (Dollars in thousands, except per share data) | 2019 | | 2019 | | 2018 | | 2019 | | 2018 |
| Earnings Summary | | | | | | | | | |
| Interest income | $ | 17,983 |
| | $ | 17,657 |
| | $ | 16,629 |
| | $ | 53,082 |
| | $ | 46,783 |
|
| Interest expense | 4,995 |
| | 5,216 |
| | 3,560 |
| | 14,935 |
| | 9,172 |
|
| Net interest income | 12,988 |
| | 12,441 |
| | 13,069 |
| | 38,147 |
| | 37,611 |
|
| Provision expense (benefit) for loan losses | (16 | ) | | 429 |
| | 619 |
| | 835 |
| | 463 |
|
| Noninterest income | 3,858 |
| | 3,477 |
| | 1,924 |
| | 9,621 |
| | 4,748 |
|
| Noninterest expense | 11,539 |
| | 11,167 |
| | 10,454 |
| | 33,074 |
| | 29,294 |
|
| Income before income taxes | 5,323 |
| | 4,322 |
| | 3,920 |
| | 13,859 |
| | 12,602 |
|
| Income tax provision | 914 |
| | 767 |
| | 665 |
| | 2,428 |
| | 2,167 |
|
| Net income | 4,409 |
| | 3,555 |
| | 3,255 |
| | 11,431 |
| | 10,435 |
|
| Per Share Data | | | | | | | | | |
| Basic earnings per common share | $ | 0.57 |
| | $ | 0.46 |
| | $ | 0.42 |
| | $ | 1.48 |
| | $ | 1.44 |
|
| Diluted earnings per common share | 0.56 |
| | 0.45 |
| | 0.41 |
| | 1.46 |
| | 1.41 |
|
| Book value per common share | 21.77 |
| | 21.07 |
| | 18.77 |
| | 21.77 |
| | 18.77 |
|
Tangible book value per share (1) | 20.51 |
| | 19.81 |
| | 17.50 |
| | 20.51 |
| | 17.50 |
|
| Shares outstanding (in thousands) | 7,714 |
| | 7,728 |
| | 7,749 |
| | 7,714 |
| | 7,749 |
|
| Average basic common shares (in thousands) | 7,721 |
| | 7,741 |
| | 7,749 |
| | 7,738 |
| | 7,264 |
|
| Average diluted common shares (in thousands) | 7,752 |
| | 7,856 |
| | 7,901 |
| | 7,776 |
| | 7,414 |
|
| Selected Period End Balances | | | | | | | | | |
| Total assets | $ | 1,509,463 |
| | $ | 1,505,376 |
| | $ | 1,446,269 |
| | $ | 1,509,463 |
| | $ | 1,446,269 |
|
| Securities available-for-sale | 205,242 |
| | 218,145 |
| | 199,051 |
| | 205,242 |
| | 199,051 |
|
| Total loans | 1,168,923 |
| | 1,166,501 |
| | 1,114,999 |
| | 1,168,923 |
| | 1,114,999 |
|
| Total deposits | 1,194,542 |
| | 1,229,445 |
| | 1,130,311 |
| | 1,194,542 |
| | 1,130,311 |
|
| Total liabilities | 1,341,495 |
| | 1,342,509 |
| | 1,300,810 |
| | 1,341,495 |
| | 1,300,810 |
|
| Total shareholders' equity | 167,968 |
| | 162,867 |
| | 145,459 |
| | 167,968 |
| | 145,459 |
|
Tangible shareholders' equity (1) | 158,250 |
| | 153,121 |
| | 135,570 |
| | 158,250 |
| | 135,570 |
|
| Performance and Capital Ratios | | | | | | | | | |
| Return on average assets | 1.16 | % | | 0.95 | % | | 0.95 | % | | 1.02 | % | | 1.06 | % |
| Return on average equity | 10.58 |
| | 8.92 |
| | 8.95 |
| | 9.51 |
| | 10.68 |
|
Net interest margin (fully taxable equivalent) (2) | 3.59 |
| | 3.5 |
| | 3.97 |
| | 3.61 |
| | 3.99 |
|
| Efficiency ratio (noninterest expense/net interest income plus noninterest income) | 68.50 |
| | 70.15 |
| | 69.73 |
| | 69.24 |
| | 69.16 |
|
| Dividend payout ratio | 7.03 |
| | 8.69 |
| | 7.13 |
| | 7.45 |
| | 4.12 |
|
| Total shareholders' equity to total assets | 11.13 |
| | 10.82 |
| | 10.06 |
| | 11.13 |
| | 10.06 |
|
Tangible equity to tangible assets (1) | 10.55 |
| | 10.24 |
| | 9.44 |
| | 10.55 |
| | 9.44 |
|
| Common equity tier 1 to risk-weighted assets | 11.73 |
| | 11.49 |
| | 11.75 |
| | 11.73 |
| | 11.75 |
|
| Tier 1 capital to risk-weighted assets | 11.73 |
| | 11.49 |
| | 11.75 |
| | 11.73 |
| | 11.75 |
|
| Total capital to risk-weighted assets | 13.84 |
| | 13.62 |
| | 13.99 |
| | 13.84 |
| | 13.99 |
|
| Tier 1 capital to average assets (leverage ratio) | 10.12 |
| | 10.01 |
| | 10.31 |
| | 10.12 |
| | 10.31 |
|
| Asset Quality Ratios: | | | | | | | | | |
| Net charge-offs to average loans | 0.01 | % | | 0.01 | % | | 0.07 | % | | 0.03 | % | | 0.04 | % |
| Nonperforming assets as a percentage of total assets | 0.78 |
| | 0.99 |
| | 0.89 |
| | 0.78 |
| | 0.89 |
|
| Nonaccrual loans as a percent of total loans | 0.98 |
| | 1.25 |
| | 1.15 |
| | 0.98 |
| | 1.15 |
|
| Allowance for loan losses as a percentage of period-end loans | 1.05 |
| | 1.06 |
| | 1.07 |
| | 1.05 |
| | 1.07 |
|
| Allowance for loan losses as a percentage of nonaccrual loans | 107.46 |
| | 84.94 |
| | 92.36 |
| | 107.46 |
| | 92.36 |
|
| Allowance for loan losses as a percentage of nonaccrual loans, excluding allowance allocated to loans accounted for under ASC 310-30 | 100.52 |
| | 79.41 |
| | 84.72 |
| | 100.52 |
| | 84.72 |
|
(1) See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" below.
(2) Presented on a tax equivalent basis using a 21% tax rate.
GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Some of the financial measures included in this report are not measures of financial condition or performance recognized by GAAP. These non-GAAP financial measures include tangible common shareholders' equity, tangible book value per common share and the ratio of tangible common equity to tangible assets.assets, net income and diluted earnings per common share excluding acquisition and due diligence fees as well as allowance for loan loss as a percentage of total loans excluding PPP loans. Our management uses these non-GAAP financial measures in its analysis of our performance, and we believe that providing this information to financial analysts and investors allows them to evaluate capital adequacy, as well as better understand and evaluate the Company’s core financial results for the periods in question.
We calculate: (i) tangible shareholders' equity as total shareholders' equity less core deposit intangibles, mortgage servicing rights and goodwill; (ii) tangible book value per share as tangible shareholders' equity divided by shares of common stock outstanding; and (iii) tangible assets as total assets, less core deposit intangibles, mortgage servicing rights and goodwill.
The following presents these non-GAAP financial measures along with their most directly comparable financial measures calculated in accordance with GAAP:
| | | | | | | | | | | | | | | | | | | | | | | |
| Tangible Common Shareholders' Equity, Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share | | |
| As of | | |
| (Dollars in thousands, except per share data) | September 30,
2020 | | June 30,
2020 | | | | | | September 30,
2019 | | |
| (Unaudited) | | (Unaudited) | | | | | | (Unaudited) | | |
| Total shareholders' equity | $ | 209,468 | | | $ | 180,259 | | | | | | | $ | 167,968 | | | |
| Less: | | | | | | | | | | | |
| Preferred stock | 23,370 | | | — | | | | | | | — | | | |
| Total common shareholders' equity | 186,098 | | | 180,259 | | | | | | | 167,968 | | | |
| Less: | | | | | | | | | | | |
| Goodwill | 35,554 | | | 35,554 | | | | | | | 9,387 | | | |
| Other intangible assets, net | 5,581 | | | 4,792 | | | | | | | 331 | | | |
| Tangible common shareholders' equity | $ | 144,963 | | | $ | 139,913 | | | | | | | $ | 158,250 | | | |
| | | | | | | | | | | |
| Common shares outstanding (in thousands) | 7,734 | | | 7,734 | | | | | | | 7,714 | | | |
| Tangible book value per common share | $ | 18.74 | | | $ | 18.09 | | | | | | | $ | 20.51 | | | |
| | | | | | | | | | | |
| Total assets | $ | 2,446,447 | | | $ | 2,541,696 | | | | | | | $ | 1,509,463 | | | |
| Less: | | | | | | | | | | | |
| Goodwill | 35,554 | | | 35,554 | | | | | | | 9,387 | | | |
| Other intangible assets, net | 5,581 | | | 4,792 | | | | | | | 331 | | | |
| Tangible assets | $ | 2,405,312 | | | $ | 2,501,350 | | | | | | | $ | 1,499,745 | | | |
| | | | | | | | | | | |
| Tangible common equity to tangible assets | 6.03 | % | | 5.59 | % | | | | | | 10.55 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjusted Income and Diluted Earnings Per Share |
| For the three months ended | | For the nine months ended |
| (Dollars in thousands, except per share data) | September 30,
2020 | | June 30,
2020 | | September 30,
2019 | | September 30,
2020 | | September 30,
2019 |
| (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) |
| Net income, as reported | $ | 5,209 | | | $ | 2,721 | | | 4,409 | | | $ | 12,040 | | | 11,431 | |
| Acquisition and due diligence fees | 17 | | | 176 | | | 319 | | | 1,664 | | | 319 | |
Income tax benefit (1) | (4) | | | (34) | | | (25) | | | (333) | | | (25) | |
| Net income, excluding acquisition and due diligence fees | $ | 5,222 | | | $ | 2,863 | | | 4,703 | | | $ | 13,371 | | | 11,725 | |
| | | | | | | | | |
| Diluted earnings per share, as reported | $ | 0.67 | | | $ | 0.35 | | | $ | 0.56 | | | $ | 1.55 | | | $ | 1.46 | |
| Effect of acquisition and due diligence fees, net of income tax benefit | 0.00 | | | 0.02 | | | 0.04 | | | 0.17 | | | 0.04 | |
| Diluted earnings per common share, excluding acquisition and due diligence fees | $ | 0.67 | | | $ | 0.37 | | | $ | 0.60 | | | $ | 1.72 | | | $ | 1.50 | |
| (1) Assumes income tax rate of 21% on deductible acquisition expenses. | | | | | |
| | | | | | | | | | | | | | | | | |
| Allowance for Loan Loss as a Percentage of Total Loans, Excluding PPP Loans |
| As of |
| (Dollars in thousands, except per share data) | September 30,
2020 | | June 30,
2020 | | September 30, 2019 |
| (Unaudited) | | (Unaudited) | | (Unaudited) |
| Total loans | $ | 1,843,888 | | | $ | 1,815,353 | | | $ | 1,168,923 | |
| Less: | | | | | |
| PPP loans | 392,521 | | | 388,264 | | | — | |
| Total loans, excluding PPP loans | $ | 1,451,367 | | | $ | 1,427,089 | | | $ | 1,168,923 | |
| | | | | |
| Allowance for loan loss | 21,254 | | | 17,063 | | | 12,307 | |
| Allowance for loan loss as a percentage of total loans | 1.15 | % | | 0.94 | % | | 1.05 | % |
| Allowance for loan loss as a percentage of total loans excluding PPP loans | 1.46 | % | | 1.20 | % | | 1.05 | % |
|
| | | | | | | | | | | |
| (Dollars in thousands, except per share data) | September 30, 2019 | | December 31, 2018 | | September 30, 2018 |
| | (Unaudited) | | | | (Unaudited) |
| Total shareholders' equity | $ | 167,968 |
| | $ | 151,760 |
| | $ | 145,459 |
|
| Less: | | | | | |
| Goodwill | 9,387 |
| | 9,387 |
| | 9,387 |
|
| Other intangible assets, net | 331 |
| | 447 |
| | 502 |
|
| Tangible shareholders' equity | $ | 158,250 |
| | $ | 141,926 |
| | $ | 135,570 |
|
| | | | | | |
| Shares outstanding (in thousands) | 7,714 |
| | 7,750 |
| | 7,749 |
|
| Tangible book value per share | $ | 20.51 |
| | $ | 18.31 |
| | $ | 17.50 |
|
| | | | | | |
| Total assets | $ | 1,509,463 |
| | $ | 1,416,215 |
| | $ | 1,446,269 |
|
| Less: | | | | | |
| Goodwill | 9,387 |
| | 9,387 |
| | 9,387 |
|
| Other intangible assets, net | 331 |
| | 447 |
| | 502 |
|
| Tangible assets | $ | 1,499,745 |
| | $ | 1,406,381 |
| | $ | 1,436,380 |
|
| | | | | | |
| Tangible equity to tangible assets | 10.55 | % | | 10.09 | % | | 9.44 | % |
Results of Operations
Net Income
We had net income of $5.2 million, or $0.67 per diluted common share, for the three months ended September 30, 2020, compared to $4.4 million, or $0.56 per diluted common share, for the three months ended September 30, 2019, compared to $3.3 million, or $0.41 per diluted common share, for the three months ended September 30, 2018.2019. The increase of $1.2 million$800 thousand in net income in the third quarterreflected increases of 2019 primarily reflected an increase of $1.9$5.3 million in noninterest income, primarily as a result of higher mortgage banking income, and a decrease$3.6 million in provision for loan losses of $635 thousand.net interest income due to higher interest income on loans and lower interest expense on deposits year over year. This was partially offset by increases of $1.0$4.3 million in provision for loan losses as a result of the economic factors relating to COVID-19 and $3.6 million in noninterest expense mainly as a result of higher salary and $249 thousand in income tax provision.employee benefits.
We had net income of $12.0 million, or $1.55 per diluted common share, for the nine months ended September 30, 2020, compared to $11.4 million, or $1.46 per diluted common share, for the nine months ended September 30, 2019, compared to $10.4 million, or $1.41 per diluted common share, for the nine months ended September 30, 2018.2019. The increase of $996$609 thousand in net income year over year primarily reflected increases of $4.9$12.0 million in noninterest income and $536 thousand$9.5 million in net interest income.income and a decrease of $319 thousand in income tax provision. The factors contributing to the increases in noninterest income and net interest income year over year are noted above. This was partially offset by increases of $3.8$11.7 million in noninterest expense, $372 thousandprimarily due to higher salary and employee benefits as well as increase acquisition and due diligence fees, and $9.5 million in provision for loan losses and $261 thousand in income tax provision.due to the same factors discussed above.
Net Interest Income
Our primary source of revenue is net interest income, which is the difference between interest income from interest-earning assets (primarily loans and securities) and interest expense of funding sources (primarily interest‑bearinginterest-bearing deposits and borrowings).
Net interest income of $16.6 million in the third quarter of 2020 was $3.6 million higher than net interest income of $13.0 million and $13.1 million forin the third quarter of 2019. The three months ended September 30, 2019 and 2018, respectively. An2020 included a $2.3 million increase of $1.7in interest income as well as a $1.3 million in deposit interest expense was partially offset by a decrease in interest expense, on borrowed funds of $241 thousand andcompared to the same period in 2019. The increase in interest income was primarily driven by increases of $1.0$2.6 million in interest and fees on loans $179partially offset by a decrease of $180 thousand in interest income fromon investment securities, and $148 thousand in interest income on federal funds sold.
securities. The increase in interest and fees on loans for the three months ended September 30, 20192020 compared to the same period in 2018,2019 was mainly attributable to thedriven by an increase of $688.4 million in the average balance of loans primarily as a result of $107.1 million. Thisthe origination of $392.5 million of PPP loans and the acquisition of Ann Arbor State Bank. In the third quarter of 2020, the Bank earned $1.5 million of the total projected $12.1 million net SBA fees on PPP loans, with the remaining expected to be earned over the life of the loans, the majority of which are expected to mature two years from the date of funding unless modified by the lender and borrower. In addition to the net SBA fees, the Bank also recognized $1.0 million of interest income on the PPP loans. The decrease in interest on investment securities was mainly due to lower average interest rates. The decrease in interest expense was primarily driven by a decrease of $2.2 million in interest expense on deposits partially offset by a 16 basis pointincreases of $432 thousand of interest expense on borrowed funds and $376 thousand of interest expense on subordinated notes. The decrease in the average yield on loans.
The increase in deposit interest expense during the three months ended September 30, 2020 compared to 2019 was primarily due to a higher average ratelower interest rates paid on deposits of 1.42% compared to 1.02% for the same period in 2018, which was mainly as a result of revised internal deposit rates, mainly driven by the decreases in the target federal funds interest rate increase of 50150 basis points during the nine months ended September 30, 2018first quarter of 2020 and decrease of 25 basis points in each of August, September and October of 2019. The increase in interest expense on subordinated notes was primarily due to the thirdissuance of $30.0 million of subordinated debt in the fourth quarter of 2019 leaving the cost of funds higher year over year, as well as increased competition. In addition, the2019. The increase in depositinterest expense on borrowings was impactedmainly driven by an increase of $323.3 million in the average balance of depositsborrowings primarily as a result of $147.3 million compared to the same period in 2018.funding PPP loans through FRB borrowings.
Net interest income was $38.1of $47.7 million and $37.6 million for the nine months ended September 30, 2019 and 2018, respectively.2020 was $9.4 million higher than the net interest income of $38.1 million for the nine months ended September 30, 2019. The $536 thousandnine months ended September 30, 2020 included a $7.4 million increase in netinterest income as well as a $2.0 million decrease in interest expense, compared to the same period in 2019. The increase in interest income was primarily driven by increases of $8.3 million in interest and fees on loans partially offset by a $4.7 milliondecrease of $677 thousand in interest on investment securities. The increase in interest and fees on loans and a $1.3 million increase in interest income from investment securities, partially offset by a $5.7 million increase in deposit interest expense.
The changes in interest and fees on loans and interest income from investment securities for the nine months ended September 30, 20192020 compared to the same period in 20182019 was primarilymainly driven by increasesan increase of $538.2 million in the average balance of loans primarily as result of $104.9the acquisition of Ann Arbor State Bank, as well as the origination of PPP loans. In the nine months ending September 30, 2020, the Bank earned $2.9 million of the total projected $12.1 million net SBA fees on PPP loans, with the remaining expected to be earned over the life of the loans, the majority of which are expected to mature two years from the date of funding unless modified by the lender and borrower. In addition to the net SBA fees, the Bank also recognized $1.8 million of interest income on the PPP loans. The decrease in interest income on investment securities was mainly due to lower average interest rates. The decrease in interest expense was primarily driven by a decrease of $4.2 million in interest expense on deposits partially offset by increases of $1.1 million in interest expense on subordinated notes and $906 thousand in interest expense on borrowed funds. The increase in interest expense on borrowings was mainly
driven by an increase of $249.0 million in the average balance of investments securities portfolio of $42.0 million.
The increase in deposit interest expense during nine months ended September 30, 2019 wasborrowings primarily due to a higher average rate paid on total deposits of 1.43% compared to 0.91% for the same period in 2018, which was mainly as a result of the federal funds rate increase of 50 basis points during the nine months ended September 30, 2018 and decrease of 25 basis points in the third quarter of 2019 leaving the cost of funds higher year over year,FHLB borrowings as well as increased competition. In addition, thefunding PPP loans through FRB borrowings. The increase in depositinterest expense on subordinated notes was impacted by increase in average balance of deposits of $138.9 million compareddue to the same period in 2018.factors mentioned above.
Our net interest margin (on a fully tax equivalent basis ("FTE")) for the three months ended September 30, 20192020 was 3.59%2.80%, compared to 3.97%3.59% for the same period in 2018.2019. The decrease of 3879 basis points in the net interest margin year over year was primarily a result of lower average loan yield as well as lower yields on interest earning cash balances. Average loan yield decreased to 3.98% for the third quarter of 2020, compared to 5.41% for the same period in 2018 wasthird quarter of 2019, primarily due to the target federal funds interest rate increase of 50dropping 150 basis points duringin March 2020 in response to the nine months ended September 30, 2018COVID-19 pandemic and decrease ofdecreasing 25 basis points in each of August, September and October of 2019. Another contributing factor to the decrease in loan yields was the impact of the PPP loans originated during the second and third quarters of 2020, which had an average yield of 2.59%, net of deferred fees/costs, compared to the non-PPP loans which had an average yield of 4.35%. The decrease in loan yields was accompanied by a corresponding decrease in the cost of funds, which declined 110 basis points to 0.88% in the third quarter 2020 from 1.98% in the third quarter of 2019, leaving2019. Finally, during the costthird quarter of 2020, our average interest-earning cash balances of $259.3 million, of which the vast majority comprised of excess funding from the PPP process, earned 0.12%, which negatively affected the net interest margin. As a result of the reductions in the target federal funds higher year over year. interest rate, as well as the impact of the COVID-19 pandemic, we expect that our net interest income and net interest margin will decrease in future periods.
Our net interest margin benefits from discount accretion on our purchased credit impaired loan portfolios, a component of our accretable yield. The accretable yield represents the excess of the net present value of expected future cash flows over the acquisition date fair value and includes both the expected coupon of the loan and the discount accretion. The accretable yield is recognized as interest income over the expected remaining life of the purchased credit impaired loan. The difference between the actual yield earned on total loans and the yield generated based on the con
tractualcontractual coupon (not including any interest income for loans in nonaccrual status) represents excess accretable yield. The contractual coupon of the loan considers the contractual coupon rates of the loan and does not include any interest income for loans in nonaccrual status. For the three months ended September 30, 2020 and 2019, and 2018, the average yield on total loans was 5.41% and 5.57%, respectively. The yield on total loans was impacted by 157 basis points and 3315 basis points, respectively, due to the accretable yield on purchased credit impaired loans. Our net interest margin for the three months ended September 30, 20192020 and 2018,2019, benefited by 138 basis points and 2713 basis points, respectively, as a result of the excess accretable yield. As of September 30, 20192020 and December 31, 2018,2019, our remaining accretable yield was $9.6$7.9 million and $10.9$9.1 million, respectively, and our nonaccretable difference was $4.4$2.7 million and $5.6$3.9 million, respectively.
Our net interest margin (FTE) for the nine months ended September 30, 20192020 was 3.61%3.04%, compared to 3.99%3.61% for the same period in 2018.2019. The decrease of 3857 basis points reflected the federal funds rate increase of 50 basis points during the nine months ended September 30, 2018 and decrease of 25 basis points in the third quarter of 2019 leaving the cost of funds higher year over year.lower average loan yield as well as lower average interest earning cash yield that is described above. For the nine months ended September 30, 20192020 and 2018,2019, the average yield on total loans was 5.49%4.40% and 5.44%5.49%, respectively. PPP loans had an average yield of 2.87%, net of deferred fees/costs, compared to the non-PPP loans which had an average yield of 4.62%. The yield on total loans was impacted by 157 basis points and 3015 basis points, respectively due to the accretable yield on purchased credit impaired loans. Our net interest margin for the nine months ended September 30, 20192020 and 2018,2019, benefited by 129 basis points and 2512 basis points, respectively, as a result of the excess accretable yield.
The following tables settable sets forth information related to our average balance sheet, average yields on assets, and average rates on liabilities for the periods indicated. We derived these yields by dividing income or expense by the average daily balance of the corresponding assets or liabilities. In this table, adjustments arewere made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis.
Analysis of Net Interest Income—Fully Taxable Equivalent
| | | | | For the three months ended September 30, | | | For the three months ended September 30, | |
| | | 2019 | | 2018 | | | 2020 | | 2019 | |
| (Dollars in thousands) | | Average Balance | | Interest Revenue/Expense (1) | | Average Yield/Rate (2) | | Average Balance | | Interest Revenue/Expense (1) | | Average Yield/Rate (2) | (Dollars in thousands) | | Average Balance | | Interest Revenue/Expense (1) | | Average Yield/Rate (2) | | Average Balance | | Interest Revenue/Expense (1) | | Average Yield/Rate (2) | |
| Interest-earning assets: | | | | | | | | | | | | | Interest-earning assets: | | | | | | | | | | | | | |
Gross loans(3) | | $ | 1,182,764 |
| | $ | 16,134 |
| | 5.41 | % | | $ | 1,075,642 |
| | $ | 15,107 |
| | 5.57 | % | Gross loans(3) | | $ | 1,871,164 | | | $ | 18,730 | | | 3.98 | % | | $ | 1,182,764 | | | $ | 16,134 | | | 5.41 | % | |
Investment securities(4): | | | | | | | | | | | | | Investment securities(4): | | |
| Taxable | | 121,473 |
| | 857 |
| | 2.80 |
| | 134,619 |
| | 816 |
| | 2.41 |
| Taxable | | 139,237 | | | 652 | | | 1.86 | | | 121,473 | | | 857 | | | 2.80 | | |
| Tax-exempt | | 85,332 |
| | 588 |
| | 3.28 |
| | 67,599 |
| | 450 |
| | 3.13 |
| Tax-exempt | | 94,526 | | | 613 | | | 3.19 | | | 85,332 | | | 588 | | | 3.28 | | |
| Interest-earning cash balances | | 51,142 |
| | 289 |
| | 2.24 |
| | 28,685 |
| | 157 |
| | 2.17 |
| Interest-earning cash balances | | 259,349 | | | 76 | | | 0.12 | | | 51,142 | | | 289 | | | 2.24 | | |
| Federal Home Loan Bank stock | | 8,325 |
| | 115 |
| | 5.48 |
| | 8,303 |
| | 99 |
| | 4.73 |
| |
| Other investments | | Other investments | | 12,419 | | | 174 | | | 5.57 | | | 8,325 | | | 115 | | | 5.48 | | |
| Total interest-earning assets | | 1,449,036 |
| | 17,983 |
| | 4.96 | % | | 1,314,848 |
| | 16,629 |
| | 5.04 | % | Total interest-earning assets | | $ | 2,376,695 | | | $ | 20,245 | | | 3.41 | % | | $ | 1,449,036 | | | $ | 17,983 | | | 4.96 | % | |
| Non-earning assets: | | | | | | | | | | | | | Non-earning assets: | | | | | | | | | | | | | |
| Cash and due from banks | | 23,103 |
| | | | | | 22,358 |
| | | | | Cash and due from banks | | 27,571 | | | 23,103 | | | |
| Premises and equipment | | 13,228 |
| | | | | | 13,465 |
| | | | | Premises and equipment | | 15,791 | | | 13,228 | | | |
| Goodwill | | 9,387 |
| | | | | | 9,387 |
| | | | | Goodwill | | 35,554 | | | 9,387 | | | |
| Other intangible assets, net | | 347 |
| | | | | | 533 |
| | | | | Other intangible assets, net | | 4,980 | | | 347 | | | |
| Bank-owned life insurance | | 12,023 |
| | | | | | 11,732 |
| | | | | Bank-owned life insurance | | 18,006 | | | 12,023 | | | |
| Allowance for loan losses | | (12,241 | ) | | | | | | (11,591 | ) | | | | | Allowance for loan losses | | (17,321) | | | (12,241) | | | |
| Other non-earning assets | | 27,145 |
| | | | | | 7,414 |
| | | | | Other non-earning assets | | 55,899 | | | 27,145 | | | |
| Total assets | | $ | 1,522,028 |
| | | | | | $ | 1,368,146 |
| | | | | Total assets | | $ | 2,517,175 | | | $ | 1,522,028 | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | Interest-bearing liabilities: | | | | | | |
| Deposits: | | | | | | | | | | | | | Deposits: | | |
| Interest-bearing demand deposits | | $ | 51,963 |
| | $ | 63 |
| | 0.48 | % | | $ | 60,022 |
| | 52 |
| | 0.34 | % | Interest-bearing demand deposits | | $ | 116,285 | | | $ | 65 | | | 0.22 | % | | $ | 51,963 | | | $ | 63 | | | 0.48 | % | |
| Money market and savings deposits | | 320,363 |
| | 1,170 |
| | 1.45 |
| | 249,595 |
| | 625 |
| | 0.99 |
| Money market and savings deposits | | 513,420 | | | 556 | | | 0.43 | | | 320,363 | | | 1,170 | | | 1.45 | | |
| Time deposits | | 543,765 |
| | 3,245 |
| | 2.37 |
| | 463,373 |
| | 2,125 |
| | 1.82 |
| Time deposits | | 575,179 | | | 1,702 | | | 1.18 | | | 543,765 | | | 3,245 | | | 2.37 | | |
| Borrowings | | 70,766 |
| | 261 |
| | 1.46 |
| | 95,371 |
| | 502 |
| | 2.09 |
| Borrowings | | 394,020 | | | 693 | | | 0.70 | | | 70,766 | | | 261 | | | 1.46 | | |
| Subordinated notes | | 14,925 |
| | 256 |
| | 6.81 |
| | 14,874 |
| | 256 |
| | 6.83 |
| Subordinated notes | | 44,468 | | | 632 | | | 5.65 | | | 14,925 | | | 256 | | | 6.81 | | |
| Total interest-bearing liabilities | | 1,001,782 |
| | 4,995 |
| | 1.98 | % | | 883,235 |
| | 3,560 |
| | 1.60 | % | Total interest-bearing liabilities | | $ | 1,643,372 | | | $ | 3,648 | | | 0.88 | % | | $ | 1,001,782 | | | $ | 4,995 | | | 1.98 | % | |
| Noninterest-bearing liabilities and shareholders' equity: | | | | | | | | | | | | | Noninterest-bearing liabilities and shareholders' equity: | | | | | | | | | | | | | |
| Noninterest-bearing demand deposits | | 333,690 |
| | | | | | 329,459 |
| | | | | Noninterest-bearing demand deposits | | $ | 640,095 | | | $ | 333,690 | | | |
| Other liabilities | | 19,804 |
| | | | | | 9,956 |
| | | | | Other liabilities | | 34,846 | | | 19,804 | | | |
| Shareholders' equity | | 166,752 |
| | | | | | 145,496 |
| | | | | Shareholders' equity | | 198,862 | | | 166,752 | | | |
| Total liabilities and shareholders' equity | | $ | 1,522,028 |
| | | | | | $ | 1,368,146 |
| | | | | Total liabilities and shareholders' equity | | $ | 2,517,175 | | | $ | 1,522,028 | | | |
| Net interest income | | | | $ | 12,988 |
| | | | | | $ | 13,069 |
| | | Net interest income | | | | $ | 16,597 | | | | | $ | 12,988 | | | |
| Interest spread | | | | | | 2.98 | % | | | | | | 3.44 | % | Interest spread | | | | 2.53 | % | | | | 2.98 | % | |
Net interest margin(5) | | | | | | 3.56 |
| | | | | | 3.94 |
| Net interest margin(5) | | 2.78 | % | | 3.56 | % | |
| Tax equivalent effect | | | | | | 0.03 |
| | | | | | 0.03 |
| Tax equivalent effect | | 0.02 | % | | 0.03 | % | |
| Net interest margin on a fully tax equivalent basis | | | | | | 3.59 | % | | | | | | 3.97 | % | Net interest margin on a fully tax equivalent basis | | 2.80 | % | | 3.59 | % | |
(1) Interest income is shown on actual basis and does not include taxable equivalent adjustments.
(2) Average rates and yields are presented on an annual basis and include a taxable equivalent adjustment to interest income of $118$144 thousand and $84$118 thousand on tax-exempt securities for the three months ended September 30, 20192020 and 2018,2019, respectively, using the federal corporate tax rate of 21%.
(3) Includes nonaccrual loansloans.
(4) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(5) Net interest margin represents net interest income divided by average total interest-earning assets.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | For the nine months ended September 30, |
| | | 2019 | | 2018 |
| (Dollars in thousands) | | Average Balance | | Interest Revenue/Expense (1) | | Average Yield/Rate (2) | | Average Balance | | Interest Revenue/Expense (1) | | Average Yield/Rate (2) |
| Interest-earning assets: | | | | | | | | | | | | |
Gross loans(3) | | $ | 1,157,837 |
| | $ | 47,547 |
| | 5.49 | % | | $ | 1,052,942 |
| | $ | 42,837 |
| | 5.44 | % |
Investment securities(4): | |
|
| | | | | | | | | | |
| Taxable | | 135,460 |
| | 2,773 |
| | 2.74 |
| | 117,356 |
| | 2,057 |
| | 2.34 |
|
| Tax-exempt | | 84,476 |
| | 1,728 |
| | 3.28 |
| | 60,570 |
| | 1,181 |
| | 3.13 |
|
| Interest-earning cash balances | | 37,359 |
| | 670 |
| | 2.40 |
| | 27,207 |
| | 382 |
| | 1.88 |
|
| Federal Home Loan Bank stock | | 8,325 |
| | 364 |
| | 5.85 |
| | 8,303 |
| | 326 |
| | 5.25 |
|
| Total interest-earning assets | | $ | 1,423,457 |
| | $ | 53,082 |
| | 5.02 | % | | $ | 1,266,378 |
| | $ | 46,783 |
| | 4.96 | % |
| Non-earning assets: | | | | | | | | | | | | |
| Cash and due from banks | | 24,075 |
| | | | | | 19,577 |
| | | | |
| Premises and equipment | | 13,252 |
| | | | | | 13,150 |
| | | | |
| Goodwill | | 9,387 |
| | | | | | 9,387 |
| | | | |
| Other intangible assets, net | | 383 |
| | | | | | 588 |
| | | | |
| Bank-owned life insurance | | 11,955 |
| | | | | | 11,651 |
| | | | |
| Allowance for loan losses | | (11,950 | ) | | | | | | (11,628 | ) | | | | |
| Other non-earning assets | | 18,642 |
| | | | | | 9,132 |
| | | | |
| Total assets | | $ | 1,489,201 |
| | | | | | $ | 1,318,235 |
| | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | |
| Interest-bearing demand deposits | | $ | 53,894 |
| | $ | 180 |
| | 0.45 | % | | $ | 62,626 |
| | $ | 151 |
| | 0.32 | % |
| Money market and savings deposits | | 307,461 |
| | 3,389 |
| | 1.47 |
| | 266,508 |
| | 1,851 |
| | 0.93 |
|
| Time deposits | | 556,922 |
| | 9,647 |
| | 2.32 |
| | 455,299 |
| | 5,465 |
| | 1.60 |
|
| Borrowings | | 62,006 |
| | 960 |
| | 2.07 |
| | 67,073 |
| | 946 |
| | 1.89 |
|
| Subordinated notes | | 14,910 |
| | 759 |
| | 6.81 |
| | 14,859 |
| | 759 |
| | 6.83 |
|
| Total interest-bearing liabilities | | $ | 995,193 |
| | $ | 14,935 |
| | 2.01 | % | | $ | 866,365 |
| | $ | 9,172 |
| | 1.42 | % |
| Noninterest-bearing liabilities and shareholders' equity: | | | | | | | | | | | | |
| Noninterest-bearing demand deposits | | 316,754 |
| | | | | | 311,675 |
| | | | |
| Other liabilities | | 17,048 |
| | | | | | 9,941 |
| | | | |
| Shareholders' equity | | 160,206 |
| | | | | | 130,254 |
| | | | |
| Total liabilities and shareholders' equity | | $ | 1,489,201 |
| | | | | | $ | 1,318,235 |
| | | | |
| Net interest income | | | | $ | 38,147 |
| | | | | | $ | 37,611 |
| | |
| Interest spread | | | | | | 3.01 | % | | | | | | 3.54 | % |
Net interest margin(5) | | | | | | 3.58 |
| | | | | | 3.97 |
|
| Tax equivalent effect | | | | | | 0.03 |
| | | | | | 0.02 |
|
| Net interest margin on a fully tax equivalent basis | | | | | | 3.61 | % | | | | | | 3.99 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, |
| | 2020 | | 2019 |
| (Dollars in thousands) | | Average Balance | | Interest Revenue/Expense(1) | | Average Yield/Rate(2) | | Average Balance | | Interest Revenue/Expense(1) | | Average Yield/Rate(2) |
| Interest-earning assets: | | | | | | | | | | | | |
Gross loans(3) | | $ | 1,696,073 | | | $ | 55,817 | | | 4.40 | % | | $ | 1,157,837 | | | $ | 47,547 | | | 5.49 | % |
Investment securities(4): | | | | | | | | | | | | |
| Taxable | | 124,169 | | | 1,930 | | | 2.08 | | | 135,460 | | | 2,773 | | | 2.74 | |
| Tax-exempt | | 97,104 | | | 1,894 | | | 3.20 | | | 84,476 | | | 1,728 | | | 3.28 | |
| Interest-earning cash balances | | 188,179 | | | 400 | | | 0.28 | | | 37,359 | | | 670 | | | 2.40 | |
| Other investments | | 12,401 | | | 417 | | | 4.49 | | | 8,325 | | | 364 | | | 5.85 | |
| Total interest-earning assets | | $ | 2,117,926 | | | $ | 60,458 | | | 3.84 | % | | $ | 1,423,457 | | | $ | 53,082 | | | 5.02 | % |
| Non-earning assets: | | | | | | | | | | | | |
| Cash and due from banks | | 26,264 | | | | | | | 24,075 | | | | | |
| Premises and equipment | | 16,195 | | | | | | | 13,252 | | | | | |
| Goodwill | | 35,894 | | | | | | | 9,387 | | | | | |
| Other intangible assets, net | | 4,420 | | | | | | | 383 | | | | | |
| Bank-owned life insurance | | 17,868 | | | | | | | 11,955 | | | | | |
| Allowance for loan losses | | (14,387) | | | | | | | (11,950) | | | | | |
| Other non-earning assets | | 47,714 | | | | | | | 18,642 | | | | | |
| Total assets | | $ | 2,251,894 | | | | | | | $ | 1,489,201 | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | |
| Interest-bearing demand deposits | | $ | 112,579 | | | $ | 262 | | | 0.31 | % | | $ | 53,894 | | | $ | 180 | | | 0.45 | % |
| Money market and savings deposits | | 458,438 | | | 2,217 | | | 0.65 | | | 307,461 | | | 3,389 | | | 1.47 | |
| Time deposits | | 564,396 | | | 6,560 | | | 1.55 | | | 556,922 | | | 9,647 | | | 2.32 | |
| Borrowings | | 311,024 | | | 1,866 | | | 0.80 | | | 62,006 | | | 960 | | | 2.07 | |
| Subordinated notes | | 44,463 | | | 1,903 | | | 5.72 | | | 14,910 | | | 759 | | | 6.81 | |
| Total interest-bearing liabilities | | $ | 1,490,900 | | | $ | 12,808 | | | 1.15 | % | | $ | 995,193 | | | $ | 14,935 | | | 2.01 | % |
| Noninterest-bearing liabilities and shareholders' equity: | | | | | | | | | | | | |
| Noninterest-bearing demand deposits | | $ | 546,066 | | | | | | | $ | 316,754 | | | | | |
| Other liabilities | | 30,047 | | | | | | | 17,048 | | | | | |
| Shareholders' equity | | 184,881 | | | | | | | 160,206 | | | | | |
| Total liabilities and shareholders' equity | | $ | 2,251,894 | | | | | | | $ | 1,489,201 | | | | | |
| Net interest income | | | | $ | 47,650 | | | | | | | $ | 38,147 | | | |
| Interest spread | | | | | | 2.69 | % | | | | | | 3.01 | % |
Net interest margin(5) | | | | | | 3.01 | % | | | | | | 3.58 | % |
| Tax equivalent effect | | | | | | 0.03 | % | | | | | | 0.03 | % |
| Net interest margin on a fully tax equivalent basis | | | | | | 3.04 | % | | | | | | 3.61 | % |
(1) Interest income is shown on actual basis and does not include taxable equivalent adjustments.
(2) Average rates and yields are presented on an annual basis and include a taxable equivalent adjustment to interest income of $347$431 thousand and $235$347 thousand on tax-exempt securities for the nine months ended September 30, 20192020 and 2018,2019, respectively, using the federal corporate tax rate of 21%.
(3) Includes nonaccrual loansloans.
(4) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(5) Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The table below presents the effect of volume and rate changes on interest income and expense for the periods indicated. Changes in volume are changes in the average balance multiplied by the previous year'speriod's average rate. Changes in rate are changes in the average rate multiplied by the average balance from the previous year.period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. The average rate for tax-exempt securities is reported on a fully taxable equivalent basis.
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| | For the three months ended September 30, 2020 vs. 2019 |
| | Increase
(Decrease) Due to: | | |
| (Dollars in thousands) | | Rate | | Volume | | Net Increase (Decrease) |
| Interest-earning assets | | | | | | |
| Gross loans | | $ | (5,085) | | | $ | 7,681 | | | $ | 2,596 | |
| Investment securities: | | | | | | |
| Taxable | | (317) | | | 112 | | | (205) | |
| Tax-exempt | | (49) | | | 74 | | | 25 | |
| Interest-earning cash balances | | (486) | | | 273 | | | (213) | |
| Other investments | | 59 | | | — | | | 59 | |
| Total interest income | | (5,878) | | | 8,140 | | | 2,262 | |
| Interest-bearing liabilities | | | | | | |
| Interest-bearing demand deposits | | (47) | | | 49 | | | 2 | |
| Money market and savings deposits | | (1,091) | | | 477 | | | (614) | |
| Time deposits | | (1,721) | | | 178 | | | (1,543) | |
| Borrowings | | (202) | | | 634 | | | 432 | |
| Subordinated debt | | (52) | | | 428 | | | 376 | |
| Total interest expense | | (3,113) | | | 1,766 | | | (1,347) | |
| Change in net interest income | | $ | (2,765) | | | $ | 6,374 | | | $ | 3,609 | |
| | | | | For the three months ended September 30, 2019 vs. 2018 | | For the nine months ended September 30, 2020 vs. 2019 |
| | | Increase (Decrease) Due to: | | | | Increase
(Decrease) Due to: | |
| (Dollars in thousands) | | Rate | | Volume | | Net Increase (Decrease) | (Dollars in thousands) | | Rate | | Volume | | Net Increase (Decrease) |
| Interest-earning assets | | | | | | | Interest-earning assets | | | | | | |
| Gross loans | | $ | (443 | ) | | $ | 1,470 |
| | $ | 1,027 |
| Gross loans | | $ | (10,773) | | | $ | 19,043 | | | $ | 8,270 | |
| Investment securities: | | | | | | | Investment securities: | |
| Taxable | | 125 |
| | (84 | ) | | 41 |
| Taxable | | (625) | | | (218) | | | (843) | |
| Tax-exempt | | (8 | ) | | 146 |
| | 138 |
| Tax-exempt | | (137) | | | 303 | | | 166 | |
| Interest-earning cash balances | | 5 |
| | 127 |
| | 132 |
| Interest-earning cash balances | | (1,016) | | | 746 | | | (270) | |
| FHLB Stock | | 16 |
| | — |
| | 16 |
| |
| Other investments | | Other investments | | (98) | | | 151 | | | 53 | |
| Total interest income | | (305 | ) | | 1,659 |
| | 1,354 |
| Total interest income | | (12,649) | | | 20,025 | | | 7,376 | |
| Interest-bearing liabilities | | |
| | |
| | |
| Interest-bearing liabilities | | | | | | |
| Interest-bearing demand deposits | | 19 |
| | (8 | ) | | 11 |
| Interest-bearing demand deposits | | (68) | | | 150 | | | 82 | |
| Money market and savings deposits | | 337 |
| | 208 |
| | 545 |
| Money market and savings deposits | | (2,398) | | | 1,226 | | | (1,172) | |
| Time deposits | | 711 |
| | 409 |
| | 1,120 |
| Time deposits | | (3,215) | | | 128 | | | (3,087) | |
| Borrowings | | (129 | ) | | (112 | ) | | (241 | ) | Borrowings | | (895) | | | 1,801 | | | 906 | |
| Subordinated debt | | (1 | ) | | 1 |
| | — |
| Subordinated debt | | (138) | | | 1,282 | | | 1,144 | |
| Total interest expense | | 937 |
| | 498 |
| | 1,435 |
| Total interest expense | | (6,714) | | | 4,587 | | | (2,127) | |
| Change in net interest income | | $ | (1,242 | ) | | $ | 1,161 |
| | $ | (81 | ) | Change in net interest income | | $ | (5,935) | | | $ | 15,438 | | | $ | 9,503 | |
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| | | For the nine months ended September 30, 2019 vs. 2018 |
| | | Increase (Decrease) Due to: | | |
| (Dollars in thousands) | | Rate | | Volume | | Net Increase (Decrease) |
| Interest-earning assets | | | | | | |
| Gross loans | | $ | 406 |
| �� | $ | 4,304 |
| | $ | 4,710 |
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| Investment securities: | | | | | | |
| Taxable | | 373 |
| | 343 |
| | 716 |
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| Tax-exempt | | (37 | ) | | 584 |
| | 547 |
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| Interest-earning cash balances | | 123 |
| | 165 |
| | 288 |
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| FHLB Stock | | 37 |
| | 1 |
| | 38 |
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| Total interest income | | 902 |
| | 5,397 |
| | 6,299 |
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| Interest-bearing liabilities | | | | | | |
| Interest-bearing demand deposits | | 52 |
| | (23 | ) | | 29 |
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| Money market and savings deposits | | 1,219 |
| | 319 |
| | 1,538 |
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| Time deposits | | 2,784 |
| | 1,398 |
| | 4,182 |
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| Borrowings | | 89 |
| | (75 | ) | | 14 |
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| Subordinated debt | | (3 | ) | | 3 |
| | — |
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| Total interest expense | | 4,141 |
| | 1,622 |
| | 5,763 |
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| Change in net interest income | | $ | (3,239 | ) | | $ | 3,775 |
| | $ | 536 |
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Provision for Loan Losses
We established an allowance for loan losses through a provision for loan losses charged as an expense in our consolidated statements of income. Management reviews the loan portfolio, consisting of originated loans and purchased loans, on a quarterly basis to evaluate the outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses.
Loans acquired in connection with acquisitions that have evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, or ASC 310-30. These credit-impaired loans have been recorded at their estimated fair value on the respective acquisition date, based on subjective determinations regarding risk ratings, expected future cash flows and fair value of the underlying collateral, without a carryover of the related allowance for loan losses. At the acquisition date, the Company recognizes the expected shortfall of expected future cash flows, as compared to the contractual amount due, as a nonaccretable discount. Any excess of the net present value of expected future cash flows over the acquisition date fair value is recognized as the accretable discount, or accretable yield. We evaluate these loans semi-annually to assess expected cash flows. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of the difference from nonaccretable to accretable with a positive impact on interest income. As of September 30, 2019,2020, and December 31, 2018,2019, our remaining accretable yield was $9.6$7.9 million and $10.9$9.1 million, respectively, and our nonaccretable difference was $4.4$2.7 million and $5.6$3.9 million, respectively.
The provision for loan losses was a provision benefitexpense of $16 thousand$4.3 million for the three months ended September 30, 2019,2020 compared to a $619$16 thousand provision expensebenefit for the same period in 2018.2019. The decrease$4.3 million increase in the provision for loan losses was primarily due to a $243 thousand decrease in specific reserves on impaired loans,result of a $228 thousand decrease$3.3 million increase in general reserves on originated loans due to slower the uncertainty surrounding the impact of the COVID-19 pandemic on the loan growth during third quarter 2019 compared to the same periodportfolio as well as a $794 thousand increase in 2018 and $164 thousand lower charge-offs during the 2019 period compared to the same period in 2018.specific reserves.
The provision for loan losses was a provision expense of $10.3 million for the nine months ended September 30, 2020, compared to $835 thousand for the nine months ended September 30, 2019, compared to $463 thousand provision expense for the nine months ended September 30, 2018.2019. The increase of $9.5 million in the provision for loan losses year over year was primarily as a result of a $6.7 million increase in general reserves due to an adjustment of qualitative factors attributable to the COVID-19 pandemic during the second and third quarters of 2020. In addition, there was a $473$1.6 million increase in provision resulting primarily from a $1.3 million chargeoff during the second quarter of 2020 on a nonaccrual loan that was subsequently sold. Lastly, there was also a $782 thousand increase in specific reserves on impaired loans individually evaluated
for impairment. The Company will continue to monitor the impacts of the COVID-19 pandemic and a $111 thousand increasewill re-evaluate the appropriateness of the provision for loan losses in general reserves on originated loansfuture quarters as a result of stronger loan growth. This was partially offset by $191 thousand lower net charge offs between the two periods. Our total nonaccrual loans decreased by $6.9 million to $11.5 million at September 30, 2019 compared to $18.4 million at December 31, 2018. The decrease in nonaccrual loans was primarily a result of payoffs of three commercial loan relationships totaling $12.4 million, partially offset by two commercial loan relationships totaling $5.2 million moving to nonaccrual during the nine months ending September 30, 2019.needed.
Noninterest Income
The following table presents noninterest income for the three and nine months ended September 30, 20192020 and 2018.2019.
| | | | | For the three months ended September 30, | | For the nine months ended September 30, | | | For the three months ended September 30, | | For the nine months ended September 30, | |
| (Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | |
| Noninterest income | | |
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| Noninterest income | | | | | | | | | |
| Service charges on deposits | | $ | 627 |
| | $ | 655 |
| | $ | 1,914 |
| | $ | 1,915 |
| Service charges on deposits | | $ | 616 | | | $ | 627 | | | $ | 1,798 | | | $ | 1,914 | | |
| Net gain on sales of securities | | 151 |
| | — |
| | 151 |
| | — |
| Net gain on sales of securities | | 434 | | | 151 | | | 1,862 | | | 151 | | |
| Mortgage banking activities | | 2,352 |
| | 754 |
| | 5,788 |
| | 1,394 |
| Mortgage banking activities | | 7,108 | | | 2,352 | | | 15,380 | | | 5,788 | | |
| Net gain on sale of commercial loans | | (37 | ) | | — |
| | (37 | ) | | 11 |
| |
| | Other charges and fees | | 765 |
| | 515 |
| | 1,805 |
| | 1,428 |
| Other charges and fees | | 967 | | | 728 | | | 2,564 | | | 1,768 | | |
| Total noninterest income | | $ | 3,858 |
| | $ | 1,924 |
| | $ | 9,621 |
| | $ | 4,748 |
| Total noninterest income | | $ | 9,125 | | | $ | 3,858 | | | $ | 21,604 | | | $ | 9,621 | | |
Noninterest income increased $1.9$5.2 million to $3.9$9.1 million for the three months ended September 30, 2019,2020 compared to $1.9$3.9 million for the same period in 2018.2019. The increase in noninterest income was primarily due to an increaseincreases in mortgage banking activities of $1.6$4.8 million as well as increases inand net gains on sales of securities of $283 thousand. The increase in the mortgage banking activities was mainly attributable to $98.2 million higher residential loan originations held for sale and $66.9 million higher residential loans sold as a result of the lower interest rate environment during the third quarter of 2020. The increase in net gain on sales of securities was due to higher gains realized on securities sold in the third quarter of 2020 than those sold in the third quarter of 2019.
Noninterest income increased $12.0 million to $21.6 million for the nine months ended September 30, 2020, compared to $9.6 million for the same period in 2019. The increase in noninterest income was primarily due to increases in mortgage banking activities of $9.6 million, net gain on sales of securities of $1.7 million, as well as increases of $263 thousand net gain on sales of other real estate owned, $139 thousand in bank owned life insurance ("BOLI") interest income, and $118 thousand in interest rate swap fees (included(all included in "other charges and fees" in the table above). The increase in the mortgage banking activities income year over year was predominantlymainly attributable to $214.4 million higher residential loan originations held for sale and $189.8 million higher residential loans sold as a result of the doubling of our mortgage team during the third quarter of 2018 which resultedlower interest rate environment in an increase in mortgage loans originated and sold.
Noninterest income increased $4.9 millionto $9.6 million for the nine months ended September 30, 2019, compared to $4.7 million for the same period in 2018.2020. The increase in noninterest income was primarily due to an increase in mortgage banking activitiesthe net gain on sales of $4.4 million, whichsecurities was attributable to the same factors mentioned above, as well as increasesabove. The increase in net gains on sales of securitiesother real estate owned was due to the sale of four properties during the second and third quarters of 2020. The increase in BOLI interest income was due to an increase in bank owned life insurance attributable to the acquisition of Ann Arbor State Bank. The increase in interest rate swap fees (included in "other charges and fees" in the table above).was due to increased volumes of customer-initiated derivatives.
Noninterest Expense
The following table presents noninterest expense for the three and nine months ended September 30, 20192020 and 2018.2019.
| | | | | For the three months ended September 30, | | For the nine months ended September 30, | | | For the three months ended September 30, | | For the nine months ended September 30, | |
| (Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | |
| Noninterest expense | | |
| | |
| | | | | Noninterest expense | | | | | | | | | |
| Salary and employee benefits | | $ | 7,536 |
| | $ | 6,888 |
| | $ | 21,642 |
| | $ | 19,013 |
| Salary and employee benefits | | $ | 9,862 | | | $ | 7,536 | | | $ | 28,090 | | | $ | 21,642 | | |
| Occupancy and equipment expense | | 1,203 |
| | 1,173 |
| | 3,575 |
| | 3,293 |
| Occupancy and equipment expense | | 1,678 | | | 1,203 | | | 4,773 | | | 3,575 | | |
| Professional service fees | | 465 |
| | 494 |
| | 1,212 |
| | 1,231 |
| Professional service fees | | 808 | | | 465 | | | 2,141 | | | 1,212 | | |
| Acquisition and due diligence fees | | 319 |
| | — |
| | 319 |
| | — |
| Acquisition and due diligence fees | | 17 | | | 319 | | | 1,664 | | | 319 | | |
| Marketing expense | | 379 |
| | 264 |
| | 843 |
| | 697 |
| Marketing expense | | 257 | | | 379 | | | 709 | | | 843 | | |
| Printing and supplies expense | | 78 |
| | 127 |
| | 250 |
| | 343 |
| Printing and supplies expense | | 89 | | | 78 | | | 398 | | | 250 | | |
| Data processing expense | | 661 |
| | 565 |
| | 1,862 |
| | 1,512 |
| Data processing expense | | 844 | | | 661 | | | 2,601 | | | 1,862 | | |
| Core deposit premium amortization | | Core deposit premium amortization | | 192 | | | 29 | | | 576 | | | 117 | | |
| Other expense | | 898 |
| | 943 |
| | 3,371 |
| | 3,205 |
| Other expense | | 1,379 | | | 869 | | | 3,819 | | | 3,254 | | |
| Total noninterest expense | | $ | 11,539 |
| | $ | 10,454 |
| | $ | 33,074 |
| | $ | 29,294 |
| Total noninterest expense | | $ | 15,126 | | | $ | 11,539 | | | $ | 44,771 | | | $ | 33,074 | | |
Noninterest expense increased $1.0$3.6 million to $11.5$15.1 million for the three months ended September 30, 2019,2020, as compared to $10.5$11.5 million for the same period in 2018.2019. The increase in noninterest expense was primarily attributabledue to increases in salary and employee benefits of $648$2.3 million, occupancy and equipment expense of $475 thousand, acquisition and due diligenceFDIC premium expense of $417
thousand (included in "other expense" in the table above), professional service fees of $319$343 thousand, marketing expense of $115 thousand, and data processing expense of $96$183 thousand, and core deposit premium amortization of $163 thousand. This was partially offset by a decrease in acquisition expense of $302 thousand. The increase in salary and employee benefits between the periods was primarily due to an increase of $387 thousand$1.6 million in mortgage commissions expense as well as an increase of 37 full-time equivalent employees, mainly attributable to the acquisition of Ann Arbor State Bank as well as organic growth. The increase in occupancy and equipment expense was primarily attributable to increased building rent and other expenses related to the addition of the three new branches acquired with Ann Arbor State Bank, as well as organic growth in the organization. The increase in FDIC premium expense was primarily due to the increase in assets related to the acquisition of Ann Arbor State Bank in addition to credits received during the third quarter of 2019. The increase in professional service fees was primarily related to increased residential mortgage volumes as well as increased legal fees. The increase in data processing expense was due to increased costs of loan systems. As a result of higher loan volumes.the acquisition, the Company recorded $3.7 million of core deposit premiums, leading to the increased amortization expense on core deposit intangibles compared to the same period in prior year. The increasedecrease in acquisition and due diligence fees was primarily due to the majority of expenses related to the pending merger with Ann Arbor State Bank. The increase in marketing expense was dueBank being incurred from the third quarter of 2019 to incremental increases in marketing efforts. The increase in data processing expense was related to higher software costs to sustain the growthfirst quarter of the Company.2020.
Noninterest expense increased $3.8$11.7 million to $33.1$44.8 million for the nine months ended September 30, 2019,2020, as compared to $29.3$33.1 million for the same period in 2018.2019. The increase in noninterest expense was primarily due to an increaseincreases in salary and employee benefits of $2.6$6.4 million, an increase in data processing expense of $350 thousand, an increase in acquisition and due diligence fees of $319 thousand, an increase in$1.3 million, occupancy and equipment expense of $282$1.2 million, professional service fees of $929 thousand, an increase in otherdata processing expense of $166$739 thousand, and an increase in marketingFDIC premium expense of $146$525 thousand (included in "other expense" in the table above), and core deposit premium amortization of $459 thousand. The increase in salary and employee benefits between the periods was primarily due to an increase of $1.5$4.3 million in mortgage commissions expense as a result of higher loan volumes, as well as an increase in headcount of seven30 full-time equivalent employees. The increase in acquisition and due diligence fees wasand core deposit premium amortization related to the pending merger with Ann Arbor State Bank.Bank, which closed on January 2, 2020. Acquisition and due diligence fees comprised of contract terminations, core system conversion, as well as severance and retention payments during the nine months ended September 30, 2020. The increase in otheroccupancy and equipment expense, FDIC premium, professional service fees, and core deposit premiums were attributable to the same factors mentioned above. The increase in data processing expense was primarily dueattributable to an increasethe retention and maintenance of Ann Arbor State Bank legacy systems during the first quarter of 2020 prior to system integration, in addition to the organic growth in the provision for unfunded commitments as a result of a change in the assumptions within the calculation, which resulted in a better representation of our line of credit utilization. The increases in the data processing, occupancy and equipment, and marketing categories were primarily attributable to incremental increases in software costs, building expenses and marketing efforts to sustain the growth of the Company.organization.
Income Taxes and Tax-Related Items
During the three months ended September 30, 2019,2020, we recognized income tax expense of $1.1 million on $6.3 million of pre-tax income resulting in an effective tax rate of 17.7% compared to the same period in 2019, in which we recognized an income tax expense of $914 thousand on $5.3 million of pre-tax income, resulting in an effective tax rate of 17.2%, compared to.
During the same period in 2018, in whichnine months ended September 30, 2020, we recognized an income tax expense of $665 thousand$2.1 million on $3.9$14.1 million of pre-tax income resulting in an effective tax rate of 17.0%.
During14.9%, compared to the nine months ended September 30,same period in 2019, in which we recognized an income tax expense of $2.4 million on $13.9 million of pre-tax income, resulting in an effective tax rate of 17.5%,. The decrease in income tax provision for the nine months ended September 30, 2020 compared to the same period in 2019 was primarily as a result of a $290 thousand tax benefit related to the Ann Arbor State Bank net operating loss (NOL) resulting from the CARES Act provision that allows for NOLs generated in 2018 in which we recognized an incometo 2020 to be carried back five years. Additionally, disqualified dispositions of Ann Arbor State Bank’s stock options generated a $175 thousand tax expense of $2.2 million on $12.6 million of pre-tax income, resulting in an effective tax rate of 17.2%.benefit.
Refer to Note 89 - Income Taxes in the notes to the consolidated financial statements for a reconciliation between expected and actual income tax expense for the three and nine months ended September 30, 20192020 and 2018.2019.
Financial Condition
Total assets increased $93.2 million to $1.51 billion at September 30, 2019 as compared to $1.42 billion at December 31, 2018. The increase in total assets was primarily due to increases of $42.4 million in gross loans, $21.3 million in mortgage loans held for sale, $16.1 million in cash and cash equivalents, $8.6 million in receivables from a loan sub-servicer (included in "other assets" on the consolidated balance sheet), $4.5 million in fair value of interest rate swaps (included in "other assets" on the consolidated balance sheet), and $1.0 million in securities available-for-sale. The year to date increase in loans was primarily driven by the growth in our commercial and industrial as well as our residential real estate loan portfolios. The increase in mortgage loans held for sale was attributable to the increase in volumes of loans held for sale as a result of the doubling of our mortgage team during the third quarter of 2018. Cash and cash equivalents increased primarily as a result of a $5.2 million increase in cash balances held with the Federal Reserve Bank as well as higher balances held at other correspondent banks. The Company maintains a cash balance at the Federal Reserve and manages this liquidity balance on a daily basis as required, and may have significant cash balance fluctuations in the ordinary course of business based on inflows and outflows from changing loan totals, investment activity, and deposit flows.
Investment Securities
The following table presents the fair value of the Company's investment securities portfolio, all of which were classified as available-for-sale as of September 30, 20192020 and December 31, 2018.2019.
| | | (Dollars in thousands) | | September 30, 2019 | | December 31, 2018 | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 | |
| Securities available-for-sale: | | |
| | |
| Securities available-for-sale: | | | | | |
| U.S. government sponsored entities and agencies | | $ | 1,497 |
| | $ | 2,397 |
| U.S. government sponsored entities and agencies | | $ | 27,199 | | | $ | — | | |
| State and political subdivision | | 90,733 |
| | 75,146 |
| State and political subdivision | | 117,550 | | | 93,747 | | |
| Mortgage-backed securities: residential | | 9,390 |
| | 9,739 |
| Mortgage-backed securities: residential | | 19,492 | | | 10,565 | | |
| Mortgage-backed securities: commercial | | 21,049 |
| | 12,382 |
| Mortgage-backed securities: commercial | | 8,655 | | | 8,779 | | |
| Collateralized mortgage obligations: residential | | 9,069 |
| | 18,671 |
| Collateralized mortgage obligations: residential | | 14,333 | | | 8,529 | | |
| Collateralized mortgage obligations: commercial | | 31,598 |
| | 31,988 |
| Collateralized mortgage obligations: commercial | | 33,003 | | | 23,181 | | |
| U.S. Treasury | | 2,001 |
| | 20,481 |
| U.S. Treasury | | 1,003 | | | 1,999 | | |
| SBA | | 23,536 |
| | 15,688 |
| SBA | | 18,808 | | | 21,984 | | |
| Asset backed securities | | 10,187 |
| | 3,842 |
| Asset backed securities | | 9,954 | | | 10,084 | | |
| Corporate bonds | | 6,182 |
| | 13,924 |
| Corporate bonds | | 3,530 | | | 2,037 | | |
| Total securities available-for-sale | | $ | 205,242 |
| | $ | 204,258 |
| Total securities available-for-sale | | $ | 253,527 | | | $ | 180,905 | | |
The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity for both normal operations and potential acquisitions, while providing an additional source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral. At September 30, 2019,2020, total investment securities were $205.2$253.5 million, or 13.6%10.4% of total assets, compared to $204.3$180.9 million, or 14.4%11.4% of total assets, at December 31, 2018.2019. The $984 thousand$72.6 million increase in securities available-for-sale from December 31, 20182019 to September 30, 2019,2020, was primarily reflected increases in obligationsdue to the acquisition of stateAnn Arbor State Bank, which contributed $47.4 million of investment securities as of January 2, 2020. In addition, we repositioned our investment portfolio through purchases of investment securities of $83.2 million and political subdivisions, mortgage backed securities: commercial, SBAsales, calls, payoffs and maturities of investment securities and asset backed securities.of $52.4 million. Securities with a carrying value of $36.7$97.2 million and $22.7$27.3 million were pledged at September 30, 20192020 and December 31, 2018,2019, respectively, to secure borrowings, deposits and mortgage derivatives.
As of September 30, 2019,2020, the Company held 5666 tax-exempt state and local municipal securities totaling $41.1$48.9 million backed by the Michigan School Bond Loan Fund. Other than the aforementioned investments, at September 30, 20192020 and December 31, 2018,2019, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders' equity.
The securities available-for-sale presented in the following tables are reported at amortized cost and by contractual maturity as of September 30, 20192020 and December 31, 2018.2019. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage-backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax equivalent basis.
| | | | | September 30, 2019 | | | September 30, 2020 |
| | | One year or less | | One to five years | | Five to ten years | | After ten years | | | One year or less | | One to five years | | Five to ten years | | After ten years |
| (Dollars in thousands) | | Amortized
Cost | | Average
Yield | | Amortized
Cost | | Average
Yield | | Amortized
Cost | | Average
Yield | | Amortized
Cost | | Average
Yield | (Dollars in thousands) | | Amortized
Cost | | Average
Yield | | Amortized
Cost | | Average
Yield | | Amortized
Cost | | Average
Yield | | Amortized
Cost | | Average
Yield |
| Securities available-for-sale: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Securities available-for-sale: | | | | | | | | | | | | | | | | |
| U.S. government sponsored agency obligations | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | 1,422 |
| | 3.21 | % | | $ | — |
| | — | % | U.S. government sponsored agency obligations | | $ | 2,520 | | | 1.61 | % | | $ | 4,572 | | | 1.62 | % | | $ | 15,000 | | | 1.22 | % | | $ | 5,000 | | | 1.48 | % |
| State and political subdivision | | 738 |
| | 2.04 |
| | 4,404 |
| | 2.30 |
| | 18,254 |
| | 2.97 |
| | 62,449 |
| | 3.43 |
| State and political subdivision | | 2,267 | | | 2.08 | | | 9,942 | | | 2.39 | | | 29,081 | | | 2.87 | | | 68,208 | | | 3.18 | |
| Mortgage-backed securities: residential | | — |
| | — |
| | 176 |
| | 0.96 |
| | 153 |
| | 2.21 |
| | 9,060 |
| | 3.07 |
| Mortgage-backed securities: residential | | — | | | — | | | 96 | | | 0.89 | | | 111 | | | 2.23 | | | 19,030 | | | 1.90 | |
| Mortgage-backed securities: commercial | | 436 |
| | 1.91 |
| | 5,599 |
| | 2.36 |
| | 10,720 |
| | 3.07 |
| | 3,230 |
| | 3.52 |
| Mortgage-backed securities: commercial | | 858 | | | 1.38 | | | 3,943 | | | 2.45 | | | 1,412 | | | 2.63 | | | 1,812 | | | 3.64 | |
| Collateralized mortgage obligations: residential | | — |
| | — |
| | — |
| | — |
| | 763 |
| | 2.12 |
| | 8,365 |
| | 2.34 |
| Collateralized mortgage obligations: residential | | — | | | — | | | 51 | | | 3.98 | | | 589 | | | 2.01 | | | 13,537 | | | 1.23 | |
| Collateralized mortgage obligations: commercial | | — |
| | — |
| | 9,268 |
| | 2.90 |
| | 11,316 |
| | 3.13 |
| | 10,163 |
| | 2.41 |
| Collateralized mortgage obligations: commercial | | 1,005 | | | 1.51 | | | 8,926 | | | 3.08 | | | 13,678 | | | 1.66 | | | 8,050 | | | 2.44 | |
| U.S. Treasury | | — |
| | — |
| | 1,974 |
| | 2.02 |
| | — |
| | — |
| | — |
| | — |
| U.S. Treasury | | 1,000 | | | 1.65 | | | — | | | — | | | — | | | — | | | — | | | — | |
| SBA | | — |
| | — |
| | — |
| | — |
| | 9,101 |
| | 1.73 |
| | 14,482 |
| | 3.18 |
| SBA | | — | | | — | | | — | | | — | | | 10,388 | | | 1.36 | | | 8,481 | | | 1.22 | |
| Asset backed securities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,384 |
| | 2.81 |
| Asset backed securities | | — | | | — | | | — | | | — | | | — | | | — | | | 10,298 | | | 0.89 | |
| Corporate bonds | | 1,509 |
| | 2.32 |
| | 3,497 |
| | 3.84 |
| | 986 |
| | 4.04 |
| | — |
| | — |
| Corporate bonds | | 3,491 | | | 3.09 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total securities available-for-sale | | $ | 2,683 |
| | 2.18 | % | | $ | 24,918 |
| | 2.72 | % | | $ | 52,715 |
| | 2.82 | % | | $ | 118,133 |
| | 3.15 | % | Total securities available-for-sale | | $ | 11,141 | | | 2.15 | % | | $ | 27,530 | | | 2.49 | % | | $ | 70,259 | | | 2.04 | % | | $ | 134,416 | | | 2.40 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 |
| | | One year or less | | One to five years | | Five to ten years | | After ten years |
| (Dollars in thousands) | | Amortized
Cost | | Average
Yield | | Amortized
Cost | | Average
Yield | | Amortized
Cost | | Average
Yield | | Amortized
Cost | | Average
Yield |
| Securities available-for-sale: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| State and political subdivision | | $ | 1,375 | | | 2.25 | % | | $ | 3,747 | | | 2.24 | % | | $ | 18,566 | | | 2.95 | % | | $ | 65,616 | | | 3.38 | % |
| Mortgage-backed securities: residential | | — | | | — | | | 153 | | | 0.93 | | | 143 | | | 2.07 | | | 10,313 | | | 2.84 | |
| Mortgage-backed securities: commercial | | 431 | | | 0.99 | | | 4,874 | | | 2.27 | | | 1,435 | | | 2.65 | | | 1,827 | | | 3.64 | |
| Collateralized mortgage obligations: residential | | — | | | — | | | — | | | — | | | 727 | | | 2.15 | | | 7,814 | | | 2.11 | |
| Collateralized mortgage obligations: commercial | | — | | | — | | | 9,031 | | | 2.87 | | | 4,371 | | | 2.83 | | | 9,489 | | | 2.39 | |
| U.S. Treasury | | — | | | — | | | 1,976 | | | 2.06 | | | — | | | — | | | — | | | — | |
| SBA | | — | | | — | | | — | | | — | | | 8,706 | | | 2.59 | | | 13,345 | | | 2.49 | |
| Asset backed securities | | — | | | — | | | — | | | — | | | — | | | — | | | 10,390 | | | 2.59 | |
| Corporate bonds | | 1,006 | | | 2.44 | | | 1,024 | | | 4.43 | | | — | | | — | | | — | | | — | |
| Total securities available-for-sale | | $ | 2,812 | | | 2.13 | % | | $ | 20,805 | | | 2.60 | % | | $ | 33,948 | | | 2.81 | % | | $ | 118,794 | | | 3.01 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2018 |
| | | One year or less | | One to five years | | Five to ten years | | After ten years |
| (Dollars in thousands) | | Amortized
Cost | | Average
Yield | | Amortized
Cost | | Average
Yield | | Amortized
Cost | | Average
Yield | | Amortized
Cost | | Average
Yield |
| Securities available-for-sale: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| U.S. government sponsored agency obligations | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | 2,404 |
| | 3.09 | % | | $ | — |
| | — | % |
| State and political subdivision | | 181 |
| | 2.02 |
| | 6,273 |
| | 2.16 |
| | 16,329 |
| | 2.91 |
| | 52,310 |
| | 3.41 |
|
| Mortgage-backed securities: residential | | — |
| | — |
| | 235 |
| | 1.21 |
| | 183 |
| | 2.33 |
| | 9,696 |
| | 2.84 |
|
| Mortgage-backed securities: commercial | | — |
| | — |
| | 6,124 |
| | 2.30 |
| | 5,016 |
| | 2.91 |
| | 1,454 |
| | 3.46 |
|
| Collateralized mortgage obligations: residential | | — |
| | — |
| | — |
| | — |
| | 837 |
| | 2.09 |
| | 18,079 |
| | 3.22 |
|
| Collateralized mortgage obligations: commercial | | — |
| | — |
| | 9,772 |
| | 2.90 |
| | 10,047 |
| | 3.27 |
| | 12,571 |
| | 2.49 |
|
| U.S. Treasury | | — |
| | — |
| | 21,232 |
| | 1.53 |
| | — |
| | — |
| | — |
| | — |
|
| SBA | | — |
| | — |
| | — |
| | — |
| | 1,664 |
| | 3.17 |
| | 14,192 |
| | 3.21 |
|
| Asset backed securities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,872 |
| | 3.04 |
|
| Corporate bonds | | 1,501 |
| | 2.04 |
| | 10,034 |
| | 3.43 |
| | 2,471 |
| | 3.75 |
| | — |
| | — |
|
| Total securities available-for-sale | | $ | 1,682 |
| | 2.04 | % | | $ | 53,670 |
| | 2.29 | % | | $ | 38,951 |
| | 3.06 | % | | $ | 112,174 |
| | 3.19 | % |
Loans
Our loan portfolio represents a broad range of borrowers comprised of commercial real estate, commercial and industrial, residential real estate, and consumer financing loans.
Commercial real estate loans consist of term loans secured by a mortgage lien on the real property, such as office and industrial buildings, retail shopping centers and apartment buildings, as well as commercial real estate construction loans that are offered to builders and developers. Commercial real estate loans are then segregated into two classes: non-owner occupied and owner occupied commercial real estate loans. Non-owner occupied loans, which include loans secured by non-owner occupied and nonresidential properties, generally have a greater risk profile than owner-occupied loans, which include loans secured by multifamily structures and owner-occupied commercial structures.
Commercial and industrial loans include financing for commercial purposes in various lines of businesses, including manufacturing, service industry and professional service areas. Commercial and industrial loans are generally secured with the assets of the company and/or the personal guarantee of the business owners. The PPP loans funded during the second and third quarters of 2020, which are guaranteed by the SBA, are reported within the commercial and industrial loan category.
Residential real estate loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15- to 30-year term and, in most cases, are extended to borrowers to finance their primary residence with both fixed-rate and adjustable-rate terms. Real estate construction loans are also offered to consumers who wish to build their own homes and are often structured to be converted to permanent loans at the end of the construction phase, which is typically twelve months. Residential real estate loans also include home equity loans and lines of credit that are secured by a first- or second-lien on the borrower's residence. Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate.
Consumer loans include loans made to individuals not secured by real estate, including loans secured by automobiles or watercraft, and personal unsecured loans.
The following table details our loan portfolio by loan type at the dates presented:
| | | | | As of September 30, | | As of December 31, | | | As of September 30, | | As of December 31, | |
| (Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | (Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | |
| Commercial real estate: | | |
| | |
| | |
| | |
| | |
| Commercial real estate: | | | | | | | | | | | |
| Non-owner occupied | | $ | 369,284 |
| | $ | 367,671 |
| | $ | 343,420 |
| | $ | 322,354 |
| | $ | 240,161 |
| Non-owner occupied | | $ | 460,708 | | | $ | 388,515 | | | $ | 367,671 | | | $ | 343,420 | | | $ | 322,354 | | |
| Owner occupied | | 196,497 |
| | 194,422 |
| | 168,342 |
| | 169,348 |
| | 146,487 |
| Owner occupied | | 269,481 | | | 216,131 | | | 194,422 | | | 168,342 | | | 169,348 | | |
| Total commercial real estate | | 565,781 |
| | 562,093 |
| | 511,762 |
| | 491,702 |
| | 386,648 |
| Total commercial real estate | | 730,189 | | | 604,646 | | | 562,093 | | | 511,762 | | | 491,702 | | |
| Commercial and industrial | | 404,130 |
| | 383,455 |
| | 377,686 |
| | 342,069 |
| | 254,808 |
| Commercial and industrial | | 807,923 | | | 410,228 | | | 383,455 | | | 377,686 | | | 342,069 | | |
| Residential real estate | | 198,277 |
| | 180,018 |
| | 144,439 |
| | 118,730 |
| | 116,734 |
| Residential real estate | | 304,088 | | | 211,839 | | | 180,018 | | | 144,439 | | | 118,730 | | |
| Consumer | | 735 |
| | 999 |
| | 1,036 |
| | 892 |
| | 1,528 |
| Consumer | | 1,688 | | | 896 | | | 999 | | | 1,036 | | | 892 | | |
| Total loans | | $ | 1,168,923 |
| | $ | 1,126,565 |
| | $ | 1,034,923 |
| | $ | 953,393 |
| | $ | 759,718 |
| Total loans | | $ | 1,843,888 | | | $ | 1,227,609 | | | $ | 1,126,565 | | | $ | 1,034,923 | | | $ | 953,393 | | |
Total loans were $1.17$1.84 billion at September 30, 2019,2020, an increase of $42.4$616.3 million from December 31, 2018.2019. The total increasegrowth in loans fromour loan portfolio compared to December 31, 20182019 was primarily due to an increase in commercial$392.5 million of PPP loans that were originated during the second and industrialthird quarters of 2020. The acquisition of Ann Arbor State Bank also contributed $224.1 million of loans as of $20.7January 2, 2020. There was additional organic growth of $53.3 million and residential real estateduring the first three quarters of $18.3 million.2020. The loan growth was partially offset by $53.6 million of runoff of acquired loans. In general, we target a loan portfolio mix of approximately one-half commercial real estate, approximately one-third commercial and industrial loans and one-sixth a mix of residential real estate and consumer loans. As of September 30, 2019,2020, approximately 48.4%39.6% of our loans were commercial real estate, 34.6%43.8% were commercial and industrial, and 17.0%16.6% were residential real estate and consumer loans. The loan mix was affected by PPP loans, which fall into the commercial and industrial loan type.
We originate both fixed and adjustable rate residential real estate loans conforming to the underwriting guidelines of the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation,Fannie Mae and Freddie Mac, as well as home equity loans and lines of credit that are secured by first or junior liens. Most of our fixed rate residential loans, along with some of our adjustable rate mortgages, are sold to other financial institutions with which we have established a correspondent lending relationship. The Company has established a direct relationship with FNMAFannie Mae and began locking and selling loans to FNMAFannie Mae with servicing retained during the third quarter of 2019. Refer to Note 7- Goodwill and Intangible Assets for further details on our mortgage servicing rights.
Loan Maturity/Rate Sensitivity
The following table shows the contractual maturities of our loans as of September 30, 2019.2020. | | | (Dollars in thousands) | | One year or less | | After one but within five years | | After five years | | Total | (Dollars in thousands) | | One year or
less | | After one but
within five
years | | After five
years | | Total |
| September 30, 2019 | | |
| | |
| | |
| | |
| |
| September 30, 2020 | | September 30, 2020 | | | | | | | | |
| Commercial real estate | | $ | 59,219 |
| | $ | 356,318 |
| | $ | 150,244 |
| | $ | 565,781 |
| Commercial real estate | | $ | 93,069 | | | $ | 435,324 | | | $ | 201,796 | | | $ | 730,189 | |
| Commercial and industrial | | 145,158 |
| | 172,562 |
| | 86,410 |
| | 404,130 |
| Commercial and industrial | | 149,938 | | | 579,914 | | | 78,071 | | | 807,923 | |
| Residential real estate | | 6,132 |
| | 4,712 |
| | 187,433 |
| | 198,277 |
| Residential real estate | | 9,175 | | | 7,907 | | | 287,006 | | | 304,088 | |
| Consumer | | 10 |
| | 565 |
| | 160 |
| | 735 |
| Consumer | | 59 | | | 1,499 | | | 130 | | | 1,688 | |
| Total loans | | $ | 210,519 |
| | $ | 534,157 |
| | $ | 424,247 |
| | $ | 1,168,923 |
| Total loans | | $ | 252,241 | | | $ | 1,024,644 | | | $ | 567,003 | | | $ | 1,843,888 | |
| Sensitivity of loans to changes in interest rates: | | |
| | | | |
| | |
| Sensitivity of loans to changes in interest rates: | | | | | | | | |
| Fixed interest rates | | |
| | $ | 428,693 |
| | $ | 164,923 |
| | |
| Fixed interest rates | | | | $ | 905,028 | | | $ | 185,832 | | | |
| Floating interest rates | | |
| | 105,464 |
| | 259,324 |
| | |
| Floating interest rates | | | | 119,616 | | | 381,171 | | | |
| Total | | |
| | $ | 534,157 |
| | $ | 424,247 |
| | |
| Total | | | | $ | 1,024,644 | | | $ | 567,003 | | | |
Summary of Impaired Assets and Past Due Loans
Nonperforming assets consist of nonaccrual loans and other real estate owned. We do not consider performing troubled debt restructurings (TDRs) to be nonperforming assets, but they are included as part of impaired assets. The level of nonaccrual loans is an important element in assessing asset quality. Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is not expected according to the terms of the agreement. Generally, loans are placed on nonaccrual status due to the continued failure by the borrower to adhere to contractual payment terms coupled with other pertinent factors, such as insufficient collateral value.
A loan is categorized as a troubled debt restructuring if a concession is granted, such as to provide for the reduction of either interest or principal, due to deterioration in the financial condition of the borrower. Typical concessions include reduction of the interest rate on the loan to a rate considered lower than the current market rate, forgiveness of a portion of the loan balance, extension of the maturity date, and/or modifications from principal and interest payments to interest-only payments for a certain period. Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments to be received. In accordance with bank regulatory guidance, troubled debt restructurings do not include short-term modifications made on a good-faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief.
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of 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 loans individually by classifying the loans as to credit risk. This analysis includes commercial and industrial and commercial real estate loans and is performed on an annual basis. The Company uses the following definitions for risk ratings:
Pass. Loans classified as pass are higher quality loans that do not fit any of the other categories described below. This category includes loans risk rated with the following ratings: cash/stock secured, excellent credit risk, superior credit risk, good credit risk, satisfactory credit risk, and marginal credit risk.
Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company's credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
For residential real estate loans and consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. Residential real estate loans and consumer loans are considered nonperforming if they are 90 days or more past due. Consumer loan types are continuously monitored for changes in delinquency trends and other asset quality indicators.
Purchased credit impaired loans accounted for under ASC 310-30 are classified as performing, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the semi-annual re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss provision or future period yield adjustments.
Total classified and criticized loans as of September 30, 20192020 compared to December 31, 20182019 were as follows:
| | | (Dollars in thousands) | | September 30, 2019 | | December 31, 2018 | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 | |
| Classified loans: | | |
| | |
| Classified loans: | | | | | |
| Substandard | | $ | 11,093 |
| | $ | 18,391 |
| Substandard | | $ | 18,983 | | | $ | 20,569 | | |
| Doubtful | | 506 |
| | 44 |
| Doubtful | | 5,086 | | | 1,838 | | |
| Total classified loans | | $ | 11,599 |
| | $ | 18,435 |
| Total classified loans | | $ | 24,069 | | | $ | 22,407 | | |
| Special mention | | 22,612 |
| | 13,081 |
| Special mention | | 37,560 | | | 17,292 | | |
| Total classified and criticized loans | | $ | 34,211 |
| | $ | 31,516 |
| Total classified and criticized loans | | $ | 61,629 | | | $ | 39,699 | | |
A summary of nonperforming assets (defined as nonaccrual loans and other real estate owned), performing troubled debt restructurings and loans 90 days or more past due and still accruing, as of the dates indicated, are presented below.
| | | | | As of September 30, | | As of December 31, | | | As of September 30, | | As of December 31, |
| (Dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | (Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Nonaccrual loans | | |
| | |
| | |
| | |
| | |
| Nonaccrual loans | | | | | | | | | | |
| Commercial real estate | | $ | 5,043 |
| | $ | 5,927 |
| | $ | 2,257 |
| | $ | 147 |
| | $ | 141 |
| Commercial real estate | | $ | 7,022 | | | $ | 4,832 | | | $ | 5,927 | | | $ | 2,257 | | | $ | 147 | |
| Commercial and industrial | | 4,071 |
| | 9,605 |
| | 9,024 |
| | 13,389 |
| | 309 |
| Commercial and industrial | | 8,078 | | | 11,112 | | | 9,605 | | | 9,024 | | | 13,389 | |
| Residential real estate | | 2,339 |
| | 2,915 |
| | 2,767 |
| | 1,498 |
| | 1,177 |
| Residential real estate | | 4,151 | | | 2,569 | | | 2,915 | | | 2,767 | | | 1,498 | |
| Consumer | | Consumer | | 15 | | | 16 | | | — | | | — | | | — | |
Total nonaccrual loans(1) | | 11,453 |
| | 18,447 |
| | 14,048 |
| | 15,034 |
| | 1,627 |
| Total nonaccrual loans(1) | | 19,266 | | | 18,529 | | | 18,447 | | | 14,048 | | | 15,034 | |
| Other real estate owned | | 373 |
| | — |
| | 652 |
| | 258 |
| | 81 |
| Other real estate owned | | — | | | 921 | | | — | | | 652 | | | 258 | |
| Total nonperforming assets | | 11,826 |
| | 18,447 |
| | 14,700 |
| | 15,292 |
| | 1,708 |
| Total nonperforming assets | | 19,266 | | | 19,450 | | | 18,447 | | | 14,700 | | | 15,292 | |
| Performing troubled debt restructurings | | |
| | |
| | |
| | |
| | |
| Performing troubled debt restructurings | | | | | | | | | | |
| Commercial real estate | | — |
| | — |
| | — |
| | 290 |
| | — |
| Commercial real estate | | — | | | — | | | — | | | — | | | 290 | |
| Commercial and industrial | | 553 |
| | 568 |
| | 961 |
| | 1,018 |
| | 1,069 |
| Commercial and industrial | | 550 | | | 547 | | | 568 | | | 961 | | | 1,018 | |
| Residential real estate | | 361 |
| | 363 |
| | 261 |
| | 207 |
| | 279 |
| Residential real estate | | 599 | | | 359 | | | 363 | | | 261 | | | 207 | |
| Total performing troubled debt restructurings | | 914 |
| | 931 |
| | 1,222 |
| | 1,515 |
| | 1,348 |
| Total performing troubled debt restructurings | | 1,149 | | | 906 | | | 931 | | | 1,222 | | | 1,515 | |
| Total impaired assets, excluding ASC 310-30 loans | | $ | 12,740 |
| | $ | 19,378 |
| | $ | 15,922 |
| | $ | 16,807 |
| | $ | 3,056 |
| Total impaired assets, excluding ASC 310-30 loans | | $ | 20,415 | | | $ | 20,356 | | | $ | 19,378 | | | $ | 15,922 | | | $ | 16,807 | |
| Loans 90 days or more past due and still accruing | | $ | 157 |
| | $ | 243 |
| | $ | 440 |
| | $ | 377 |
| | $ | 883 |
| Loans 90 days or more past due and still accruing | | $ | 552 | | | $ | 157 | | | $ | 243 | | | $ | 440 | | | $ | 377 | |
(1)Nonaccrual loans include nonperforming troubled debt restructurings of $2.4 million, $3.0 million, $5.0 million, $6.4 million, and $5.8 million at the respective dates indicated above.
| |
(1)
| Nonaccrual loans include nonperforming troubled debt restructurings of $3.2 million, $5.0 million, $6.4 million, $5.8 million, and $564 thousand at the respective dates indicated above. |
During the nine months ended September 30, 20192020 and 2018,2019, the Company recorded $848$144 thousand and $380$848 thousand, respectively, of interest income on nonaccrual loans and performing TDRs excluding PCI loans.`
In addition to nonperforming and impaired assets, the Company had purchased credit impaired loans accounted for under ASC 310-30 which amounted to $6.9$6.1 million, $6.0 million, $7.9 million, $9.7 million, $11.6 million, and $17.6$11.6 million at the respective dates indicated in the table above. The increase in purchase credit impaired loans as of September 30, 2020 compared to December 31, 2019 was due to the acquisition of Ann Arbor State Bank.
Nonperforming assets decreased $184 thousand as of September 30, 2020 compared to December 31, 2019. The decrease in nonperforming assets was attributable to a decrease of $921 thousand in other real estate owned, partially offset by an increase of $737 thousand in nonaccrual loans. The decrease in other real estate owned assets was due to the sale of four properties totaling $2.1 million during the second and third quarters of 2020, which included the sale of a property related to a $1.0 million commercial loan relationship transferred from nonaccrual loans to other real estate owned during the first nine months of 2020. The increase in nonaccrual loans was primarily due to five commercial loan relationships and two residential loan relationships totaling $11.4 million moving to nonaccrual status, partially offset by the sale of a $7.9 million commercial loan relationship on nonaccrual status as well as the transfer of the $1.0 million commercial loan relationship from nonaccrual loans to other real estate owned during the second quarter of 2020.
Allowance for Loan Losses
We maintain the allowance for loan losses at a level we believe is sufficient to absorb probable incurred losses in our loan portfolio given the conditions at the time. Management determines the adequacy of the allowance based on periodic evaluations of the loan portfolio and other factors. These evaluations are inherently subjective as they require management to make material estimates, all of which may be susceptible to significant change. The allowance is increased by provisions charged to expense and decreased by actual charge-offs, net of recoveries.
Purchased Loans
The allowance for loan losses on purchased loans is based on credit deterioration subsequent to the acquisition date. In accordance with the accounting guidance for business combinations, there was no allowance brought forward on any of the acquired loans as any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition date. For purchased credit impaired loans, accounted for under ASC 310-30, management establishes an allowance for credit deterioration subsequent to the date of acquisition by re-estimating expected cash flows on a semi-annual basis with any decline in expected cash flows recorded as provision for loan losses. Impairment is measured as the excess of the recorded investment in a loan over the present value of expected future cash flows discounted at the pre-impairment accounting yield of the loan. For increases in cash flows expected to be collected, we first reverse any previously recorded allowance for loan losses, then adjust the amount of accretable yield recognized on a prospective basis over the loan's remaining life. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. For non-purchased credit impaired loans acquired in our acquisitions that are accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced since acquisition. We record an allowance for loan losses only when the calculated amount exceeds the discount remaining from acquisition that was established for the similar period covered in the allowance for loan loss calculation. For all other purchased loans, the
allowance is calculated in accordance with the methods used to calculate the allowance for loan losses for originated loans, as described below.
Originated Loans
The allowance for loan losses represents management's assessment of probable credit losses inherent in the loan portfolio. The allowance for loan losses consists of specific components, based on individual evaluation of certain loans, and general components for homogeneous pools of loans with similar risk characteristics.
Impaired loans include loans placed on nonaccrual status and troubled debt restructurings. Loans are considered impaired when based on current information and events it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. When determining if we will be unable to collect all principal and interest payments due in accordance with the original contractual terms of the loan agreement, we consider the borrower's overall financial condition, resources and payment record, support from guarantors, and the realizable value of any collateral. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
All impaired loans are identified to be individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the discounted expected future cash flows or at the fair value of collateral if repayment is collateral dependent.
The allowance for our nonimpaired loans, which includes commercial real estate, commercial and industrial, residential real estate, and consumer loans that are not individually evaluated for impairment, begins with a process of estimating the probable incurred losses in the portfolio. These estimates are established based on our historical loss data. Additional allowance estimates for commercial and industrial and commercial real estate loans are based on internal credit risk ratings. Internal credit risk ratings are assigned to each business loan at the time of approval and are subjected to subsequent periodic reviews by
senior management, at least annually or more frequently upon the occurrence of a circumstance that affects the credit risk of the loan.
The Company's current methodology on historical loss analysis incorporates and fully relies on the Company's own historical loss data. The historical loss estimates are established by loan type including commercial real estate, commercial and industrial, residential real estate, and consumer. In addition, consideration is given to the borrower’s rating for commercial and industrial and commercial real estate loans.
The following table presents, by loan type, the changes in the allowance for loan losses for the periods presented.
| | | | | For the three months ended September 30, | | For the nine months ended September 30, | | | For the three months ended September 30, | | For the nine months ended September 30, | |
| (Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | |
| Balance at beginning of period | | $ | 12,353 |
| | $ | 11,465 |
| | $ | 11,566 |
| | $ | 11,713 |
| Balance at beginning of period | | $ | 17,063 | | | $ | 12,353 | | | $ | 12,674 | | | $ | 11,566 | | |
| Loan charge-offs: | | | | | | | | | Loan charge-offs: | | |
| Commercial real estate | | — |
| | — |
| | (74 | ) | | (112 | ) | Commercial real estate | | — | | | — | | | — | | | (74) | | |
| Commercial and industrial | | (49 | ) | | (237 | ) | | (164 | ) | | (995 | ) | Commercial and industrial | | (10) | | | (49) | | | (1,729) | | | (164) | | |
| Residential real estate | | — |
| | — |
| | — |
| | (47 | ) | |
| | Consumer | | (34 | ) | | (8 | ) | | (48 | ) | | (23 | ) | Consumer | | (4) | | | (34) | | | (47) | | | (48) | | |
| Total loan charge-offs | | (83 | ) | | (245 | ) | | (286 | ) | | (1,177 | ) | Total loan charge-offs | | (124) | | | (83) | | | (1,886) | | | (286) | | |
| Recoveries of loans previously charged-off: | | | | | | | | | Recoveries of loans previously charged-off: | | |
| Commercial real estate | | 5 |
| | 23 |
| | 6 |
| | 25 |
| Commercial real estate | | 12 | | | 5 | | | 12 | | | 6 | | |
| Commercial and industrial | | 10 |
| | 8 |
| | 101 |
| | 814 |
| Commercial and industrial | | 15 | | | 10 | | | 47 | | | 101 | | |
| Residential real estate | | 12 |
| | 19 |
| | 55 |
| | 51 |
| Residential real estate | | 10 | | | 12 | | | 51 | | | 55 | | |
| Consumer | | 26 |
| | 1 |
| | 30 |
| | 1 |
| Consumer | | 8 | | | 26 | | | 22 | | | 30 | | |
| Total loan recoveries | | 53 |
| | 51 |
| | 192 |
| | 891 |
| Total loan recoveries | | 45 | | | 53 | | | 132 | | | 192 | | |
| Net charge-offs | | (30 | ) | | (194 | ) | | (94 | ) | | (286 | ) | Net charge-offs | | (79) | | | (30) | | | (1,754) | | | (94) | | |
| Provision expense (benefit) for loan losses | | (16 | ) | | 619 |
| | 835 |
| | 463 |
| |
| Provision expense for loan losses | | Provision expense for loan losses | | 4,270 | | | (16) | | | 10,334 | | | 835 | | |
| Balance at end of period | | $ | 12,307 |
| | $ | 11,890 |
| | $ | 12,307 |
| | $ | 11,890 |
| Balance at end of period | | $ | 21,254 | | | $ | 12,307 | | | $ | 21,254 | | | $ | 12,307 | | |
| Allowance for loan losses as a percentage of period-end loans | | 1.05 | % | | 1.07 | % | | 1.05 | % | | 1.07 | % | Allowance for loan losses as a percentage of period-end loans | | 1.15 | % | | 1.05 | % | | 1.15 | % | | 1.05 | % | |
| Net charge-offs to average loans | | 0.01 |
| | 0.07 |
| | 0.03 |
| | 0.04 |
| Net charge-offs to average loans | | 0.02 | | | 0.01 | | | 0.14 | | | 0.03 | | |
Our allowance for loan losses was $12.3$21.3 million, or 1.05%1.15% of loans, at September 30, 20192020 compared to $11.6$12.7 million, or 1.03% of loans, at December 31, 2018.2019. As of September 30, 2020, the allowance for loan losses as a percentage of loans excluding PPP loans, was 1.46%. The $741 thousand$8.6 million increase in the allowance for loan losses during the nine months ended September 30,since December 31, 2019 was primarily due to an increaseincreases in general reserves related to organica 25 basis point increase of the economic qualitative factors, reflecting the expected economic impact of the COVID-19 pandemic in the second quarter of 2020 as well as a 20-25 basis point increase of the qualitative factors in the third quarter of 2020 reflecting the uncertainty surrounding the impact of the COVID-19 pandemic on the loan growth.portfolio.
The following table presents, by loan type, the allocation of the allowance for loan losses at the dates presented.
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | Allocated
Allowance | | Percentage of loans in each category
to total loans |
| September 30, 2020 | | | | |
| Balance at end of period applicable to: | | | | |
| Commercial real estate | | $ | 9,819 | | | 39.6 | % |
| Commercial and industrial | | 8,180 | | | 43.8 | |
| Residential real estate | | 3,246 | | | 16.5 | |
| Consumer | | 9 | | | 0.1 | |
| Total loans | | $ | 21,254 | | | 100.0 | % |
| December 31, 2019 | | | | |
| Balance at end of period applicable to: | | | | |
| Commercial real estate | | $ | 5,773 | | | 49.2 | % |
| Commercial and industrial | | 5,515 | | | 33.4 | |
| Residential real estate | | 1,384 | | | 17.3 | |
| Consumer | | 2 | | | 0.1 | |
| Total loans | | $ | 12,674 | | | 100.0 | % |
| December 31, 2018 | | | | |
| Balance at end of period applicable to: | | | | |
| Commercial real estate | | $ | 5,227 | | | 49.9 | % |
| Commercial and industrial | | 5,174 | | | 34.0 | |
| Residential real estate | | 1,164 | | | 16.0 | |
| Consumer | | 1 | | | 0.1 | |
| Total loans | | $ | 11,566 | | | 100.0 | % |
| December 31, 2017 | | | | |
| Balance at end of period applicable to: | | | | |
| Commercial real estate | | $ | 4,852 | | | 49.4 | % |
| Commercial and industrial | | 5,903 | | | 36.5 | |
| Residential real estate | | 950 | | | 14.0 | |
| Consumer | | 8 | | | 0.1 | |
| Total loans | | $ | 11,713 | | | 100.0 | % |
| December 31, 2016 | | | | |
| Balance at end of period applicable to: | | | | |
| Commercial real estate | | $ | 4,124 | | | 51.5 | % |
| Commercial and industrial | | 5,932 | | | 35.9 | |
| Residential real estate | | 1,030 | | | 12.5 | |
| Consumer | | 3 | | | 0.1 | |
| Total loans | | $ | 11,089 | | | 100.0 | % |
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Goodwill
The Company has acquired three banks, Lotus Bank in March 2015, Bank of Michigan in March 2016, and Ann Arbor State Bank in January 2020, which resulted in the recognition of goodwill. Total goodwill was $35.6 million at September 30, 2020 and $9.4 million at December 31, 2019.
As a result of the unprecedented decline in economic conditions triggered by the COVID-19 pandemic, the market valuations, including our stock price, saw a significant decline in March 2020, which then continued into second quarter of 2020. These events indicated that goodwill may be impaired and resulted in us performing a qualitative goodwill impairment assessment in the second quarter of 2020. As a result of the analysis, we concluded that it was more-likely-than-not that the fair value of the reporting unit could be greater than its carrying amount.
Since the price of our stock did not fully recover during the third quarter of 2020, the Company decided to engage a reputable, third-party valuation firm to perform a quantitative analysis of goodwill as of August 31, 2020 ("the valuation date").
|
| | | | | | | |
| (Dollars in thousands) | | Allocated Allowance | | Percentage of loans in each category to total loans |
| September 30, 2019 | | |
| | |
|
| Balance at end of period applicable to: | | | | |
|
| Commercial real estate | | $ | 5,408 |
| | 48.3 | % |
| Commercial and industrial | | 5,671 |
| | 34.6 |
|
| Residential real estate | | 1,226 |
| | 17.0 |
|
| Consumer | | 2 |
| | 0.1 |
|
| Total loans | | $ | 12,307 |
| | 100.0 | % |
| December 31, 2018 | | | | |
| Balance at end of period applicable to: | | | | |
| Commercial real estate | | $ | 5,227 |
| | 49.9 | % |
| Commercial and industrial | | 5,174 |
| | 34.0 |
|
| Residential real estate | | 1,164 |
| | 16.0 |
|
| Consumer | | 1 |
| | 0.1 |
|
| Total loans | | $ | 11,566 |
| | 100.0 | % |
| December 31, 2017 | | | | |
| Balance at end of period applicable to: | | | | |
| Commercial real estate | | $ | 4,852 |
| | 49.4 | % |
| Commercial and industrial | | 5,903 |
| | 36.5 |
|
| Residential real estate | | 950 |
| | 14.0 |
|
| Consumer | | 8 |
| | 0.1 |
|
| Total loans | | $ | 11,713 |
| | 100.0 | % |
| December 31, 2016 | | | | |
| Balance at end of period applicable to: | | | | |
| Commercial real estate | | $ | 4,124 |
| | 51.5 | % |
| Commercial and industrial | | 5,932 |
| | 35.9 |
|
| Residential real estate | | 1,030 |
| | 12.5 |
|
| Consumer | | 3 |
| | 0.1 |
|
| Total loans | | $ | 11,089 |
| | 100.0 | % |
| December 31, 2015 | | | | |
| Balance at end of period applicable to: | | | | |
| Commercial real estate | | $ | 3,299 |
| | 50.9 | % |
| Commercial and industrial | | 3,256 |
| | 33.5 |
|
| Residential real estate | | 1,307 |
| | 15.4 |
|
| Consumer | | 28 |
| | 0.2 |
|
| Total loans | | $ | 7,890 |
| | 100.0 | % |
Furthermore, management noted that despite the market capitalization declining from December 2019 to September 2020 as a result of the COVID-19 pandemic, the Bank’s financial performance has remained positive. This is evidenced by the strong financial indicators for the Bank, solid credit quality ratios, as well as the strong capital position of the Bank. In addition, third quarter 2020 revenue reflected significant and continuing growth in our residential mortgage banking business, as well as net SBA fees related to PPP loans funded during second and third quarters of 2020. Management concurred with the conclusion derived from the quantitative goodwill analysis as of August 31, 2020 and determined that there were no material changes between the valuation date and September 30, 2020. As such, management concluded that it more likely than not that there was no goodwill impairment as of September 30, 2020.
Deposits
Total deposits were $1.19$1.94 billion at September 30, 20192020 and $1.13$1.14 billion at December 31, 2018,2019, representing 89.0%86.9% and 89.7%80.3% of total liabilities, respectively. The increase in deposits of $59.9$808.0 million was due tocomprised of increases of $44.9$359.4 million in demand deposits, $281.6 million in money market and savings deposits and $26.6 million in demand deposits, partially offset by a decrease of $11.5$167.1 million in time deposits. The increase in deposits was primarily due to $543.2 million of organic deposit growth during the nine months ended September 30, 2020 mainly as a result of PPP loan funds deposited into customer accounts. In addition, the acquisition of Ann Arbor State Bank in first quarter of 2020 contributed $264.8 million in deposits.
Our average interest-bearing deposit costs were 1.92%1.06% and 1.27%1.92% for the nine months ended September 30, 20192020 and 2018,2019, respectively. The increasedecrease in interest-bearing deposit costs between the two periods was impacted by the changing mix of deposit types, as well as by the increasedecrease in overnight market rates, as measured by the target federal funds interest rate. The target federal funds interest rate rose 1.00% during 2018decreased 25 basis points in each of August, September and October of 2019 and decreased 0.25%150 basis points during the nine months ended September 30, 2019.March 2020.
Brokered deposits. Brokered deposits are marketed through national brokerage firms to their customers in $1,000 increments. For these brokered deposits, detailed records of owners are maintained by the Depository Trust Company under the name of CEDE & Co. This relationship provides a large source of deposits for the Company. Due to the competitive nature of the brokered deposit market, brokered deposits tend to bear higher rates of interest than non-brokered deposits. At September 30, 20192020 and December 31, 2018,2019, the Company had approximately $77.5$54.4 million and $110.3$67.4 million inof brokered
deposits, respectively. The Company's ability to accept, roll-over or renew brokered deposits is contingent upon the Bank maintaining a capital level of "well-capitalized."
For periods prior to September 30, 2018, Certificate of Deposit Account Registry Service (CDARS) and reciprocal money market accounts were considered to be brokered deposits by regulatory authorities and were reported as such on quarterly Call Reports. With the passage of The Economic Growth, Regulatory Relief and Consumer Protection Act in May 2018, these items are no longer considered brokered deposits. Included in the brokered deposits total at September 30, 2019 and December 31, 2018 were2019 was $514 thousand and $1.8 million in CDARSCertificate of Deposit Account Registry Service ("CDARS") customer deposit accounts respectively. The $514 thousand at September 30, 2019 was due to an early withdrawal from a CDARS customer deposit account in the first quarter of 2018 that will bewas paid at maturity.
Management understands the importance of core deposits as a stable source of funding and may periodically implement various deposit promotion strategies to encourage core deposit growth, including recent promotions for time deposits and money market deposits.growth. For periods of rising interest rates, management has modeled the aggregate yields for non-maturity deposits and time deposits to increase at a slower pace than the increase in underlying market rates, which is intended to result in net interest margin expansion and an increase in net interest income.
The following table sets forth the distribution of average deposits by account type for the periods indicated below.
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 |
| (Dollars in thousands) | | Average
Balance | | Percent | | Average
Rate |
| Noninterest-bearing demand deposits | | $ | 640,095 | | | 34.6 | % | | — | % |
| Interest-bearing demand deposits | | 116,285 | | | 6.3 | | | 0.22 | |
| Money market and savings deposits | | 513,420 | | | 27.8 | | | 0.43 | |
| Time deposits | | 575,179 | | | 31.3 | | | 1.18 | |
| Total deposits | | $ | 1,844,979 | | | 100.0 | % | | 0.50 | % |
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| | | Three Months Ended September 30, 2019 |
| (Dollars in thousands) | | Average Balance | | Percent | | Average Rate |
| Noninterest-bearing demand deposits | | $ | 333,690 |
| | 26.7 | % | | — | % |
| Interest-bearing demand deposits | | 51,963 |
| | 4.2 |
| | 0.48 |
|
| Money market and savings deposits | | 320,363 |
| | 25.6 |
| | 1.45 |
|
| Time deposits | | 543,765 |
| | 43.5 |
| | 2.37 |
|
| Total deposits | | $ | 1,249,781 |
| | 100.0 | % | | 1.42 | % |
| | | | | | | |
| | | Nine Months Ended September 30, 2019 |
| (Dollars in thousands) | | Average Balance | | Percent | | Average Rate |
| Noninterest-bearing demand deposits | | $ | 316,754 |
| | 25.6 | % | | — | % |
| Interest-bearing demand deposits | | 53,894 |
| | 4.4 |
| | 0.45 |
|
| Money market and savings deposits | | 307,461 |
| | 24.9 |
| | 1.47 |
|
| Time deposits | | 556,922 |
| | 45.1 |
| | 2.32 |
|
| Total deposits | | $ | 1,235,031 |
| | 100.0 | % | | 1.43 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
| (Dollars in thousands) | | Average
Balance | | Percent | | Average
Rate |
| Noninterest-bearing demand deposits | | $ | 546,066 | | | 32.5 | % | | — | % |
| Interest-bearing demand deposits | | 112,579 | | | 6.7 | | | 0.31 | |
| Money market and savings deposits | | 458,438 | | | 27.3 | | | 0.65 | |
| Time deposits | | 564,396 | | | 33.5 | | | 1.55 | |
| Total deposits | | $ | 1,681,479 | | | 100.0 | % | | 0.72 | % |
The following table shows the contractual maturity of time deposits, including CDARsCDARS and IRA deposits and other brokered funds, of $100 thousand and over that were outstanding as of the date presented.
| | | | | | | | |
| (Dollars in thousands) | | September 30, 2020 |
| Maturing in: | | |
| 3 months or less | | $ | 5,232 | |
| 3 months to 6 months | | 140,383 | |
| 6 months to 1 year | | 130,872 | |
| 1 year or greater | | 243,354 | |
| Total | | $ | 519,841 | |
|
| | | | |
| (Dollars in thousands) | | September 30, 2019 |
| Maturing in: | | |
|
| 3 months or less | | $ | — |
|
| 3 months to 6 months | | 141,851 |
|
| 6 months to 1 year | | 72,990 |
|
| 1 year or greater | | 135,863 |
|
| Total | | $ | 350,704 |
|
Borrowings
Total debt outstanding at September 30, 20192020 was $126.9$261.4 million, an increase of $12.4$4.6 million from $114.5$256.7 million at December 31, 2018.2019. The increase in total borrowings was primarily due to a $100.0increases of $34.1 million increasein FRB borrowings to help facilitate the funding of PPP loans, and $36.2 million in long-term FHLB advances, and a $5.0 million increase in our federal funds purchased, partially offset by a decreasedecreases of $90.0$60.0 million in short-term FHLB advances, $5.0 million in federal funds purchased and $2.5 million decrease$664 thousand in our FHLB line of credit. The increase in total borrowings was a result of more long-term borrowings neededsecurities sold under agreements to fund the liquidity needs of the Company, as well as a decrease in brokered deposits.repurchase.
At September 30, 2019,2020, the Company had $34.1 million of debt outstanding with the Federal Reserve Bank under the PPP Liquidity Facility. The FRB borrowings bear a 0.35% fixed interest rate and mature two years after the origination date of the respective PPP loans that have been pledged to secure them.
At September 30, 2020, FHLB advances were secured by a blanket lien on $419.6on $510.6 million of real estate-related loans, and repurchase agreements were secured by securities with a fair value of $1.2$1.9 million. At December 31, 2018,2019, FHLB advances were secured by a blanket lien on $372.5$408.9 million of real estate-related loans, and repurchase agreements were secured by securities with a fair value of $1.0$1.5 million.
As of September 30, 20192020, the Company had $45.0 million of subordinated notes outstanding and debt issuance costs of $445 thousand related to these subordinated notes. As of December 31, 2018,2019, the Company had $45.0 million of subordinated notes outstanding and debt issuance costs of $560 thousand related to these subordinated notes.
The $15.0 million of subordinated notes outstanding at each date, and debt issuance costs of $66 thousand and $109 thousand, respectively, related to these subordinated notes. The notesissued on December 21, 2015 bear a fixed interest rate of 6.375% per annum, payable semi-annuallysemiannually through December 15, 2020. The notes will bear a floating interest rate of three-month LIBOR plus 477 basis points payable quarterly after December 15, 2020 through maturity. The notes mature no later than December 15, 2025, and the Company has the option to redeem or prepay any or all of the subordinated notes without premium or penalty any time after December 15, 2020 or atupon an occurrence of a Tier 2 capital event or tax event.
The $30.0 million of subordinated notes issued on December 18, 2019 bear a fixed interest rate of 4.75% per annum, payable semiannually through December 18, 2024. The notes will bear a floating interest rate of three-month secured overnight financing rate (SOFR) plus 311 basis points payable quarterly after December 18, 2024 through maturity. The notes mature no later than December 18, 2029, and the Company has the option to redeem any or all of the subordinated notes without premium or penalty any time inafter December 18, 2024 or upon the occurrence of a Tier 2 capital event of certain changes that affect the deductibility of interest foror tax purposes or the treatmentevent. The issuance of the $30.0 million subordinated notes reflected management's efforts to fund the liquidity needs of the Company as Tier 2 Capital.well as pay the merger consideration to purchase Ann Arbor State Bank.
Selected financial information pertaining to the components of our short-term borrowings for the periods and as of the dates indicated is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the three months ended September 30, | | For the nine months ended September 30, | | | | | | |
| (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | | | | | |
| Securities sold under agreements to repurchase | | | | | | | | | | | | | | |
| Average daily balance | | $ | 163 | | | $ | 563 | | | $ | 330 | | | $ | 537 | | | | | | | |
| Weighted-average rate during period | | 0.30 | % | | 0.30 | % | | 0.30 | % | | 0.30 | % | | | | | | |
| Amount outstanding at period end | | $ | 187 | | | $ | 545 | | | $ | 187 | | | $ | 545 | | | | | | | |
| Weighted-average rate at period end | | 0.30 | % | | 0.30 | % | | 0.30 | % | | 0.30 | % | | | | | | |
| Maximum month-end balance | | $ | 187 | | | $ | 866 | | | $ | 936 | | | $ | 866 | | | | | | | |
| FHLB Advances | | | | | | | | | | | | | | |
| Average daily balance | | $ | — | | | $ | 6,630 | | | $ | 5,456 | | | $ | 27,903 | | | | | | | |
| Weighted-average rate during period | | — | % | | 2.57 | % | | 0.99 | % | | 2.49 | % | | | | | | |
| Amount outstanding at period end | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | | | |
| Weighted-average rate at period end | | — | % | | — | % | | — | % | | — | % | | | | | | |
| Maximum month-end balance | | $ | — | | | $ | — | | | $ | 25,000 | | | $ | 95,000 | | | | | | | |
| FHLB Line of Credit | | | | | | | | | | | | | | |
| Average daily balance | | $ | 63 | | | $ | — | | | $ | 60 | | | $ | 111 | | | | | | | |
| Weighted-average rate during period | | — | % | | — | % | | 1.29 | % | | 2.92 | % | | | | | | |
| Amount outstanding at period end | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | | | |
| Weighted-average rate at period end | | — | % | | — | % | | — | % | | — | % | | | | | | |
| Maximum month-end balance | | $ | — | | | $ | — | | | $ | — | | | $ | 895 | | | | | | | |
| Federal funds purchased | | | | | | | | | | | | | | |
| Average daily balance | | $ | — | | | $ | 109 | | | $ | 193 | | | $ | 2,044 | | | | | | | |
| Weighted-average rate during period | | — | % | | — | % | | 2.73 | % | | 2.74 | % | | | | | | |
| Amount outstanding at period end | | $ | — | | | $ | 10,000 | | | $ | — | | | $ | 10,000 | | | | | | | |
| Weighted-average rate at period end | | — | % | | 1.90 | % | | — | % | | 1.90 | % | | | | | | |
| Maximum month-end balance | | $ | — | | | $ | 10,000 | | | $ | — | | | $ | 15,000 | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | For the three months ended September 30, | | For the nine months ended September 30, |
| (Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Securities sold under agreements to repurchase | | |
| | |
| | |
| | |
|
| Average daily balance | | $ | 563 |
| | $ | 9,824 |
| | $ | 537 |
| | $ | 4,413 |
|
| Weighted-average rate during period | | 0.30 | % | | 2.00 | % | | 0.30 | % | | 1.76 | % |
| Amount outstanding at period end | | $ | 545 |
| | $ | 10,061 |
| | $ | 545 |
| | $ | 10,061 |
|
| Weighted-average rate at period end | | 0.30 | % | | 2.34 | % | | 0.30 | % | | 2.34 | % |
| Maximum month-end balance | | $ | 866 |
| | $ | 10,338 |
| | $ | 866 |
| | $ | 12,718 |
|
| FHLB Advances | | | | | | | | |
| Average daily balance | | $ | 6,630 |
| | $ | 71,054 |
| | $ | 27,903 |
| | $ | 47,077 |
|
| Weighted-average rate during period | | 2.57 | % | | 2.14 | % | | 2.49 | % | | 1.94 | % |
| Amount outstanding at period end | | $ | — |
| | $ | 125,000 |
| | $ | — |
| | $ | 125,000 |
|
| Weighted-average rate at period end | | — | % | | 1.94 | % | | — | % | | 1.94 | % |
| Maximum month-end balance | | $ | — |
| | $ | 125,000 |
| | $ | 95,000 |
| | $ | 125,000 |
|
| FHLB Line of Credit | | | | | | | | |
| Average daily balance | | $ | — |
| | $ | 3,026 |
| | $ | 111 |
| | $ | 4,085 |
|
| Weighted-average rate during period | | — | % | | 2.40 | % | | 2.92 | % | | 2.06 | % |
| Amount outstanding at period end | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Weighted-average rate at period end | | — | % | | — | % | | — | % | | — | % |
| Maximum month-end balance | | $ | — |
| | $ | 37,081 |
| | $ | 895 |
| | $ | 37,081 |
|
| Federal funds purchased | | | | | | | | |
| Average daily balance | | $ | 109 |
| | $ | — |
| | $ | 2,044 |
| | $ | — |
|
| Weighted-average rate during period | | — | % | | — | % | | 2.74 | % | | — | % |
| Amount outstanding at period end | | $ | 10,000 |
| | $ | — |
| | $ | 10,000 |
| | $ | — |
|
| Weighted-average rate at period end | | 1.90 | % | | — | % | | 1.90 | % | | — | % |
| Maximum month-end balance | | $ | 10,000 |
| | $ | — |
| | $ | 15,000 |
| | $ | — |
|
Capital Resources
Shareholders' equity is influenced primarily by earnings, dividends, the Company's sales and repurchases of its common stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized gains or losses, net of taxes, on available for sale securities.
Shareholders' equity increased $16.2$38.8 million to $168.0$209.5 million at September 30, 20192020 as compared to $151.8$170.7 million at December 31, 2018.2019. The increase in shareholders' equity was primarily impacted by $11.4$23.4 million from the issuance of preferred stock as well as $12.0 million of net income generated during the nine months ended September 30, 2019 as well as2020 and an increase of $7.0$4.5 million of other comprehensive income due to increases in net unrealized gains on available-for-sale securities, partially offset by $2.1$1.2 million of dividends declared on our common stock and $620 thousand of stock repurchased through the share buyback program and $928 thousand of dividends declared on our common stock during the nine months ended September 30, 2019.2020.
The following table summarizes the changes in our shareholders' equity for the periods indicated below:
| | | | | For the three months ended September 30, | | For the nine months ended September 30, | | | For the three months ended September 30, | | For the nine months ended September 30, | |
| (Dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | |
| Balance at beginning of period | | $ | 162,867 |
| | $ | 143,445 |
| | $ | 151,760 |
| | $ | 107,960 |
| Balance at beginning of period | | $ | 180,259 | | | $ | 162,867 | | | $ | 170,703 | | | $ | 151,760 | | |
| Net income | | 4,409 |
| | 3,255 |
| | 11,431 |
| | 10,435 |
| Net income | | 5,209 | | | 4,409 | | | 12,040 | | | 11,431 | | |
| Other comprehensive income (loss) | | 1,238 |
| | (986 | ) | | 7,120 |
| | (3,174 | ) | |
| Initial public offering of 1,150,765 shares of common stock, net of issuance costs | | — |
| | — |
| | — |
| | 29,030 |
| |
| Other comprehensive income | | Other comprehensive income | | 783 | | | 1,238 | | | 4,451 | | | 7,120 | | |
| | Preferred stock offering, net of issuance costs | | Preferred stock offering, net of issuance costs | | 23,370 | | | — | | | 23,370 | | | — | | |
| Redeemed stock | | (488 | ) | | — |
| | (2,108 | ) | | — |
| Redeemed stock | | — | | | (488) | | | (620) | | | (2,108) | | |
| Dividends declared | | (310 | ) | | (465 | ) | | (928 | ) | | (662 | ) | |
| Common stock dividends declared | | Common stock dividends declared | | (387) | | | (310) | | | (1,160) | | | (928) | | |
| Exercise of stock options | | 63 |
| | 12 |
| | 219 |
| | 1,269 |
| Exercise of stock options | | — | | | 63 | | | 95 | | | 219 | | |
| | Stock-based compensation expense | | 189 |
| | 198 |
| | 474 |
| | 601 |
| Stock-based compensation expense | | 234 | | | 189 | | | 589 | | | 474 | | |
| Balance at end of period | | $ | 167,968 |
| | $ | 145,459 |
| | $ | 167,968 |
| | $ | 145,459 |
| Balance at end of period | | $ | 209,468 | | | $ | 167,968 | | | $ | 209,468 | | | $ | 167,968 | | |
We strive to maintain an adequate capital base to support our activities in a safe and sound manner while at the same time attempting to maximize shareholder value. We assess capital adequacy against the risk inherent in our balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity has the greatest capacity to absorb unexpected loss.
We are subject to various regulatory capital requirements both at the Company and at the Bank level. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting policies. We have consistently maintained regulatory capital ratios at or above the well-capitalized standards.
The Basel III rules requireA capital conservation buffer, comprised of common equity tier 1 capital, is established above the Company toregulatory minimum capital requirements, and financial institutions that maintain a capital conservation buffer of common equity capital ofgreater than 2.5% aboveare generally not subject to the minimum risk-weighted assets ratios, which isadditional restrictions on dividends, share repurchases and discretionary bonus payments to executive officers under the fully phased-in amount of the capital conservation buffer. The capital conservation buffer requirement was 2.5% as of September 30, 2019 and 1.875% as of December 31, 2018, which is reflected in the table below.Basel III Rule.
At September 30, 2020 and December 31, 2019, the Company andBank's capital ratios were in excess of the Bank met allrequirement to be "well capitalized" under the capital adequacy requirements to which they were subject.regulatory framework for prompt corrective action.
The summary below compares the actual capital ratios with the minimum quantitative measures established by regulation to ensure capital adequacy:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual
Capital
Ratio | | Capital
Adequacy
Regulatory
Requirement | | Capital Adequacy
Regulatory Requirement +
Capital Conservation
Buffer(1) | | Well
Capitalized
Regulatory
Requirement |
| September 30, 2020 | | | | | | | | |
| Common equity tier 1 to risk-weighted assets: | | | | | | | | |
| Consolidated | | 8.83 | % | | 4.50 | % | | 7.00 | % | | |
| Bank | | 11.23 | % | | 4.50 | % | | 7.00 | % | | 6.50 | % |
| Tier 1 capital to risk-weighted assets: | | | | | | | | |
| Consolidated | | 10.31 | % | | 6.00 | % | | 8.50 | % | | |
| Bank | | 11.23 | % | | 6.00 | % | | 8.50 | % | | 8.00 | % |
| Total capital to risk-weighted assets: | | | | | | | | |
| Consolidated | | 14.39 | % | | 8.00 | % | | 10.50 | % | | |
| Bank | | 12.48 | % | | 8.00 | % | | 10.50 | % | | 10.00 | % |
| Tier 1 capital to average assets (leverage ratio): | | | | | | | | |
| Consolidated | | 7.17 | % | | 4.00 | % | | 4.00 | % | | |
| Bank | | 7.83 | % | | 4.00 | % | | 4.00 | % | | 5.00 | % |
| December 31, 2019 | | | | | | | | |
| Common equity tier 1 to risk-weighted assets: | | | | | | | | |
| Consolidated | | 11.72 | % | | 4.50 | % | | 7.00 | % | | |
| Bank | | 12.27 | % | | 4.50 | % | | 7.00 | % | | 6.50 | % |
| Tier 1 capital to risk-weighted assets: | | | | | | | | |
| Consolidated | | 11.72 | % | | 6.00 | % | | 8.50 | % | | |
| Bank | | 12.27 | % | | 6.00 | % | | 8.50 | % | | 8.00 | % |
| Total capital to risk-weighted assets: | | | | | | | | |
| Consolidated | | 15.99 | % | | 8.00 | % | | 10.50 | % | | |
| Bank | | 13.24 | % | | 8.00 | % | | 10.50 | % | | 10.00 | % |
| Tier 1 capital to average assets (leverage ratio): | | | | | | | | |
| Consolidated | | 10.41 | % | | 4.00 | % | | 4.00 | % | | |
| Bank | | 10.96 | % | | 4.00 | % | | 4.00 | % | | 5.00 | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1) Reflects the capital conservation buffer of 2.5%.
|
| | | | | | | | | | | | |
| | | Actual Capital Ratio | | Capital Adequacy Regulatory Requirement | | Capital Adequacy Regulatory Requirement + Capital Conservation Buffer(1) | | Well Capitalized Regulatory Requirement |
| September 30, 2019 | | | | |
| | |
| | |
|
| Common equity tier 1 to risk-weighted assets: | | | | |
| | |
| | |
|
| Consolidated | | 11.73 | % | | 4.50 | % | | 7.00 | % | |
|
|
| Bank | | 12.25 | % | | 4.50 | % | | 7.00 | % | | 6.50 | % |
| Tier 1 capital to risk-weighted assets: | | | | | | | | |
|
| Consolidated | | 11.73 | % | | 6.00 | % | | 8.50 | % | |
|
|
| Bank | | 12.25 | % | | 6.00 | % | | 8.50 | % | | 8.00 | % |
| Total capital to risk-weighted assets: | | | | | | | | |
|
| Consolidated | | 13.84 | % | | 8.00 | % | | 10.50 | % | |
|
|
| Bank | | 13.22 | % | | 8.00 | % | | 10.50 | % | | 10.00 | % |
| Tier 1 capital to average assets (leverage ratio): | | | | | | | | |
|
| Consolidated | | 10.12 | % | | 4.00 | % | | 4.00 | % | |
|
|
| Bank | | 10.64 | % | | 4.00 | % | | 4.00 | % | | 5.00 | % |
| December 31, 2018 | | |
| | |
| | |
| | |
|
| Common equity tier 1 to risk-weighted assets: | | |
| | |
| | |
| | |
|
| Consolidated | | 11.82 | % | | 4.50 | % | | 6.38 | % | |
|
|
| Bank | | 12.12 | % | | 4.50 | % | | 6.38 | % | | 6.50 | % |
| Tier 1 capital to risk-weighted assets: | | | | | | | | |
|
| Consolidated | | 11.82 | % | | 6.00 | % | | 7.88 | % | |
|
|
| Bank | | 12.12 | % | | 6.00 | % | | 7.88 | % | | 8.00 | % |
| Total capital to risk-weighted assets: | | | | | | | | |
|
| Consolidated | | 14.00 | % | | 8.00 | % | | 9.88 | % | |
|
|
| Bank | | 13.07 | % | | 8.00 | % | | 9.88 | % | | 10.00 | % |
| Tier 1 capital to average assets (leverage ratio): | | | | | | | | |
|
| Consolidated | | 10.21 | % | | 4.00 | % | | 4.00 | % | |
|
|
| Bank | | 10.48 | % | | 4.00 | % | | 4.00 | % | | 5.00 | % |
| |
(1) | Reflects the capital conservation buffer of 2.5% and 1.875% applicable during 2019 and 2018, respectively. |
Contractual Obligations
In the ordinary course of our operations, we enter into certain contractual obligations. Total contractual obligations at September 30, 20192020 were $610.9$873.4 million, an increase of $3.7$173.1 million, from $607.2$700.3 million at December 31, 2018.2019. The increase of $3.7$173.1 million was primarily due to increases of $100.0$167.1 million in time deposits, $36.2 million in long-term FHLB advances, $34.1 million in FRB borrowings under the Paycheck Protection Program Liquidity Facility ("PPPLF"), and $2.8$1.4 million in operating lease obligations, partially offset by a decrease of $87.6$65.7 million in short-term borrowings and $11.5 million in time deposits.borrowings.
The following tables present our contractual obligations as of September 30, 20192020 and December 31, 2018.2019.The $34.1 million of FRB borrowings under PPPLF mature two years after the origination date of the respective PPP loans that have been pledged to secure them.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Contractual Maturities as of September 30, 2020 |
| (Dollars in thousands) | | Less Than
One Year | | One to
Three Years | | Three to
Five Years | | Over
Five Years | | Total |
| Operating lease obligations | | $ | 1,739 | | | $ | 3,507 | | | $ | 2,613 | | | $ | 4,074 | | | $ | 11,933 | |
| Short-term borrowings | | 187 | | | — | | | — | | | — | | | 187 | |
| Long-term borrowings | | 3,202 | | | 51,420 | | | 32,000 | | | 130,000 | | | 216,622 | |
| Subordinated notes | | — | | | — | | | — | | | 44,555 | | | 44,555 | |
| Time deposits | | 444,662 | | | 150,575 | | | 4,905 | | | — | | | 600,142 | |
| Total | | $ | 449,790 | | | $ | 205,502 | | | $ | 39,518 | | | $ | 178,629 | | | $ | 873,439 | |
| | | | | Contractual Maturities as of September 30, 2019 | | | Contractual Maturities as of December 31, 2019 |
| (Dollars in thousands) | | Less Than One Year | | One to Three Years | | Three to Five Years | | Over Five Years | | Total | (Dollars in thousands) | | Less Than
One Year | | One to
Three Years | | Three to
Five Years | | Over
Five Years | | Total |
| Operating lease obligations | | $ | 1,303 |
| | $ | 2,228 |
| | $ | 2,034 |
| | $ | 5,145 |
| | $ | 10,710 |
| Operating lease obligations | | $ | 1,341 | | | $ | 2,351 | | | $ | 2,149 | | | $ | 4,736 | | | $ | 10,577 | |
| Short-term borrowings | | 10,545 |
| | — |
| | — |
| | — |
| | 10,545 |
| Short-term borrowings | | 65,851 | | | — | | | — | | | — | | | 65,851 | |
| Long-term borrowings | | — |
| | 11,392 |
| | 10,000 |
| | 80,000 |
| | 101,392 |
| Long-term borrowings | | — | | | 11,375 | | | 30,000 | | | 105,000 | | | 146,375 | |
| Subordinated notes | | — |
| | — |
| | — |
| | 14,934 |
| | 14,934 |
| Subordinated notes | | — | | | — | | | — | | | 44,440 | | | 44,440 | |
| Time deposits | | 413,145 |
| | 58,514 |
| | 1,666 |
| | — |
| | 473,325 |
| Time deposits | | 392,839 | | | 39,855 | | | 378 | | | — | | | 433,072 | |
| Total | | $ | 424,993 |
| | $ | 72,134 |
| | $ | 13,700 |
| | $ | 100,079 |
| | $ | 610,906 |
| Total | | $ | 460,031 | | | $ | 53,581 | | | $ | 32,527 | | | $ | 154,176 | | | $ | 700,315 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Contractual Maturities as of December 31, 2018 |
| (Dollars in thousands) | | Less Than
One Year | | One to
Three Years | | Three to
Five Years | | Over
Five Years | | Total |
| Operating lease obligations | | $ | 1,160 |
| | $ | 1,849 |
| | $ | 1,628 |
| | $ | 3,235 |
| | $ | 7,872 |
|
| Short-term borrowings | | 98,129 |
| | — |
| | — |
| | — |
| | 98,129 |
|
| Long-term borrowings | | — |
| | — |
| | 1,445 |
| | — |
| | 1,445 |
|
| Subordinated notes | | — |
| | — |
| | — |
| | 14,891 |
| | 14,891 |
|
| Time deposits | | 408,408 |
| | 74,055 |
| | 2,409 |
| | — |
| | 484,872 |
|
| Total | | $ | 507,697 |
| | $ | 75,904 |
| | $ | 5,482 |
| | $ | 18,126 |
| | $ | 607,209 |
|
Off-Balance Sheet Arrangements
In the normal course of business, the Company offers a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include outstanding commitments to extend credit, credit lines, commercial letters of credit and standby letters of credit. These are agreements to provide credit, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies used for loans are used to make such commitments, including obtaining collateral at exercise of the commitment.
We maintain an allowance to cover probable losses inherent in our financial instruments with off-balance sheet risk. At September 30, 2019,2020, the allowance for off-balance sheet risk was $326$498 thousand, compared to $38$318 thousand at December 31, 2018,2019, and was included in "Other liabilities" on our consolidated balance sheets. The increase in the allowance for off-balance sheet risk as compared to December 31, 2018 was due to a change in the assumptions within the calculation for provision of unfunded commitments, which resulted in a better representation of our line of credit utilization.
A summary of the contractual amounts of our exposure to off-balance sheet risk is as follows.
| | | | | September 30, 2019 | | December 31, 2018 | | | September 30, 2020 | | December 31, 2019 |
| (Dollars in thousands) | | Fixed Rate | | Variable Rate | | Fixed Rate | | Variable Rate | (Dollars in thousands) | | Fixed Rate | | Variable Rate | | Fixed Rate | | Variable Rate |
| Commitments to make loans | | $ | 16,252 |
| | $ | 22,769 |
| | $ | 8,608 |
| | $ | 10,900 |
| Commitments to make loans | | $ | 5,302 | | | $ | 5,295 | | | $ | 16,276 | | | $ | 20,128 | |
| Unused lines of credit | | 19,544 |
| | 289,779 |
| | 18,672 |
| | 229,490 |
| Unused lines of credit | | 30,496 | | | 361,749 | | | 28,723 | | | 288,086 | |
| Unused standby letters of credit and commercial letters of credit | | 4,195 |
| | — |
| | 3,861 |
| | 232 |
| Unused standby letters of credit and commercial letters of credit | | 3,705 | | | 2,028 | | | 4,895 | | | — | |
Of the total unused lines of credit of $309.3$392.2 million at September 30, 2019, $49.92020, $49.2 million was comprised of undisbursed construction loan commitments. The Company expects to have sufficient access to liquidity to fund its off-balance sheet commitments.
Liquidity
Liquidity management is the process by which we manage the flow of funds necessary to meet our financial commitments on a timely basis and at a reasonable cost and to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of our operations, and capital expenditures. Liquidity is monitored and closely managed by the Bank's Asset and Liability Committee (ALCO), a group of senior officers from the finance, enterprise risk management, treasury, and lending areas, as well as two board members. It is ALCO's responsibility to ensure we have the necessary level of funds available for normal operations as well as maintain a contingency funding policy to ensure that potential liquidity stress events are planned for and quickly identified, and management has plans in place to respond. ALCO has created policies which establish limits and require measurements to monitor liquidity trends, including modeling and management reporting that identifies the amounts and costs of all available funding sources. In addition, we have implemented modeling software that projects cash flows from the balance sheet under a broad range of potential scenarios, including severe changes in the economic environment.
During the second quarter of 2020, management took steps to increase liquidity on the balance sheet and expand the capacity for additional funding in the uncertain environment. Management maintained an elevated level of liquidity on the balance sheet in the third quarter of 2020, and will continue to monitor and determine the appropriate levels of liquidity as economic conditions develop. Furthermore, the Company continues to monitor its capital ratios regularly and has benefited from income from participation in the PPP, offset by potential stress from the weakening economy due to the COVID-19 pandemic.
At September 30, 2019,2020, we had liquid assets of $205.3$316.8 million, compared to $213.7$257.5 million at December 31, 2018.2019. Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks and unencumbered securities available-for-sale. Cash and due from banks increased to $176.5 million, compared to $103.9 million at December 31, 2019 primarily as a result of excess deposits.
The Bank is a member of the FHLB, which provides short- and long-term funding to its members through advances collateralized by real estate-related assets and other select collateral, most typically in the form of debt securities. The actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. As of September 30, 2019,2020, we had $100.0$181.2 million of outstanding borrowings from the FHLB, and these advances were secured by a blanket lien on $419.6$510.6 million of real estate-related loans. Based on this collateral and the approved policy limits, the Company is eligible to borrow up to an additional $144.9$211.1 million withfrom the FHLB. Additionally, the Bank can borrow up to $130.0$122.5 million through the unsecured lines of credit it has established with nineeight other banks, as well as $4.9$5.3 million through a secured line with the Federal Reserve Bank.
Further, because the Bank is "well capitalized," it can accept wholesale funding up to 40% of total assets, or approximately $602.5$977.5 million, based on current policy limits at September 30, 2019.2020. Management believed that as of September 30, 2019,2020, we had adequate resources to fund all of our commitments.
The following liquidity ratios compare certain assets and liabilities to total deposits or total assets.
| | | | | | | | | | | | | | |
| | | September 30, 2020 | | December 31, 2019 |
| Investment securities available-for-sale to total assets | | 10.36 | % | | 11.41 | % |
| Loans to total deposits | | 94.88 | | | 108.12 | |
| Interest-earning assets to total assets | | 94.32 | | | 95.58 | |
| Interest-bearing deposits to total deposits | | 67.46 | | | 71.30 | |
|
| | | | | | |
| | | September 30, 2019 | | December 31, 2018 |
| Investment securities available-for-sale to total assets | | 13.60 | % | | 14.42 | % |
| Loans to total deposits | | 97.86 |
| | 99.29 |
|
| Interest-earning assets to total assets | | 94.11 |
| | 95.31 |
|
| Interest-bearing deposits to total deposits | | 73.04 |
| | 72.73 |
|
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. Interest-rate risk is the risk to earnings and equity value arising from changes in market interest rates and arises in the normal course of business to the extent that there is a divergence between the amount of our interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, re-price, or mature in specified periods. We seek to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. ALCO oversees market risk management, monitoring risk measures, limits, and policy guidelines for managing the amount of interest-rate risk and its effect on net interest income and capital. Our Board of Directors approves policy limits with respect to interest rate risk.
Interest Rate Risk
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective interest rate risk management begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk position given business activities, management objectives, market expectations and ALCO policy limits and guidelines.
Interest rate risk can come in a variety of forms, including repricing risk, basis risk, yield curve risk and option risk. Repricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences in the timing of when those interest rate changes impact our assets and liabilities. Basis risk is the risk of adverse consequence resulting from unequal change in the spread between two or more rates for different instruments with the same maturity. Yield curve risk is the risk of adverse consequence resulting from unequal changes in the spread between two or more rates for different maturities for the same or different instruments. Option risk in financial instruments arises from embedded options such as options provided to borrowers to make unscheduled loan prepayments, options provided to debt issuers to exercise call options prior to maturity, and depositor options to make withdrawals and early redemptions.
We regularly review our exposure to changes in interest rates. Among the factors we consider are changes in the mix of interest-earning assets and interest-bearing liabilities, interest rate spreads and repricing periods. ALCO reviews, on at least a quarterly basis, our interest rate risk position.
The interest rate risk position is measured and monitored at the Bank using net interest income simulation models and economic value of equity sensitivity analysis that capture both short-term and long-term interest-rate risk exposure.
Modeling the sensitivity of net interest income and the economic value of equity to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. The models used for these measurements rely on estimates of the potential impact that changes in interest rates may have on the value and prepayment speeds on all components of our loan portfolio, investment portfolio, as well as embedded options and cash flows of other assets and liabilities. Balance sheet growth assumptions are also included in the simulation modeling process. The analysis provides a framework as to what our overall sensitivity position is as of our most recent reported position and the impact that potential changes in interest rates may have on net interest income and the economic value of our equity.
Modeling assumptions were enhanced in the first quarter of 2020 to include a more robust modeling of decay rates for non-maturity deposits. The assumption changes more accurately reflect the interest rate position of the Bank to increase in value for rising interest rate scenarios. In addition, the lower rate environment in the quarter extended the expected average life on certain borrowings.
Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios including instantaneous shocks.
The estimated impact on our net interest income as of September 30, 20192020 and December 31, 2018,2019, assuming immediate parallel moves in interest rates is presented in the table below.
| | | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
| Change in rates | Following 12 months | | Following 24 months | | Following 12 months | | Following 24 months | Change in rates | Following 12 months | | Following 24 months | | Following 12 months | | Following 24 months |
| +400 basis points | 1.5 | % | | (2.0 | )% | | 1.8 | % | | (1.0 | )% | +400 basis points | (2.6) | % | | 4.8 | % | | 5.8 | % | | 1.9 | % |
| +300 basis points | 2.0 |
| | (0.3 | ) | | 1.8 |
| | (0.2 | ) | +300 basis points | 1.2 | | | 7.0 | | | 5.2 | | | 2.6 | |
| +200 basis points | 2.0 |
| | 0.8 |
| | 1.5 |
| | 0.4 |
| +200 basis points | 3.2 | | | 8.3 | | | 4.2 | | | 2.7 | |
| +100 basis points | 1.4 |
| | 0.9 |
| | 1.3 |
| | 0.8 |
| +100 basis points | 3.9 | | | 7.9 | | | 2.7 | | | 2.1 | |
| -100 basis points | (2.0 | ) | | (2.0 | ) | | (0.9 | ) | | (0.8 | ) | -100 basis points | (2.8) | | | (4.2) | | | (4.0) | | | (3.9) | |
Management strategies may impact future reporting periods, as our actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the difference between actual experience and the characteristics assumed, as well as changes in market conditions. Market-based prepayment speeds are factored into the analysis for loan and securities portfolios. Rate sensitivity for transactional deposit accounts is modeled based on both historical experience and external industry studies.
We use economic value of equity sensitivity analysis to understand the impact of interest rate changes on long-term cash flows, income, and capital. Economic value of equity is based on discounting the cash flows for all balance sheet instruments under different interest rate scenarios. Deposit premiums are based on external industry studies and utilizing historical experience.
The table below presents the change in our economic value of equity as of September 30, 20192020 and December 31, 2018,2019, assuming immediate parallel shifts in interest rates. Changes noted between the two periods reflect recent enhancements in our asset/liability modeling, including projected values for non-maturity deposits in changing interest rate environments and limitations on lowering certain deposit rates below zero.
| | | | | | | | | | | |
| Change in rates | September 30, 2020 | | December 31, 2019 |
| +400 basis points | 24.0 | % | | (39.4) | % |
| +300 basis points | 27.0 | | | (28.4) | |
| +200 basis points | 26.0 | | | (17.8) | |
| +100 basis points | 19.0 | | | (8.1) | |
| -100 basis points | (30.0) | | | 6.6 | |
|
| | | | | |
| Change in rates | September 30, 2019 | | December 31, 2018 |
| +400 basis points | (35.2 | )% | | (38.1 | )% |
| +300 basis points | (25.0 | ) | | (28.5 | ) |
| +200 basis points | (15.7 | ) | | (18.3 | ) |
| +100 basis points | (7.4 | ) | | (8.4 | ) |
| -100 basis points | 6.2 |
| | 7.9 |
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Item 4 – Controls and Procedures
Evaluation of disclosure controls and procedures. The Company’s management, including our President and Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the 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 rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controlinternal control over Financial Reportinfinancial reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1 – Legal Proceedings
In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits, none of which we expect to have a material effect on the Company. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security, anti-money laundering and anti-terrorism), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we or any of our subsidiaries is a party or to which our property is the subject.
Item 1A – Risk Factors
There have been no material changes fromIn addition to the risk factors previously disclosedset forth under Part I, Item 1A “Risk Factors” in the “Risk Factors” section included in our Annual Report onCompany’s Form 10-K for the fiscal year ended December 31, 2018.2019, the following risk factors apply to the Company.
The COVID-19 pandemic has adversely impacted our business, and we expect that it will continue to negatively affect economic conditions, our borrowers and our business, financial condition, liquidity and results of operations, all in a complex manner with uncertain duration and magnitude.
The COVID-19 pandemic has caused substantial economic dislocation in the United States. As a result, the Company has taken comprehensive steps to help our customers, team members and communities during the current COVID-19 pandemic health crisis. For our customers, we have provided loan payment deferrals and offered fee waivers, among other actions. Through September 30, 2020, we have helped our consumer and small business customers by deferring loan payments and waiving fees on $416.3 million of non-PPP loans ($388.9 million of commercial balances and $27.4 million of consumer balances). As of September 30, 2020, we had $16.3 million of loans that had an outstanding payment deferral.
In addition, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, social distancing in our branches and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely, and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.
Given the ongoing and dynamic nature of the pandemic, it is difficult to predict the full impact on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when and whether the pandemic can be controlled or abated. Further, while jurisdictions in which we operate have gradually allowed the reopening of businesses and other organizations, and removed the sheltering restrictions, those actions can be reversed, and it is premature to assess whether such reopening will result in a meaningful increase in economic activity and the impact of such actions on further COVID-19 cases. As the result of the pandemic and the related adverse local and national economic consequences, we could be subject to the following risks, among others, any of which could have a material, adverse effect on our business, financial condition, liquidity and results of operations:
•demand for our products and services may decline, and we may determine that we are not able to prudently grow our loan portfolio, any of which would negatively affect our future growth and income;
•if the economy, including our business and commercial real estate borrowers and customers, is unable to substantially and successfully reopen, or if high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased provisions for credit losses and charge-offs and reduced income;
•in the event of a prolonged or more permanent shift toward a wide-spread work-remote environment, collateral for loans, especially commercial real estate, may decline in value, which could cause loan losses to increase;
•our allowance for credit losses may increase if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
•a further and sustained decline in our stock price or the occurrence of other developments could, under certain circumstances, cause our management to perform impairment testing on our goodwill or other intangibles, which could require us to record an impairment charge that would adversely impact our results of operations, the ability of the Bank to pay dividends to us, and the Company's ability to pay dividends to its shareholders;
•as a result of the decline in the Federal Reserve’s target federal funds rate to near 0% (or possibly below 0% in the future), the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and reducing net income;
•uncertainties created by the pandemic, combined with the disruptions to our own business, will negatively affect our ability to execute our acquisition strategy for the foreseeable future, limiting or delaying our future growth plans;
•any negative developments in our business, financial condition, capital ratios, liquidity or results of operations could result in the elimination of or a decrease in the rate of our historical quarterly cash dividend on our common stock, and could affect our board of directors’ determination of whether to declare dividends on our preferred stock;
•our cyber security risks are increased as the result of an increase in the number of our employees and the employees of our third-party vendors and partners working remotely;
•we rely on third party vendors and partners for certain services, and the unavailability of a critical service due to the COVID-19 pandemic, including as a result of any heightened cyber-related risks and/or incidents such third-parties might experience, could adversely affect us;
•local, state and federal taxes may increase as a result of deficits created by the numerous governmental support programs enacted and efforts taken to attempt to lessen the economic impact of the pandemic, which could reduce our net income; and
•FDIC premiums may increase if the agency experiences additional resolution costs.
Moreover, our future success and profitability depend substantially upon the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the pandemic could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Any one or a combination of the factors identified above, or other factors, could materially and adversely affect our business, financial condition, results of operations and prospects.
We may be adversely affected by actions taken by the U.S. government to mitigate the impact of the COVID-19 pandemic on the U.S. economy.
The United States government has taken a number of actions to mitigate the impact of the COVID-19 pandemic on the U.S. economy. Among other steps, the Federal Reserve cut the federal funds rate in March 2020, and also lowered the interest rate on emergency lending at the discount window and lengthened the term of loans to 90 days. On March 27, 2020, the CARES Act was signed into law, which, among other things, provided for one-time payments to individuals, additional unemployment insurance, additional health-care funding, loans and grants to certain businesses, and temporary amendments to the Internal Revenue Code. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19 pandemic.
The SBA was tapped to lead the effort to loan funds to small businesses, in conjunction with banks. The Federal Reserve and the U.S. Treasury have also responded with lending programs under the CARES Act. Further, the Federal Reserve has intervened with a number of credit facilities intended to keep the capital markets liquid.
There can be no assurance that these actions or any future interventions by the U.S. government will be successful in mitigating the impact of the COVID-19 pandemic, and it is unclear what the cumulative effect of these extraordinary actions will be on the economy as a whole and our business. In addition, many of these measures designed to support and benefit the economy, businesses and consumers during this time have expired or are set to expire in the near future, absent further affirmative action of and extension by the government. There can be no assurance that the expiration of these programs and measures will not have a material adverse effect on our customers, including our borrowers, our employees and the economies in our market areas, which, in turn, could negatively affect our business, financial condition, results of operations and growth strategy. Also, we may experience a significant increase in inflation as a result of local, state and federal deficits created as a result of the numerous governmental support efforts enacted to attempt to lessen the economic impact of the COVID-19 pandemic, which could negatively impact our business and our earnings.
We are subject to potential litigation, regulatory enforcement risk and reputation risk regarding the Bank’s participation in the Paycheck Protection Program and the risk that the SBA may not fund some or all PPP loan guaranties.
The CARES Act included a $349 billion loan program administered through the SBA referred to as the PPP. The $349 billion in funds for the PPP were exhausted on April 16, 2020. On April 27, 2020, the program was reopened with an additional $310 billion approved by Congress. Under the PPP, small businesses and other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to detailed qualifications and eligibility criteria. As of September 30, 2020, Level One had $392.5 million of PPP loans outstanding to more than 2,000 small and mid-sized businesses.
Because of the short timeframe between the passing of the CARES Act and implementation of the PPP, some of the rules and guidance relating to PPP were issued after lenders began processing PPP applications. Also, there was and continues to be uncertainty in the laws, rules and guidance relating to the PPP. Since the opening of the PPP, several banks have been subject to litigation regarding the procedures used in processing PPP applications or litigation from agents with respect to agent fees. In addition, some banks and borrowers have received negative media attention associated with PPP loans. Although we believe that we have administered the PPP in accordance with all applicable laws, regulations and guidance, we may be exposed to litigation risk and negative media attention our participation in the PPP. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation or media attention could have a material adverse impact on our business, financial condition, and results of operations.
The PPP has also attracted interest from federal and state enforcement authorities, oversight agencies, regulators, and Congressional committees. State Attorneys General and other federal and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations entitling the Bank to rely on borrower certifications, and take more aggressive action against the Bank for alleged violations of the provisions governing the Bank’s participation in the PPP. Federal and state regulators can impose or request that we consent to substantial sanctions, restrictions and requirements if they determine there are violations of laws, rules or regulations or weaknesses or failures with respect to general standards of safety and soundness, which could adversely affect our business, reputation, results of operation and financial condition.
The Bank also has credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which any loans were originated, funded or serviced by the Bank, including any issue with the eligibility of a borrower to receive a PPP loan. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Bank.
If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could require charges to earnings, which would have a negative impact on our financial condition and results of operations.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase. We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of the asset might be impaired.
We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations
in the periods in which they become known. As of September 30, 2020, our goodwill totaled $35.6 million. The Company conducted an interim period goodwill impairment assessment, triggered by the COVID-19 pandemic, and concluded that goodwill was not impaired as of September 30, 2020. However, there can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Use of Proceeds from Registered Securities
On April 24, 2018, the Company sold 1,150,765 shares of common stock in its initial public offering, including 180,000 shares of common stock pursuant to the exercise in full by the underwriters of their option to purchase additional shares. All of the shares were sold pursuant to our Registration Statement on Form S-1, as amended (File No. 333-223866), which was declared effective by the SEC on April 19, 2018. Our common stock is currently traded on Nasdaq under the symbol “LEVL”.
There has been no material change in the planned use of proceeds from our initial public offering as described in our prospectus filed with the SEC on April 20, 2018 pursuant to Rule 424(b)(4) under the Securities Act. On April 25, 2018, the Company contributed $20.0 million of the net proceeds of the initial public offering to the Bank.
Issuer Purchases of Equity Securities
Share Buyback Program. On January 23, 2019, the Company announced that its Board of Directors approved a repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, shares of the Company’s common stock with an aggregate purchase price of up to $5 million. The repurchase program began on January 23, 2019, and expires on December 31, 2020. The repurchase program does not obligate the Company to repurchase any dollar amount or number of shares, and the program may be extended, modified, suspended or discontinued at any time. As of September 30, 2020, $2.2 million of shares remained available to be repurchased under the repurchase program.
The following table sets forth information regarding the Company’s repurchase of shares of its outstanding common stock during the three months ended September 30, 2019.2020.
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| (Dollars in thousands, except per share amounts) | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet be Purchased under the Plans or Programs |
| July 1-31, 2019 | — |
| | $ | — |
| | — |
| | $ | 3,380 |
|
| August 1-31, 2019 | 20,530 |
| | 23.74 |
| | 20,530 |
| | 2,892 |
|
| September 1-30, 2019 | — |
| | — |
| | — |
| | 2,892 |
|
| Total | 20,530 |
| | $ | 23.74 |
| | 20,530 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands, except per share amounts) | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet be Purchased under the Plans or Programs |
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| July 1-31, 2020 | — | | | $ | — | | | — | | | $ | 2,215 | |
| August 1-31, 2020 | — | | | — | | | — | | | 2,215 | |
| September 1-30, 2020 | — | | | — | | | — | | | 2,215 | |
| Total | — | | | $ | — | | | — | | | |
Under applicable state law, Michigan corporations are not permitted to retain treasury stock. As such, the price paid for the repurchased shares is recorded to common stock. As of September 30, 2019,2020, the total shares repurchased in the amount of $2.1$2.8 million were redeemed but remain authorized, unissued shares.
Item 3 – Defaults Upon Senior Securities
None.
Item 4 – Mine Safety Disclosures
Not Applicable.
Item 5 – Other Information
None.
Item 6 – - Exhibits
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| Exhibit No. | | Description |
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Exhibit No. | | Description |
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| 1.1 | | Underwriting Agreement, and Plan of Merger, dated as of August 12, 2019, among10, 2020, between Level One Bancorp, Inc., AASB Acquisition, Inc. and Ann ArborPiper Sandler & Co. (incorporated by reference to Exhibit 1.1 to the Company’s current report on Form 8-K filed August 13, 2020). |
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| 101 | | Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2019,2020, formatted in XBRLiXBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of
Comprehensive Income; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v)
Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements – filed
herewith. |
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| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Level One Bancorp, Inc. |
| | | |
| Level One Bancorp, Inc. |
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Date: November 8, 20196, 2020 | By: | /s/ | Patrick J. Fehring |
| | | Patrick J. Fehring |
| | | President and Chief Executive Officer |
| | | (principal executive officer) |
| | | |
Date: November 8, 20196, 2020 | By: | /s/ | David C. Walker |
| | | David C. Walker |
| | | Executive Vice President and Chief Financial Officer |
| | | (principal financial officer) |